Utility and aggregated power purchase agreements (PPA) could become the likely ways to lure small and medium sized enterprises (SMEs) into this market and help them with their clean energy procurement, experts told Montel.
PPAs, seen as an important tool to help corporations decarbonise their operations and hedge their risks in the power market, have been growing at a fast pace in the past decade, mainly led by large corporations.
However, smaller players have been left out because signing PPAs can be time-consuming and complex and many SMEs lack the human and financial resources and the knowledge to sign such deals. SMEs represent 99% of all business in the EU, according to the European Commission.
For Miguel Marroquin, managing director of PPA transaction advisory firm Our New Energy, utility PPAs would be the simplest way for SMEs to tap into this market.
“In the short term, utilities may represent the easiest option for SMEs to procure green energy and PPA contracts,” he said. “Utilities have a role to play because they are the gearbox that can swing from generators on one side to consumers on the other.”
A utility would sign a longer-term 10-year PPA with the generator and grant a discount or a fixed price for the power it supplies to the SME if the consumer commits to buying its energy from that supplier for a three-to-five-year term, he said.
For newly built assets, signing a short-term supply agreement with an SME would not be appealing as it would not offer investment grade payment guarantees required by banks and other financial backers, said Marroquin.
“In Spain for example, if you look at our list of corporate PPAs, 90% of those deals are signed by a utility with large or small companies,” Marroquin said.
Simple, aggregated deals
For Brendan O’Flaherty, business development director at the marketplace for clean energy Squeaky, simplified and aggregated PPAs could be the best formula to “democratise” these deals and make them accessible to SMEs.
An aggregated corporate PPA is when a group of companies collaborate and pool their power usage to purchase green and clean energy directly from the generator. For SMEs, banding together in an aggregated basket provides stronger bargaining power to help capture the best price by buying at scale, gain direct access to clean green energy and significantly lower process costs.
Another key factor for this type of PPA is simplifying the contract, said O’Flaherty. “The PPA needs to be re-engineered,” O’Flaherty said. “It’s important to standardise the PPA and simplify it by cutting a 150-page document with a complex legal process to an easier-to-digest 15-page document.”
Access to corporate PPAs
Squeaky, which put together an aggregated PPA for 20 UK universities in 2019, is now executing similar initiatives to enable smaller companies to access corporate PPAs.
In these basket deals, corporations have the flexibility to commit to a certain percentage of their energy consumption as a starting point, O’Flaherty said.
“We’re not asking organisations to procure or hedge out all their energy. We’re offering the flexibility for them to do a percentage so they can protect against energy price volatility while giving certainty about the source of their energy,” he said.