Corporate PPAs – We are only seeing the tip of the iceberg

Corporate PPAs the importance in global decarbonization

This blog is part of KPMG's Davos WEF 2020 Climate Blogs, describing the importance of corporate PPAs in global decarbonization

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Ice Glacier

Strong ambitions for corporates

As corporates account for approximately two-thirds of the world's electricity end-use consumption, they can and will play a vital role in decarbonizing global economies by 2050. Until recently and outside the energy-intensive industries, the majority of corporates used to treat energy procurement as a cost to be managed rather than a strategic area for risk reduction and value creation. This has changed over the last years, partly driven by stakeholder pressure and government policy, but also as multiple options have emerged for corporates to reduce carbon emissions with respect to electricity consumption, varying from energy efficiency programs (often driven by innovation) to equity investments in renewable generation assets. By now, a large part of the largest global corporate consumers of energy have clear renewable energy targets in place - some of them already committed to procuring 100% of their electricity from renewable sources.

In particular, sourcing renewable electricity through a Corporate Power Purchase Agreement (corporate PPA) has grown in popularity recently. Simply put, a corporate PPA usually is a long-term contract under which a company agrees to purchase electricity directly from an energy generator/developer (instead of through a utility).

A clear acceleration of Global corporate PPA volumes has been observed over the second half of the previous decade (see below – source Bloomberg NEF).  

Infographics Global Corporate PPA

Tip of the iceberg

The growth of global corporate PPA volumes is a clear indication that the private sector is mobilizing in an unprecedented way, replacing the supporting role of governments with respect to the significant global build out of renewable capacity over the next decade. Corporates are offering renewable asset developers an alternative to risk mitigating subsidies by offering long term contracts with risk mitigating characteristics (e.g. fixed price or flexible pricing with caps and floors), while providing themselves with improved costs management (more stable, more predictable and/or lower costs – driven by a strong reduction of the levelized cost of renewable energy), strengthened resilience and an enhanced green brand.

While the recent growth of global corporate PPA volumes has been steep, it is expected this is just the tip of the iceberg. Driven by a further decrease of government incentives with respect to renewable energy projects (resulting from a combination of a stronger policy focus on environmental goals and reduced government interference of national electricity markets in developed countries), risk mitigated corporate PPA's will be required for developers to be able to attract competitive financing and realize new build of renewable generation assets, perfectly aligning with the increased demand for renewables by corporates driven by their renewable energy sourcing targets. This combination of elements will further catalyze growth of global corporate PPA volumes in the coming decade.

Impact to the broader value chain

The further increase of corporate PPA volumes can have a fundamental impact on the traditional electricity value chain, which need to be monitored carefully over the coming years, examples include;
  • What is the long term impact of a significant increase of bi-lateral trading through corporate PPA's on the liquidity of the energy trading markets?
  • What is the impact on developers and corporate offtakers of renewable energy of the reduction of government control and supervision with respect to national energy markets?

Davos WEF 2020

This blog is part of a series of blogs prepared by a number of expert KPMG colleagues as part of Davos 2020, where we highlight the vital role that the private sector can play either on its own or working hand in hand with the public sector.

© 2021 KPMG N.V., een Nederlandse naamloze vennootschap en lid van de wereldwijde KPMG-organisatie van onafhankelijke ondernemingen gelieerd aan KPMG International Limited, een Engelse vennootschap “limited by guarantee”. Alle rechten voorbehouden.

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