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Power Purchasing Agreement Regulation in The EU

August 1, 2019
Thanh Doan

Europe

The potential for corporations sourcing renewable energy in Europe is vast. However, the market is currently growing at a slower rate than it could, due to political and regulatory uncertainty. Nonetheless, with just a few enabling developments, large-scale electricity consumers transitioning to renewables could become one of the major stories of the continent in the coming years.

Thus far, most European renewable PPA activity has been in northern European countries like Norway, Sweden and Finland. Prioritising regulatory improvements in the EU will enable significant growth in large countries that have favourable business and environmental conditions. Germany, for example, has available land. France, Spain and Ireland have available land and long coastlines. They all have significant potential to host new renewables projects, coupled with large numbers of corporate headquarters – an abundance of companies motivated to change to renewables.

Finding a balance that provides a detailed and consistent set of standards whilst also promoting business action on PPAs is a challenge for policy makers. Particularly given the speed of developments in renewables. At present, there is no thorough regulatory or legal framework supporting Corporate PPAs across the EU. Without this, standardisation can only develop for certain components and growth will be slow.

Fragmentation

Presently, some countries have rules allowing Virtual / Financial PPAs – the U.K. and the Netherlands being two. In such an arrangement, a direct connection between the buyer and the seller is not required. Energy is moved through the system by grids, utilities and power traders to ensure a balance between the points of purchase and generation.

In France and Germany, onsite PPAs, in which a company partners with a generator to produce renewable electricity on their own land to power operations, are permitted. However, Sleeved / Physical / Direct PPAs where energy is produced, ‘sleeved’ through the grid, and an equivalent amount to the amount sold is consumed by the corporate off-taker, is restricted.

There are many states in which only Virtual / Financial PPAs are allowed. This ensures grid operators, utility companies and traders stay involved in the process. It maintains the eco-system, even if it is inefficient in terms of price, ensuring each party has a limited number of functions and responsibilities in a deal.

The balance between competition and pursuing the cost effectiveness that promotes projects also has challenges. To obtain the best economies of scale, suppliers and generators would like a single mega-project to service a large volume of local corporations. This would mean a better price for the conglomerate of businesses buying the energy, too. However, fear that either side could potentially use this position to exploit each other or end consumers, along with the reduction in competitiveness and security of supply concerns, means it would be unlikely to appeal to regulators.

The U.K. has Renewable Obligation Certificates (ROCs) and Renewable Energy Guarantees of Origin (REGOs). All EU Member States are required to have such a scheme. There are equivalents on the continent: France has ‘garanties d’origine’ and Germany has ‘Herkunftsnachweise’ – both translate as ‘guarantees of origin’. The systems maintain electronic registers of certificates purchased and connects them to their renewable power generation sources, to ensure that the claimed green credentials of electricity actually equals the volumes going into the grid.
The process works well in the largest European markets where high levels of trust are a reflection of independent monitoring and enforcement of regulations. Trust and standards are mutually reinforcing, but the reverse is also true and geographic comparisons can hold less-developed markets back. Enhancing uniform adoption of a high set of standards across all the EU countries, without restricting enterprise will promote proliferation.

ROCs have a monetary value to generators of renewable electricity. The generators receive one certificate per MWh of electricity they generate. Large utilities (or corporates in a direct PPA) then purchase power from the generators by buying these ROCs, thus, promoting more sustainable activities.
REGOs are the next step along. They are the accepted documentation that utilities / suppliers use to prove to their customers that their energy has come from a renewable source.

EU Initiatives

The EU is making continued efforts at designing legislation that frames liberalisation of the electricity market – crowding-in business without allowing room for quality to slide.

As a component of the Energy Union created in February 2015 and in order to action the Paris Agreement, the “Clean Energy For All Europeans” package was launched in November 2016. Also known as the “Fouth Package” / “4th Energy Package” (because it is the fourth time the EU has made significant updates to its outlines), it’s over 5,000 pages are designed to provide a roadmap for the EU becoming a renewables leader, improve security of supply and provide a deal that will work for consumers.

An important sentence from the Clean Energy For All Europeans package is: “Member States shall remove administrative barriers to long-term power purchase agreements by companies to finance renewable energy and to facilitate its adoption”. If long term agreements become easier to arrange because paperwork complexity is removed, then renewables have a chance of increasing their share in the energy mix. According to the most recent BP statistical review of the energy sector, despite growing at a record rate last year, renewables did not improve their percentage share of energy production. That is because demand for energy grew so heavily that there were rises across the board. As a result, CO2 levels increased at their fastest rate for a decade last year – 2%. Cutting CO2 while increasing supply will require collaborative action, and that is yet to be formalised.

Collaboration

The RE-Source Platform is an alliance of companies (those interested/involved in buying renewable energy) and suppliers, which wants to improve Europe’s regulatory frameworks for corporate renewable PPAs. Designed to help implement common initiatives across the European Union (EU) and increase information flow, it hopes to unlock the potential for financing renewables projects by providing a central hub for all types of stakeholders.

In June 2019, RE-Source announced the publication of the standard Corporate Power Purchase Agreement (CPPA) template along with the European Federation of Energy Traders (EFET). “This is the first standard CPPA valid for all European countries to bring down transaction costs and facilitate the negotiation process. The standard CPPA had been widely circulated across the industry (energy buyers and suppliers), law firms, advisors and a number of lenders have confirmed its bankability.”

Impact of Brexit

As of Summer 2019, the U.K. has a relatively flexible set of corporate PPA regulations, when compared with most EU countries. It represents a relatively well-developed market.

However, as with so many aspects of Brexit, the position of the U.K. in relation to growing its renewables landscape is uncertain. Whether the U.K. will design its own equivalent to the EU Fourth Energy Package, opt for something else entirely, or try to maintain the EU approach through a transition period is a complete unknown at present. This could have implications for Traders and Investors, leaving the future of corporate PPAs in the U.K. in a grey space.

REGOs are one example of the problems likely to be faced. Ofgem has confirmed that the U.K. will continue to issue REGOs and accept Guarantees of Origin from EU member states after EU Exit Day. However, the EU has stated that if the U.K. exits without a deal, REGOs issued in the UK will no longer be recognised by EU member states. This suggests that the U.K. would like to maintain the current status quo, but will need to find a method that appeases Europe over transparent REGO verification. Should that become the case for every component of legislation, the administrative and bureaucratic burden will be enormous, which will undoubtedly have a knock-on impact, restricting business flows in the private sector.

Corporates, Investors and other interested parties use Pangea’s network to get access to the most up to date information on PPA developments. Our Experts help our clients by shedding light on the current framework for PPAs and helping them anticipate progressions in the market ahead of the curve.

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