Why more corporates are turning to purchase power agreements

As more companies seek ways to procure high quality renewable electricity corporate power purchase agreements (CPPAs) are becoming an increasingly popular option.
Power purchase agreements (PPAs) are long-term electricity contracts between power producers and energy suppliers – who then sell it on to end users. While PPAs have existed for many years in various iterations, more corporates, as end users, are now entering CPPAs directly with renewable electricity assets, such as wind or solar farms, to procure electricity at agreed long-term prices. Today’s CPPAs typically last between 10 and 20 years although some are as short as five years.

Global CPPA activity grew 12% in 2023 to a new record of 46GW of wind and solar power, according to BloombergNEF. Some 45% (20.9GW) of CPPAs announced in 2023 were in the Americas, followed by Europe at 33% (15.4GW).

“The global urgency for meaningful climate action is driving an uptick in CPPAs,” says Sabrina Andrei, Associate, Sustainability at JLL. “More companies now have clean energy goals, which are increasingly under scrutiny, while legislation is also becoming more stringent. In particular for large companies with purchasing power, CPPAs can be an attractive route.”

For the fourth consecutive year, Amazon was the world’s top buyer of CPPAs, followed by a number of tech giants, but the concept of clean corporate electricity is gaining traction in the wider economy.

While CPPAs can bring price security to energy costs, concerns remain around the longer-term economic benefit of a fixed price structure – especially at times when electricity prices are relatively high compared to historic averages.

“Companies need to consider how they want to hedge their electricity costs,” explains James Lythgoe, Associate Director – Energy & Infrastructure at JLL. “They must understand the long-term outlook for their energy market, the financial implications of entering a CPPA and build confidence with key internal stakeholders when negotiating terms.”

In Europe, demand for PPAs has surged as supply chain issues eased and gas balances normalized after the region’s 2022 energy crisis, according to Bloomberg. In contrast, the economics behind PPAs were weaker in the U.S. last year, leading to a drop in signings following a record 2022.

Negotiating contracts can be a complex task with generators and suppliers often having specific criteria.

“Generators want high electricity consumption figures if they’re to agree a CPPA because they want to know that when they build a project, it’s going to be able to sell a lot of energy for a long time,” says David Mead, Associate Director, Utilities at JLL.

“Furthermore, they want customers with high-quality credit and a certain financial structure. This means many organisations aren’t yet able to ‘plug and play’ CPPAs as part of their net zero strategy.”

Other challenges include finding suitable stop gap measures before new assets become operational, or renewable electricity output falling short of what’s required by users with 24/7 energy demand such as data centers. Recently, volatile wholesale electricity market prices, rising interest rates and construction costs have also widened the gap between price expectations of sellers and buyers, Lythgoe notes.

There are ways to mitigate some of the concerns around CPPAs. “Companies could layer multiple PPAs that have different prices and term lengths or explore options such as onsite energy generation and potentially battery storage where feasible,” says Mead. “And of course, improving building energy efficiency is crucial to cut overall energy use.”

For CPPAs to drive the transition to green energy, they need to be accessible beyond large-scale corporate consumers, Mead believes.

“CPPAs won’t move the needle on clean energy installations until there are less restrictive credit requirements on one hand, and on the other, more willingness for long-term contracts at a decent price versus a short-term chase to the lowest price,” he says.

Aggregate CPPAs, anchored by large corporates, could bring more small companies into the fold by selling on electricity - although this could involve a complex contracting process. Smaller companies in leased spaces could equally discuss renewable energy procurement with their landlord, ideally during the lease event.

The involvement of local authorities could also drive market growth. In 2023, a first-of-its-kind 50MW solar park in Dorset went live following a 15-year deal between the City of London and Voltalia, setting a precedent for the public sector to reduce emissions without the risk of managing their own infrastructure investments.

Digital platforms are another driver in widening CPPA market liquidity. Evolving technology can also support on contracting processes, traceability and matching supply and demand for renewable power within a PPA more accurately.

The growth of CPPAs is key to the wider decarbonization of the built environment.

“To meet our decarbonization targets we clearly need to build out a substantial volume of renewable capacity,” says Lythgoe. “In many cases, CPPAs can bring tangible financial support to enable additional capacity.”

The UK Green Building Council, for example, is among the industry bodies that cite additionality as a criteria of clean energy procurement. “Corporates need to verify their renewable electricity procurement fits best practices, including the provision of additionality, which is often the hardest criteria to meet,” says Andrei.

Government policy has an important role too. “Greater support and the right incentives for new renewable capacity to come online can enable additionality to be a standard feature in corporate electricity procurement,” Andrei adds.

As the transition to green electricity gathers pace, CPPAs will continue to evolve with the help of technology, new contract structures and the growing emphasis on the social impact of projects to help establish CPPAs in broader ESG strategies.

“Ultimately, CPPAs not only allow businesses to lock in electricity prices and secure a supply of renewable certificates, but they facilitate active participation in the development of renewable assets,” says Lythgoe. “With broader accessibility, they could be an important tool in building out the infrastructure needed for a net zero economy.”