Corporate demand for clean electricity has the potential to drive investment in renewable energy and accelerate the global energy transformation. As such, it is a very important tool in helping to mobilize capital.
While CPPAs have been prevalent for over a decade, recent years have seen a marked increase in this market globally, particularly in the United States, United Kingdom and Europe. An increasing number of global corporations are committing to transition to 100% renewable energy procurement over a defined period.
This trend is likely to increase exponentially given the extensive commitments being made to decarbonize across all business and industrial sectors. However, notwithstanding the economic and climate benefits of CPPA, significant obstacles to the use of CPPAs remain in many emerging and developing markets.
Corporate power purchase agreements
A corporate power purchase agreement (CPPA) is a long- term power purchasing mechanism between an electricity generator and corporate customer allowing the customer to procure renewable energy. It provides certainty over the wholesale price of energy over a particular period typically subject to indexation. On the generator side, the CPPA provides an attractive and predictable revenue stream which assists in customer and risk diversification, and eases access to capital. It also enables developers to construct new renewable infrastructure without reliance on government tariffs, especially in regions where renewable resources and electricity prices are strong enough for projects to be economic without such supports.
The World Economic Forum’s Task Force on Mobilizing Investment for Clean Energy in Emerging and Developing Economies – together with the CEO Climate Leaders Alliance – formed a working group led by Brookfield Renewable and KPMG to study CPPA challenges in emerging markets. The work undertaken by the group included:
- Obtaining practical relevant experiences from working group members
- Undertaking a detailed analysis of key jurisdictions, including in India, Indonesia, Viet Nam, Malaysia, Thailand, Ukraine, Mexico, Chile and Brazil
- Interacting with relevant stakeholders to obtain wide-ranging perspectives on key issues
Economic advantages of a liberalized CPPA regime
The removal of barriers to implementing the wide range of CPPA solutions now being sought by global corporations will produce significant economic and climate benefits for the jurisdictions in question. There are four areas where these benefits should arise:
1. The race to net zero
The demand for renewable energy CPPAs is growing exponentially across the world. This is driven by the rise of net-zero and carbon neutral commitments being made by countries and global corporations that have committed to achieving significant carbon reductions by a particular timeline typically from 2030 to 2050. In implementing their net-zero ambitions, corporations will look to the procurement of renewable power as a critical solution in reducing their Scope 2 issues. This trend means that countries with favourable CPPA regimes have the opportunity to significantly increase the deployment of renewable energy and to reduce their dependence on unabated power solutions.
In fact, the lack of ability to procure renewable power will increasingly have an adverse influence on direct foreign investment for countries. Corporates’ emission footprints and reduction strategies are now playing a critical role in their investment decisions. The expansion of data centres perfectly exemplifies the fact that the availability of (directly procured) renewable energy is becoming a must have for global organisations. Countries having adopted favourable CPPA regimes (such as Chile or Taiwan, China) are seeing significant new inward investment levels.
2. Safeguarding supply chains
When a global corporation makes a net-zero commitment, it is also, in effect, committing to decarbonising its supply chains. This will result in additional pressure for suppliers across the world, including in emerging economies to implement decarbonisation solutions such as CPPAs for their own business.
Suppliers that are not in a position to implement CPPA solutions will leave themselves exposed to the risk that their customers will seek alternative suppliers in other jurisdictions that are capable of implementing these types of renewable power solutions. Additionally, creating an environment where suppliers can implement cost-effective CPPA structures can help mitigate the impact of other climate transition measures that might adversely impact their business such as the Carbon Border Adjustment Mechanism. Suppliers who use renewable energy solutions will also be less exposed to carbon taxes.
3. Additionality
An increasing component of any CPPA structure is the concept of additionality. Additionality normally requires the construction of new renewable energy generating technologies that would not have otherwise been constructed. This brings two essential benefits. First, the additional build-out of renewable capacity helps the country meet its own national renewable energy targets. Second, the new facility creates additional employment opportunities, both during the construction phase, and, to a lesser extent, during the operational phase.
4. Wider economic benefits
Removing barriers to the adoption of CPPAs offer a range of benefits, including:
- Overall economic benefits – associated with increased deployment of renewable energy in a given jurisdiction.
- Security of supply – increasingly relevant given the growing number of weather events resulting in partial or almost complete shutdowns of the power system.
- Bottom-line improvement for the corporate sector with renewables now being a cheaper source of energy than fossil fuel solutions in many countries; this is especially relevant for countries and corporates showing heavy power and fuel consumption.
- Opportunities to introduce new clean energy technologies – while wind and solar technologies will continue to dominate the CPPA market as the technologies of choice, developers will inevitably start adding new technologies to the solution mix in order to improve the overall financial returns, such as green hydrogen, floating offshore wind, tidal and wave, etc.
- Adoption of various digital solutions, blockchain and artificial intelligence are increasingly being used to establish the provenance and verifiability of renewable energy certificates and would be encouraged by an active CPPA market.
Deregulating the CPPA market to enable onsite and offsite solutions will not just increase the deployment of renewable energy in the relevant country, thereby helping to achieve decarbonization benefits, but it will also produce wider economic benefits and produce lasting competitive advantages. In particular, the creation of these new renewable opportunities through removal of barriers will facilitate much greater foreign direct investment into those countries. However, it is vital that these external flows of capital help mobilise local developers and local supply chains over time which in turn will help decrease dependence on external investment and reap greater longer-term benefits for these emerging economies.
Michael Hayes, Global Head of Renewable Energy, KPMG
Natalie Adomait, Managing Director, Investments, Brookfield Renewable
