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Power Purchase Agreements in the US and Latin America

August 16, 2019
Thanh Doan

The US market comprises of public sector entities which are structured in various formats such as municipally owned entities to electric cooperatives that are formed by residents. With the US population expected to increase by up to 0.9 percent per annum and 2018 being a record year of Energy consumption in the country – due to extreme hot and cold weather events, utility provision in the nation is a priority that should be focused on.

How Do Power Purchase Agreements Work In The US

Power Purchase Agreement (“PPA”) contracts, where by an energy generator directly sells power – traditionally electricity – to a corporate business on a long-term basis, grew popular in the United States and are now very common internationally among companies considering energy procurement solutions for new markets.

The main structures of corporate PPAs come in two forms: “Sleeved” (also referred to as “Physical”) and “Synthetic” (also known as “Virtual”), with the latter being the preferred contract structure in the United States.

*QUICK INTELLIGENCE: Synthetic PPAs usually involve a physical component; being that the corporate buyer has access to the green certificate(s) awarded to the project to ensure performance and the agreed deliverability of renewable power.

 

Early adopters / when did PPAs gain exposure?

United States

Since the second industrial revolution, with the developments of improved manufacturing efficiency, biotechnology, high-level automation and advance of telecommunications, utility companies have evolved in how they supply and distribute energy.

The Energy Policy Act of 2005 (EPAct 2005) was integral to the deregulation of the industry, in such a manner that it facilitated fair trade in wholesale power and gas markets, and also aided in the regulation of electric transmission and gas transportation.

Since the early 2000s, there has been a significant growth in corporate PPA’s in the United States, with these types of contracts dominating business to business energy arrangements in 2018. The municipal-scale use of PPAs is also more obvious – over fifteen states successfully use PPAs to procure cleaner electricity for environmental and resident benefits. For example, the District of Columbia entered three physical PPAs with wind and solar developers – two of which were on 20-year contracts, to ensure reliable electricity supply and install solar on schools, recreation and police centres, as well as other district government buildings.

Latin America

Latin America as a region has a history of being plagued with high transmission constraints and high utility prices. PPAs have emerged as a way to inject relevant changes needed to facilitate and regulate new projects. There is a clear aim to increase electricity access and explore investment opportunities.

Renewable storage and power storage are emerging as key components to the region’s growth and development, Brazil, Chile, Colombia, Mexico and Peru (followed recently by Argentina) are the regional entities that have dominated in terms of access to bilateral PPAs and spot markets for the expansion of utility access.

Argentina’s renewables program is a major driver for change, with an aim to increase the national electric energy consumption from renewables by 20% by 2025. Brazil has an intention to expand its wind energy capacity and has successfully engaged the corporate world and encouraged PPA projects. In 2017, Chile signed a supply tender that facilitated the generation of several PPAs to drastically change their sphere for electricity generation and supply.

What key legislation exists?

The United States Federal Government facilitated the deregulation of the US industry.

With its current supplier pool of approximately 3,300 electricity provider – both from the public and private sectors, 150 million consumers have access to relevant utilities. With a series of reforms that included restructuring and deregulation, the economy is now an open market.

States are now in a position to regulate their retail sales, and with the emergence of retail electricity choice programs, competition is being encouraged – to make costs competitive and increase service innovation.

USA Retail Electricity Choice States
State Public Utility Commissions (2017) – from An Introduction To Retail Electricity Choice in the US
– by NREL

 

The Story of Gathering Momentum – the rise of PPAs in US and LATAM

In the United States, the volume of corporate PPAs were boosted by federal income tax incentives – in the form of production tax credits and investment tax credits for solar and wind, with renewable energy projects receiving increased investment support due to the “reduced” capital cost involved. The US market showed a noticeable increase in the number of renewable Power Purchase Agreements took place between 2015 and 2018.

In 2015, companies in the United States purchased a record 3.22 gigawatts (GW) of renewable power. In 2018 this record was broken by more than double, with 6.43 GW of renewable power being purchased – enough to power 3 million homes in America annually.

Rocky Mountain Institute’s Business Renewables Center reported the record year of wind and solar energy deals from US PPAs, green tariffs, green power purchases and project ownership, with Facebook, AT&T, Walmart, ExxonMobil and Microsoft setting the top five highest volume in deals.

Corporate Renewables Deals 2014-2018
GreenTech – Business Renewables Centre, Corporate Renewable Deals 2014 – 2018 YTD

The graph above indicates an upward trend in power purchase agreements for the desire to control costs and utility access, to pro-actively accelerate towards enabling a low-carbon economy and meet UN sustainability goals.

Commercial and Industrial Sector Impact

While there are myriad variables that can impact the doubling of commercial power purchase agreements in one industrial area of focus, the commercial and industrial sectors are seemingly the primary beneficiaries of the renewables market, having embraced the utilities sector challenges of providing greater flexibility for corporates and reducing consumer dependence on the supplier.

*QUICK INTELLIGENCE: PPAs usually contain technical details pertaining to the generating output limits, ownership and distribution, transmission interconnection, and the sale of generated energy. With respect to the United States Power Purchase Legislations, there are several entities that facilitate the policy creation for the electricity sector. “Third party” ownership often occurs with limited liability corporations becoming system owners through their offering of investment capital to a project.

 

The Information Technology Influence on PPAs

As the world becomes more reliant on the internet, the Industry 4.0 movement has induced the need for technology companies to maintain their edge and manage their reputational risk. With technology companies having procured the most renewable energy in recent years, giants such as Facebook, Google, Apple and Microsoft have heavily invested in renewables as part of their long-term strategies and consideration for big data. As major energy consumers, with frequent and continuous application and product development cycles and a significant reliance on big data and worldwide data centres, there has been an obvious need for long-term, reliable power at a fixed price. In the end, power demand for their facilities can be met in a manner that is sustainable and green.

Considering that the total installed base of Internet of Things of connected devices is expected to amount to 75.44 billion worldwide by 2025, Corporations generally are aiming to present their best selves to the world, whilst maintaining their profitability and economic viability.

Microsoft entered a PPA with Nephila Capital, the world’s largest investment manager specialising in weather insurance-linked securities, to improve the assessment of risks associated with renewable energy production, in turn giving major corporates looking at energy costs and power pricing over long periods of time better certainty and ability to mitigate risk.

*QUICK INTELLIGENCE: The largest sellers of green power to these companies are NextEra, Invenergy LLC and units of large European utilities such as Energias de Portugal SA, Electricite de France SA and Enel SpA.

 

Renewable Energy in Latin America – What Are The Trends?

According to a BN Americas study, a detailed outline of the 2019 installed electricity sources in the region are highlighted in the graph below.

Installed Capacity of Electric Power Generation By Source
Installed Capacity of Electric Power Generation By Source – BNA Americas

The data indicates a shift from traditional energy sources to renewables sources such as Hydraulics, Thermal, Nuclear Energy, Wind, Solar, Biogas, Biomass, Geothermal Energy and Self Generation. What this study indicates is the need for the region to be more self-reliant with respect to its energy sources. As it currently stands, the regional statistics indicate that there 838 business projects worth US$110 bn. A few key examples of optimization in the region include:

Chile: With a series of projects emerging from plans made in 2013, the fruits are manifesting now. The region has plans to target vehicle to grid technology, and facilitate electricity transfer from the electric vehicle grid to the power grid. The country also has plans to create a solar park that will generate 64MWp.

Mexico: Mexico has plans to expand its solar and wind energy initiatives and has projects worth up to US $3.9bn for expansion initiatives.

Brazil: As a nation that challenges itself to grow and emerge, Brazil is dedicating its efforts to incorporate a distributed solar power system in the region. The organization is also delving into offshore projects that will generate additional power capacity. The nation also has a mandate for the expansion of renewables, which was proposed in the form of a tender that will aim to drive investments to the North-East of the region where wind and solar are the sources that will be of focus.

Just like the United States, these changes do require the implementation of industrial contracts for their facilitation, which are generated via the establishment of power purchase agreements for their execution.

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