What’s the future for corporate PPAs in Europe? Just ask Red M&M

Red M&M has emerged as an unlikely advocate for the wind industry following the announcement by Mars that wind will play a key part in a $1bn sustainability drive. What does this tell us about corporate interest in wind power purchase agreements in Europe? Richard Heap reports

The invite is out.

There’s a handful of celebrities that came out in late 2017 to rave about wind farms – Dr. Who and Emma Thompson to name just two – but there is one big name we really want at our Financing Wind Europe conference: Red M&M.

Yes, Red M&M. He’s be perfect. He’s chocolatey; he’s been on TV; he’s redder than the button in the White House over which Donald Trump’s angry hand is constantly hovering; and he likes wind farms. Through to the end of 2018, M&Ms owner Mars is running a global campaign to raise awareness of a $1bn sustainability drive, which includes buying wind power – and Red M&M is its star.

Mars is also notable in the world of corporate power purchase agreements (PPAs) with wind farms, as it has done deals in the US and Europe. Corporates use these deals because they enable them to hit their green targets while giving certainty over the cost of their energy. Even so, they’re still largely a North American phenomenon and Europe is struggling to catch up.

But why?

That is a question that we are due to discuss at Financing Wind Europe this year, as the European Union looks to unleash a PPAs revolution. In June 2018, the European Union agreed a revised version of its renewable energy directive, which said that EU member states should look to identify and remove obstacles to corporate PPAs.

But now it is up to member states to listen and act. The pressure is on the politicians.

In Europe, wind corporate PPAs have mostly been a feature of the market in Nordic nations such as Norway and Sweden, as we wrote in our Finance Quarterly special report – Europe’s PPA Revolution – in July 2018. But why has take-up been so slow in the rest of Europe and what can be done to address this?

There are a couple of significant reasons for this slow take-up.

One reason we have seen less of these PPAs in Europe than the US is because the incentives for renewables are so different. In Europe, governments have historically backed projects including wind farms with centrally-set feed-in tariffs. This has given owners guaranteed income, and little reason to go to corporate buyers.

The Contracts for Difference regime used for UK offshore wind farms poses a similar challenge. With CfDs, the government pays a subsidy on top of the market price of electricity to ensure that the project owner gets a guaranteed income that can make their scheme viable. Helpful, but also a disincentive to go elsewhere.

In contrast, the US has been more supportive for PPAs. The production tax credit has helped the wind industry to bring the cost of electricity below the project cost of traditional energy in many areas, and made renewables attractive to large firms.

But change is coming.

In 2016, renewables PPAs totalling over 1GW were signed in Europe, and governments are ditching centrally-set FITs in favour of auctions where they can pay less in the way of subsidies. We expect more project owners to look at PPAs as a way to mitigate the risks of fluctuating power prices.

Corporates in Scandinavia are also showing how these deals can work well, as are a handful of companies in the UK and the Netherlands. Check out this report for more.

A second obstacle to the growth of PPAs in Europe is that there has been no clear framework from the EU to support corporates that want to sign PPAs – but, with FITs in place, there has been little demand for such a framework. The revised renewable energy directive should help to address this by removing some barriers for would-be buyers – but this is still a work in progress.

These two factors have enabled US companies to make more progress on signing PPAs than European counterparts, and we have seen a mix of technology giants (Amazon, Google, Microsoft) and others (Ikea, Mars, Wal-Mart) entering the fray.

And a third reason for the slow take-up in Europe is, arguably, cultural. Over many decades we have seen a tension in countries like Germany over whether the growth of renewables should be led by top-down government targets or the bottom-up work of activists. Corporates would inevitably get some people's backs up.

Even so, we expect PPA activity in Europe to pick up with the move away from FITs, changes to the RED, and the Scandinavian example. And this should help investors in wind. These PPAs give developers and investors the security of income they need to start work on new schemes; and that certainty is also attractive for investors that might buy the development post-completion.

But we’ll let Red M&M go into more detail on that.