David Foxwell assesses the offshore wind market's preparedness for power purchase agreements
In late February, a 10-year corporate power purchase agreement (PPA) was signed for electricity from an offshore windfarm in the UK for the first time. The PPA was signed by developer Ørsted and Northumbrian Water Group and will see Northumbrian Water take almost a third of its renewable energy demand from the 573-MW Race Bank offshore windfarm.
The corporate PPA will deliver approximately 100 GWh per year of renewable electricity from the offshore windfarm to sites in the northeast, Essex and Suffolk, amounting to approximately 1 TWh in total. This agreement will grow Northumbrian Water’s renewable energy activity and reduce Northumbrian Water’s operational costs through a long-term fixed price for electricity.
Ørsted described the deal as an important step towards building long-term green partnerships with corporate power customers. And so it is, but I don’t expect a glut of corporate PPAs for electricity from offshore wind just yet, although they are increasingly common in the onshore wind sector.
A corporate PPA is a contract wherein the customer buys electricity directly from an energy producer, cutting out the utilities as the middleman. Businesses like them because they align with their environmental and reputational goals. Developers like them because PPAs provide stable revenue in the long term that can help get projects built.
A contract typically includes the commercial terms of the renewable energy purchase – such as the contract period, delivery date, point of delivery, volume and price. They often include quite sophisticated pricing mechanisms.
Wind energy is better suited than other low carbon technologies to supplying companies’ needs for renewable electricity due to its scale, cost competitiveness and risk profile. However, offshore wind’s problem with corporate PPAs is just how big it could become. More and more companies are keen to buy green energy from onshore wind, but how many of them would need the entire output of a gigawatt-size offshore windfarm? Increasingly, that is where offshore wind is headed, towards larger and larger projects. Onshore windfarms are generally of a size that suits corporate buyers’ needs.
The answer may lie in ‘PPA clubs’ in which like-minded corporates aggregate their needs and each take a slice of the output from a large offshore windfarm. Or it might lie in intermediaries, who act as off-takers, who buy the electricity produced by a windfarm and slice and dice the output to corporate clients. It might also lie in multinational companies that already have trading operations buying and selling electricity.
As more players enter the offshore wind market, the number and type of financial instruments used is likely to grow. Who the developer is and who the off-taker is will vary from project to project and country to country and so too will the way a PPA is structured. As companies with the financial might of Shell re-enter offshore wind, they bring a growing commitment to become electricity businesses, with the acquisition of utilities said to be in their sights. Increasingly, energy companies such as Vattenfall – a leading developer of offshore wind – are building trading operations, too. In fact, the following PPA’s have recently been agreed:
The market is evolving, and as offshore windfarms grow, I’m not sure how many one-to-one deals between developers and corporates able to take the entire output from a single large offshore windfarm will take place. I doubt very much whether there is going to be a one size fits all solution to PPAs for offshore wind, or that corporate PPAs will be the only solution, but new players in the market with trading arms could come to play a role.
Shell’s old business model saw it explore for oil and gas, ship it around the world and sell it to us on the garage forecourt. Through Shell Trading, it has long worked in energy markets around the world, trading crude oil, natural gas, refined products, biofuels and chemical feedstocks. A few years from now, Shell and vertically-integrated companies like it could be co-developing offshore windfarms, and generating, buying and selling a whole lot more electricity.