You say you want a PPAs revolution? You'll get one

It's Bastille Day tomorrow, so let's talk about a revolution.

This week, we published our third Finance Quarterly special report of 2018. This report, called Europe’s PPA Revolution, looks at why wind farm owners in the Scandinavian nations Norway and Sweden have been so successful at securing power purchase agreements with large corporates in the last 12 months.

This has put the region at the forefront of a move in Europe to promote the use of PPAs with corporates. They have been well-used in the US since 2012, and will be more important for European investors too.

Governments have been cutting feed-in tariffs, which forces project developers and investors to take greater risks on the fluctuations of national power prices. PPAs can be a more stable alternative.

But all this talk of revolution. Bit over the top, isn't it?

Well, no. We're sure there'll be a revolution in the use of corporate PPAs in the European wind market over the next five years, with Scandinavia at the vanguard along with other early adopters including the Netherlands and the UK. However, we expect the revolution to be slow rather than swift, as there are major obstacles to be overcome. It's not exactly the storming of the Bastille.

Let’s look at the US situation. These PPAs grew up in part because large corporates wanted to cut their energy costs by dealing directly with wind farm owners. The wind farm owners embraced them because they gave stability in a market that, until 2015, was subject to frequent changes to the wind production tax credit support regime.

Having done these deals, US corporates looked to export this model to other nations – and Scandinavia has been an early beneficiary. When online giants Facebook and Google wanted to set up data centres in Europe powered with renewables, Norway and Sweden made sense. Large wind farms, supportive politicians, cool temperatures to help the centres work better, and low power prices were all vital.

That doesn’t mean the rest of Europe can follow suit yet.

Yes, we’ve seen a handful of these deals in the UK and the Netherlands but, in the main, the energy system in Europe isn’t set up to support these agreements. The continent is still a patchwork of regulations that mean each country has its own subtle barriers to corporate PPAs.

This is a problem the European Union is grappling with. In June, it published the re-draft of its renewable energy directive, in which is tasked countries with identifying barriers to the signing of corporate PPAs and removing them. Of course, it is then up to national governments whether they do anything about it.

If countries are interested in growing the use of corporate PPAs, they also need systems to prove that the electricity that the corporates buy actually comes from green sources. The EU confirmed there would be no central auctioning of Guarantees of Origin that give energy buyers that confidence. Member states will need to do this themselves.

One positive point is that the EU said wind farm owners should have the freedom to use corporate PPAs alongside government support schemes. That should make things easier.

So the EU’s keen on corporate PPAs, as are corporates and the project owners. A challenge for those in the wind industry will be explaining the model to politicians and getting them to embrace it too.

In Europe, the use of feed-in tariffs has made PPAs a comparatively unattractive model for developers and investors. This has to change. There will be cultural and regulatory hurdles in each nation that would need to be overcome, but the interest in corporate PPAs from a wide range of industries should help.

And a final challenge we predict is that many in the industry are lobbying for Contracts for Difference in European onshore markets, of the type used in UK offshore. It was a big talking point at last November’s WindEurope annual conference to give investors certainty. However, it could also undermine the case for PPAs for the simple reason that governments are usually regarded as less likely to default on their bills than corporate energy buyers.

We expect a PPA revolution in Europe. Investors will make it happen. But we expect it to be a creeping revolution rather than a swift bloody battle.