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Offshore wind takes the corporate route to market

What is the best route to market for offshore wind? Conventional wisdom holds that a government-backed Contract for Difference (CfD) provides the best mechanism for allocating risk between project developer, financiers and consumers. But a new avenue is opening up to sell utility-scale wind power directly to corporate offtakers.

The use of corporate power purchase agreements (cPPAs) to leverage debt finance for renewables projects is not new. Mid-scale solar and onshore wind farms pioneered the approach to secure new routes to market when governments began to scale back renewables subsidy schemes.

But there has been a seismic shift over the last 12-18 months in the amount of corporate offtakers sitting down at the negotiating table to hammer out a deal – and the scale of projects that they are willing to consider. The appetite of big blue-chip conglomerates with much larger demand profiles is opening the door to offshore wind projects.

Growing momentum

Pexapark, a Fintech firm specialising in cPPAs and post-subsidy risk management, says the renewable energy cPPA market on the cusp of a “golden era”. Last year, Pexapark’s PPA Tracker recorded 16.2GW of disclosed contracted volumes – an increase of more than 40% over 2022. According to their data, the European PPA market has grown at a 37% compound annual growth rate since 2018.

“Looking at the deal count, the year-on-year increase appears even more radical. In total, 2023 saw 272 PPAs – an increase of an impressive 65% from 2022,” the company said in the report. “[This] truly illustrates the appetite not just from large offtakers that could potentially ‘distort’ the big image with individual large offtakes, but also from small and medium corporates and industrials that want to be part of the revolution in energy procurement.”

Offshore wind accounts for only a small portion of cPPA activity. Solar PV took the lion’s share last year, with a total of 10.5 GW – almost 65% of PPA volumes across 160 deals. Onshore wind saw 2.3 GW across 58 deals, while offshore wind saw 2 GW across 20 deals, Pexapark said.

European pioneers

A number of notable offshore wind cPPA deals have made headlines in Europe in the last few years.

Heavy industry and chemicals company Air Liquide signed a 115 MW agreement with Vattenfall for part of the output from the 1.5GW Hollandse Kust Zuid offshore wind farm in the Netherlands.

Steel producer Salzgitter struck a deal with Iberdrola for 114 MW from Iberdrola’s 476 MW Baltic Eagle wind farm in the German Baltic Sea. Amazon secured 1.1 TWh per year from Baltic Eagle and Iberdrola’s 300 MW Windanker projects. Separately, Mercedes Benz signed up for 140 MW from Windanker.

Corporate offtaker interest in offshore wind is growing (chart credit Westwood)

The UK has seen fewer such deals, but that is starting to change. TotalEnergies and SSE Renewables secured finance for their 1.1 GW Seagreen offshore wind farm in 2020 after signing a PPA for about one-third of the capacity, backed up by a Contract for Difference for 454 MW. The rest will be sold on a merchant basis.

Ocean Winds’ 882 MW Moray West offshore wind farm in Scotland took matters a step further. The project secured a CfD for just 294 MW of its capacity in the UK’s fourth CfD allocation round (AR4), prompting speculation that the scheme might struggle to raise finance for the whole development since only a small portion of its output was covered by a long-term price guarantee.

But the move was part of a plan to ‘stack’ revenue from a variety of sources. In the weeks following the AR4 results, Ocean Winds first signed a cPPA with Google for 100 MW and a separate deal with Amazon. Then in January this year, Amazon expanded its cPPA to 473 MW, meaning the Engie-EDP Renewables joint venture project is the first in the UK to commercialise more than half of its output via private corporate offtake deals.

Power-hungry blue chips

The energy needs of tech giants such as Amazon and Google are set to balloon with the expansion of generative artificial intelligence (AI). A simple Google web search consumes an estimated 0.3 watt-hours (Wh) of electricity, but this increases exponentially to 3 Wh per ChatGPT request, and a staggering 9 Wh per AI-powered Google search.

Deindustrialisation might be a defining narrative of European economic output in the post-Covid 2020s, with the mothballing and closure of numerous steel, fertiliser and chemicals facilities when gas and power prices spiked in 2022. But that loss is counterbalanced by generative AI, a huge growth market in Europe with a voracious energy appetite.

Similarly, Amazon is on a mission to ramp up its direct procurement of renewable power to cover 100% of its operations – including its retail fulfilment centres and Amazon Web Services (AWS) data centres – by 2025.

The company procured 5.6 GW of electricity production capacity globally in 2021, a 40% increase on 2020, and that figure is rising thanks to strategic partnerships with companies such as Iberdrola – which will supply power and in return use cloud services from AWS.

Big demand, big projects, big risks

Thanks to their scale, offshore wind farms are uniquely placed to capitalise on this blue-chip trend.

“Such companies consume large amounts of power, engage in long-term strategic planning and are large enough for their emissions profile to become a matter of public debate (thus providing a public relations benefit for decarbonisation),” Westwood Energy Group said in a paper last year.

“These sorts of consumers are also best placed to benefit from the price and volume hedging utility of tapping into a diverse portfolio of power providers.”

But there are numerous risks and pitfalls when negotiating corporate PPAs of this magnitude.

Projects are by their nature risky undertakings that face well-documented hurdles associated with securing planning consents, grid connection, finance and other key milestones. And once up and running, there are other issues to contemplate too.

Due to its inherent variability, wind energy rarely matches the demand profile of the corporate buyer 24/7. This creates ‘volume’ risk – whereby overall annual output diverges from models; and ‘shape’ or ‘profile’ risk – whereby hourly production differs from a 24-hour baseload delivery of electricity.

Cannibalisation and price risk are also serious considerations, because increasing renewables penetration into a grid system lowers the capture price of renewables due to highly correlated output swings during periods of high wind.

Enter the middlemen

All of these risks can be managed and allocated in a balanced manner via the use of carefully-crafted corporate power purchase agreement contracts, specialised insurance providers and other legal or financial mechanisms.

“Balancing contracts are becoming pivotal in a revenue’s stack,” says Pexapark. Utilities are well placed to provide balancing services, because neither corporate buyers nor developers have the same level of sophistication to handle imbalance risk – when there’s a steep mismatch between supply and demand, often leading to negative prices.

Utilities can provide balancing services in a ‘sleeved’ physical cPPA signed directly between corporate buyer and wind producer. Alternatively, they can act as middlemen in a ‘back-to-back’ PPA, where utilities enter into PPAs as buyers but then leverage their own origination teams to match the project volume with corporate demand.

All of these approaches add significant time and expense to the development process, and require large creditworthy counterparties that see value in lengthy strategic planning of their energy requirements.

This precludes the participation of smaller companies in offshore wind cPPAs, unless they can be aggregated into a large single buyer that contracts directly with the wind farm. The complexity of drawing up an aggregated cPPA should not be underestimated. “The allocation of default risk is one of the largest discussion points” in such negotiations, Pexapark says.

Components for the Moray West wind farm. Source: Amazon

Going beyond the ‘hybrid’ approach

So far, according to Westwood, two types of cPPA have enabled offshore wind final investment decisions (FIDs).

One is the ‘subsidy-free’ model, where 100% of the farm’s capacity is initially uncommitted and the developer will look to secure at least 50-60% from creditworthy offtakers to reach FID. This has occurred in Germany and the Netherlands, but not the UK.

The other is the ‘hybrid’ model, where part of the farm’s capacity is secured with government support and the rest is secured by private offtakers. Seagreen and Moray West, which both combine a CfD with a cPPA, are examples of this.

The question now is whether cPPAs can scale to the point where they enable UK offshore wind FIDs outside of the CfD regime. The ‘private’ model is currently speculative, but a breakthrough here could offer an entirely distinct route to market without government involvement. It would also give both sides more control over the timeframes for negotiating deals and bringing projects to market.

Experts are circumspect about such a breakthrough. “[Private] CPPAs as a route to market for an offshore wind farm is incredibly tricky – partly because being able to absorb the full amount of power is tricky,” Robert Buckley, head of relationship development at Cornwall Insight, tells E-FWD.

“I’ve seen people ask questions as to whether there could be a place here for the public sector whose energy needs are likely to be significant, but equally could have a deal underwritten by government. Again there’s risk associated with this though and signing for 15 years is a big commitment,” he added.

BP is, to an extent, breaking the mould. The British oil major is developing two offshore wind farms on a merchant basis – i.e. selling the entirety of the output into the power market without a CfD. However, the company is planning to use those wind farms to back their own demands from forecourts and EV charging stations, so in this sense these projects are for self-consumption – not for a third-party blue-chip partner, Buckley explained.

Government still looms large

Still, following the debacle of the fifth allocation round (AR5) in which no offshore wind farms bid due to impossibly low strike prices, the prospect of developing an alternative route to market is alluring to developers.

Demand for cPPAs will “depend on the attractiveness of the UK CfD regime,” said Jeremy MacIver, head of commercial development at New Zealand utility Contact.

“Corporate PPAs across Europe became popular as relevant subsidy schemes ended. If the UK CfD regime is not addressed following the recent auction failure, it is possible that cPPAs could fill the gap left by that subsidy,” MacIver said. The UK government’s decision to lift the strike price for AR6 should address those concerns – results are due at some point between June and September this year.

“Whether cPPAs become more common for offshore wind will also depend on the level of merchant risk that developers / lenders are willing take,” MacIver said. “There are plenty of examples of very large cPPAs (400MW+), which would provide hedging cover for even the largest of UK offshore wind farms, but would not entirely mitigate price risk.”

He added: “However, in absence of these one-off, very large PPAs it is possible that corporates looking to contract with offshore wind farms will need to create buyers’ clubs to aggregate enough scale.”

The market is yet to witness the successful completion of such a complex undertaking, and appetite for doing so will hinge to a large extent on the amount of capacity awarded CfDs in AR6. This, in turn, depends on the budget that government makes available for this round. A smaller budget would increase competition and raise the prospect of another cut-throat auction.

However, reports on Wednesday 6th March indicated the government would make £800 million available to offshore wind in its final budget notice for AR6, out of a record £1 billion-plus total cash pool for all technologies. This is a strong indication that much more capacity will be contracted, providing confidence to developers that they can secure a route to market via the CfD.

The more generous budget amount, if confirmed, should quell developer demand for alternatives such as cPPAs – but ongoing demand for green electrons from energy-hungry corporates will keep interest in this space very much alive.

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