We recommend reading a publication by legal counsel Gregory Mikos on the possibility of implementing Corporate PPAs (CPPAs) in commercial properties. Full content on the publication portal below and on the Real Estate Magazine portal.
Corporate PPA in commercial and warehouse facilities
Doing business in sectors with significant electricity consumption is increasingly challenging. So it’s no surprise that measures are being taken to reduce bills. Entrepreneurs long ago learned to take advantage of the right guaranteed by the law – the Energy Law – to switch electricity suppliers. They are also increasingly cooperating with experts in energy efficiency and electricity procurement.
Using the expertise of advisors can make it easier to choose the right deal. However, it does not guarantee that energy will be bought cheaply. Electricity trading companies (i.e., energy sellers) to provide energy to consumers, usually buying it on the exchange or from generators. If the price of electricity on the Commodity Exchange is high, it is also offered at a high price to consumers.
TYPES OF CORPORATE PPA
The term corporate PPA has grown in popularity in recent years and encompasses diverse models for the sale of electricity and the provision of power generation infrastructure. Below I present the models of business cooperation, which, despite fundamental differences, are collectively called corporate PPA.
Corporate PPA with physical delivery of energy
This is a contract for the sale of electricity to which the parties are:
- the generator of energy from RES,
- the trading company (i.e., the energy seller),
- the energy consumer (manager of a shopping center, hotel, etc).
The role of the trading company (energy seller), depending on the model of corporate PPA, is that the company:
- buys back electricity from the generator in order to then sell that energy to the electricity consumer, or
- covers energy shortages (to the extent that the generator has not supplied energy) by acting as the entity responsible for commercial balancing to both the generator and the energy consumer.
ROLE OF THE ELECTRICITY TRADING COMPANY
Contrary to optimistic notions, in practice it is impossible to eliminate the trading company acting as an entity responsible for commercial balancing. Without a commercial balancing entity, it would be impossible to implement a corporate PPA with physical delivery. This is because there is always a difference between the expected volume of energy to be generated by the generator or consumed by the customer and the actual performance. This is known as imbalance. Trading companies can perform balancing on their own behalf, or on behalf of others – by contract.
According to the Law – Energy Law, commercial balancing is the notification to the electricity transmission system operator1 by the entity responsible for commercial balancing for the execution of contracts for the sale of electricity concluded by system users and the settlement with them of the difference between the actual amount of electricity supplied or consumed and the volumes specified in these contracts for each settlement period.
ADVANTAGES AND DISADVANTAGES OF CORPORATE PPA CONTRACT WITH PHYSICAL DELIVERY
First of all, long-term security of the price of electricity and the supply of this energy. In addition, the consumption of so-called green energy can have a favorable impact on the image of the entrepreneur.
On the other hand, the disadvantage of such a contract is the need to pay a distribution fee and any other fees that electricity is charged by law.
In practice, an invoice documenting sales in the execution of a corporate PPA with physical delivery will include the same items as in the case of regular electricity sales contracts.
WHO CAN ENTER INTO A CORPORATE PPA CONTRACT WITH PHYSICAL DELIVERY
To enter into such a contract, one must have the status of an energy consumer. According to the Energy Law, a customer is anyone who receives or consumes fuels or energy on the basis of a contract with an energy company.
To obtain the status of a customer, one must conclude a distribution service agreement and an energy sales agreement, or alternatively a comprehensive agreement, which includes the provisions of the two aforementioned agreements.
Thus, the status of “customers” does not apply to entities that, although they consume electricity, do so without concluding a contract with the energy company, but are re-invoiced by a customer holding such a contract.
Example:
A hotel restaurant operator who bills the hotel operator for the electricity consumed on the basis of a re-invoice cannot conclude a corporate PPA with physical delivery. To be able to conclude an electricity sales contract, including a corporate PPA, he will first have to conclude a grid connection agreement and a power distribution agreement.
Corporate PPA in site
In this case, the name corporate PPA may be considered misleading. This is because the model involves the provision of power generation equipment, such as a photovoltaic plant, for a fee. In practice, lease or rental agreements are concluded for photovoltaic installations.
When designing solutions based on leasing or renting PV installations, it is necessary to take into account the risks arising from the position of the ERO President contained in the ERO President’s Information No. 7/2021 on the implementation of the obligation to obtain and present for redemption certificates of origin or certificates of origin of agricultural biogas or to pay the substitution fee.
The ERO President expressed the view that the entity providing the infrastructure to supply energy is in fact producing the energy and selling it. There are many indications that the ERO President had in mind business models in which the amount of rent is linked to the price of energy in the market or to energy consumption.
It is worth doing a legal analysis of such a solution before implementing it, in order to reduce the regulatory risk as much as possible.
Depending on the size of the installation, it may be necessary for the entity using the RES installation to obtain an energy production license or to obtain registration in the register of small RES installations. Unless all the energy from the installation will be used for own consumption and its surplus will not be fed into the grid.
ADVANTAGES AND DISADVANTAGES OF CORPORATE PPA IN SITE
Advantages arise from connecting a RES installation “behind the meter”, i.e. connecting the installation directly to the energy consumer’s electrical system, bypassing the distribution network.
As a result, the user of the installation does not have to pay a distribution fee and some public charges on the electricity consumed.
Energy generated by a RES installation connected behind the meter cannot be supplied to tenants. The sale of electricity is possible only through the distribution network.
ENERGY CONSUMER STATUS VS. OWN OZE INSTALLATION
To enter into a corporate PPA based on the lease or rental of an installation, one must have the status of an energy consumer, i.e. a contract with the power company.
Financial corporate PPA – a contract for difference
In a financial corporate PPA (also called a virtual corporate PPA), the generator does not undertake to sell energy to the customer. The essence of the financial corporate PPA – similar to, for example, RES auctions – is the use of a differential contract mechanism. It consists in a mathematical settlement of a comparison of prices and quantities of electricity – without its physical delivery.
In a financial corporate PPA, the parties settle the difference between the price they have agreed on and, for example, the spot price2 for a certain volume of electricity or an otherwise specified price (reference price).
ENERGY CONSUMER STATUS VS. FINANCIAL CORPORATE PPA
The use of the financial corporate PPA mechanism does not require the status of an electricity consumer. It is possible to use this mechanism despite accounting for electricity using sub-metering and energy re-invoicing.
This solution is particularly noteworthy when the consumer of energy that is subsequently re-invoiced (e.g., the owner of a hotel or logistics center) has entered into a contract in which energy prices are not rigidly defined, but depend on energy quotations on the exchange.
SUMMARY
The choice of a corporate PPA model depends on the conditions in a commercial facility. The application of a particular solution should be preceded by legal, financial and technical analysis. It will not be possible to connect the installation behind the meter everywhere – for example, due to the limited availability of areas where photovoltaic panels can be installed. It is also important how the facility is designed. Obtaining the status of electricity consumers by tenants may involve significant expenses, making it not always profitable.
However, it is worth considering the advantages and disadvantages of the various corporate PPA models. The common denominator for all the solutions described is the provision of a certain volume of energy at a fixed price and for a certain period of time.
