Clean energy, clear advantage: Why Developers are turning to CPPAs
The role of CPPAs continues to grow as the UK grid and businesses progress in their decarbonisation ambitions.
When it comes to funding new renewable energy projects, UK developers are increasingly moving towards Corporate Power Purchase Agreements (CPPAs).
Why are we talking about this?
Over the last few years, the UK energy markets have seen the end of several subsidies that support renewable growth, such as the Renewables Obligation Certificates (ROCs) and Feed-in Tariffs.
With the demand for traceable renewable energy increasing year-on-year, a key challenge for UK developers is how subsidy-free renewable energy projects will be funded if revenue from the Contracts for Difference (CfD) scheme is not available.
Developers are also expressing concerns about rising capital costs, and possible pending regulatory changes – such as potential zonal pricing – alongside the effects of other Review of Electricity Market Arrangements (REMA) decisions to renewable asset support subsidies, such as CfD. Changing these support mechanisms can easily alter the economics of a new renewable project.
Furthermore, geopolitical developments, including tariff-related issues, are contributing to pricing uncertainty and risk premiums being added to supply chain contracts.
These challenges have impacted major infrastructure projects worldwide, affecting not only energy but also renewable infrastructure.
Ørsted has reported that the continued rise in supply chain costs, higher interest rates and the risks associated with construction and operating to the planned timeline were instrumental in their decision to discontinue the Hornsea 4 project in the UK in its current form.
This reflects broader challenges facing infrastructure investment in the UK, where issues such as costs, policy risks, the planning system, and skills shortages are pivotal concerns.
Why are developers turning to CPPAs?
- Risk reduction: Locking in a long-term CPPA with a corporate consumer offers developers a stable, long-term financial investment in their asset, delivering additionality in the process.
- Security: CPPAs can often offer an inflation-linked revenue stream to enable consent for new to earth developments, providing reassurance to finance houses investing into the UK grid and renewable energy investors seeking more secure fixed price returns.
- Alternative funding route: Corporate buyers present developers with an alternative route to financing renewable energy projects to schemes like CfD.
What is next for CPPAs?
The role of the CPPA continues to grow as the UK grid and businesses move forward in their decarbonisation ambitions.
So far, renewable energy subsidies have provided financial security as the renewables sector has soared.
However, this is not enough for the UK to meet its growth ambitions ahead of net zero. The grid requires more renewable energy sources as a direct route to combat climate change and air pollution – while customers and shareholders are increasingly expecting corporates to deliver on their sustainability pledges.
Businesses can play a key role in supporting developers working towards decarbonising the UK grid by providing bankability. This is where a renewable generation asset is offered enough cash flow to attract financing or investment to enable the move to consented development on the UK grid.
As part of the National Energy System Operator’s reformed connections process, projects are assessed and assigned a status based on their readiness and strategic alignment with the UK’s energy goals to secure a connection date.
CPPAs were also featured within the energy announcements of the new Industrial Strategy. In “due course” the government is set to launch a call for evidence on how the market for CPPAs can be developed and improved for industry, including where the UK can draw from international best practice to improve competitiveness.
CPPAs offer an opportunity for developers and businesses to join forces. With the ability to draw on future investment from corporates alongside the CfD scheme and gain funding on sites that missed out on the allocation rounds.
How can Inspired help?
A CPPA differs from traditional procurement from a supplier, both in duration and nuance. Therefore, having an expert partner is key.
At Inspired, we partner with UK developers to align your asset with our corporate clients and UK energy suppliers for offtake, along with setting the groundwork for a long-term relationship and providing support on export connection requirements.
If you would like to discuss how our experts can support you, please email us at [email protected]
Image credit: Kate Brumwell, Inspired’s Siteworks team.
