The advantages of corporate power producer agreements

March 13th, 2019, Published in Articles: Energize

Baker McKenzie, a specialist global law firm based in Johannesburg, hosted a seminar recently which considered the benefits of corporate power producers’ agreements (PPAs) with independent power producers (IPPs) in South Africa. Principal benefits for corporates include protection from load-shedding, the ever-increasing tariffs, unreliable electricity supply, compliance to clean energy and low emission targets, and corporate responsibility towards the mitigation of climate change, a partner in the firm said in his introduction.

The seminar comprised two presentations and four panel discussions. The delegates heard that the corporate business sector can positively contribute to an enabling environment where modern electricity generating technologies such as wind, solar PV can be incorporated into the existing electricity or form part of a company’s mini-grid.

Presentations

Maree Roos

Africa Power Ventures’ Maree Roos presented the results of the “Distributed generation renewable energy case study”, which Africa Power Ventures and the South African Wind Energy Association (SAWEA) had jointly undertaken. Roos explained that the purpose of the study was to investigate the value proposition of distributed generation with renewable energy (DG-RE).

The study considered 14 scenarios which covered PV and wind power capacities, generator locations, offtakers (both customer and municipal), and utility pricing patterns. Five large municipalities had been selected for the study with specific focus on the technical and commercial impact, from both the national fiscus and local economic impact points of view.

The study conducted a high-level review of the technical impact of DG-RE and concluded that DG has the potential to reduce losses and defer network investments. However, there are some serious challenges which DG-RE could present to the existing electrical infrastructure including a voltage rise on distribution lines feeding power from the DG resources; the need for suitable equipment to prevent unwanted electrical behaviour; an adjustment of reserves to deal with RE’s inherent variability due to the lack of inertia response associated with rotating generators; and the need for a revision of planning techniques, processes and procedures.

Roos said that the key lesson learned from large installations overseas is that power utilities should anticipate and plan for the rollout of DG and provide guidance on the specification, size and location of these facilities to relieve network congestion, minimise generation curtailment and reduce peak demand to improve reliability.

Electricity beyond the grid

Kieran Whyte

Baker McKenzie’s Kieran Whyte explained that a corporate PPA is where the purchaser of the electricity is a corporate and not a utility. Corporates can benefit from such an arrangement by having greater control over the security of supply and cost of the electricity supplied. Furthermore, Whyte said, corporates can demonstrate their compliance to carbon emission reduction. Whyte proposed three PPA options: Behind the meter (BTM), “sleeved” PPAs and direct (or wheeled) PPAs.

  • Behind the meter PPA

This proposal suggests a renewable energy (RE) generator being built onsite at a corporate’s premises to supply power to meet the corporate’s requirements.  The corporate agrees to buy all or a portion of the power from the RE plant which is owned and operated by a private producer. Unmet power demand is met by the utility (national utility or municipality) which might be prepared to purchase surplus power from the IPP against a set feed-in tariff.

Benefits

The alternative is for the corporate client to have a direct PPA with a private electricity generator (IPP) on-site, isolated from the utility’s distribution network. In this case, the corporate has full access to the IPP’s supply of electricity. Another advantage of this option is that a corporate’s electricity costs are fixed and predictable without expensive network charges and should decrease over time to reflect the declining costs of renewable energy.

Challenges

The onsite RE generation will require physical space which might not be available or only available at additional rental cost. Feed-in tariffs for surplus electricity tend to be lower than purchase tariffs meaning that the corporate will still pay for unused electricity.

  • Sleeved PPA

In a sleeved PPA, the corporate buys electricity from a specific RE project (not necessarily onsite) under a long-term contract for a specified load. The IPP hedges the corporate’s load with the RE project for the same contract term as the corporate’s retail contract. No electricity is purchased by the corporate directly from the RE project.

Benefits

The corporate’s electricity costs are partially fixed and should decrease to reflect the lower cost of renewable energy from the IPP. No land is required at the corporate’s premises for the RE project as that is located offsite. Multiple corporates could pool their loads to make the IPP less dependent upon a single client.

Challenges

If the corporate is the only, or primary buyer from the IPP, the IPP faces the risk of default should the corporate cease operating. The power purchase must comply with existing PFMA and MFMA regulations.

  • Direct (or wheeled) PPA

The corporate client buys electricity from a specific renewable energy project by means of a PPA with an IPP. Electricity is wheeled by the utility from the IPP to the corporate, although the corporate does not buy electricity from a particular RE project.

Benefits

The corporate’s electricity costs are partially fixed and should decrease to reflect the lower cost of renewable energy. Corporates could pool their loads.

Challenges

This option offers no guarantee of system availability since electricity is wheeled through the utility’s existing network. The cost of wheeling might make this option unattractive.

Panel discussions

Four panel discussions, involving a total of 17 panellists discussed various aspects of corporate PPAs including African examples; trends, opportunities and challenges; financing options and global developments.

Conclusion

The seminar showed that corporate PPAs can provide a number of benefits, such as unlocking the potential of distributed RE capacity, lowering the average price of electricity and keeping it low, while increasing the amount of electricity available. Other advantages include the promotion of generating electricity from clean, renewable primary energy sources and increasing the use of the electricity network without explicit government guarantees, although a supportive regulatory environment will be required. An increasing demand for renewable energy will also increase job opportunities while efficiently addressing South Africa’s electricity crisis.

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