On 19 January 2022, a webinar hosted by Cornwall Insight in partnership with the law firm Weightmans focused on routes to market for renewable projects that may not secure a contract during the fourth allocation round of the ‘Contracts for Difference’ (CfD) auction, which opened in December 2021. In the absence of the revenue certainty provided by a contract with a credit-worthy counterparty such as the government, developers have to find alternative business models to mitigate uncertainty, such as utility power purchase agreements (PPAs) and corporate PPAs, accepting various degrees of merchant risk. Our event considered the options available for developers and investors, based on asset type, connection and potential revenue streams. The recording is available here.
Panellists:
- Gayatri Desai, Managing Director, Energy Transition, Canadian Imperial Bank of Commerce
- Tim Dixon, Lead Analyst – Assets and Infrastructure, Cornwall Insight
- Nick Fothergill, Partner, Weightmans
- Levent Gürdenli, Partner, Weightmans
- Marek Kubik, Managing Director, Fluence
- Dan Atzori, Research Partner, Cornwall Insight (chair)
A significant pipeline
Contracts for Difference Allocation Round 4 (CfD AR4) has officially opened with the final budget set at £275mn in 2011/12 money, split across three technology pots, as shown in Figure 1. This is a large auction, with government loosely aiming to procure around 12GW of capacity, and it is expected to be highly competitive. While it is open to established and non-established technologies, offshore wind is set to dominate.
“It’s good to see solar and wind coming back into the auction process. There is a strong case to say that the pot should be bigger for mainstream generation technologies and the cap higher. More room needs to be made for them as they are going to carry a lot of the burden of the shift to further renewables. To hit the climate change targets we’re going to need more solar and onshore wind,” said Nick Fothergill, Partner at Weightmans.
Figure 1: Contracts for Difference, Allocation Round 4 (CfD AR4)
| Pot | Technology | Budget |
| Pot one | Onshore Wind (>5MW), Solar PV (>5MW), Energy from Waste with CHP, Hydro (>5MW and <50MW), Landfill Gas and Sewage Gas | £10mn. 5GW capacity cap, with 3.5GW maxima for both Onshore Wind and Solar PV |
| Pot two | ACT, AD (>5MW), Dedicated Biomass with CHP, Floating Offshore Wind, Geothermal, Remote Island Wind (>5MW), Tidal Stream and Wave | 75mn, including a minimum of £24mn for Floating Offshore Wind and £20mn for Tidal Stream technologies |
| Pot three | Offshore wind | £200mn |
Source: Cornwall Insight
Meanwhile, the overall pipeline of renewables is very large. According to Cornwall Insight’s Renewables Pipeline Tracker, there is currently a total viable pipeline of 137.8GW. All projects are at various stages of development, but the majority is pre-construction and without a route to market, as they do not have a CfD or a PPA, and have not secured finance.
The pipeline capacity is dominated by four technologies: offshore wind, onshore wind (excluding remote island wind), solar PV and batteries (predominantly lithium-ion). These four technologies account for 85% of all sites, and 93% of capacity amounting to 127.7GW. Growth technologies have been offshore wind and battery, with the majority of onshore wind sites having planning approved pre-2018.
Except for battery storage, which will instead be eyeing up the upcoming Capacity Market auction, these technologies are all eligible to compete in AR4. However, capacity far outstrips the budgets and capacity caps set by BEIS.
Exploring alternative routes to market
Since CfD AR4 will be oversubscribed and much of the capacity will not procure a CfD or deem it too competitive to enter, many assets will be seeking alternative routes to market. Beyond CfD AR4, there is uncertainty on the future frequency of CfD auctions or the technologies that will be included are uncertain. This furthers the case for developers to look at other routes to market in the future, such as third party PPAs, CPPAs, private wire or optimisation agreements.
Without securing a CfD and without a large customer to sell to or a willingness to self-trade (which brings its own risks), then some form of PPA will be generally required. Options being explored include utility PPA (directly with suppliers), CPPA (with end users), private wire (also with end user) and optimisation agreement in the case of a battery or a flexibility asset. Within these, there are lots of considerations and options to choose from to support an asset to come to market, including length, fix, floors, revenue shares for optimisation, and structure for CPPAs.
PPAs, and particularly CPPAs, are increasingly fundamental as a route to market for supporting the build out of new build renewable assets, especially as we no longer have Renewable Obligation Certificates (ROCs) and Feed-in-Tariffs (FiTs). Since this auction is very likely to be highly competitive, a CPPA could allow a generator to end up with a better price than through the auction process.
Sleeved PPAs have been predominant, but now there are an increasing number of virtual or synthetic PPAs. Since they are easier to transact with different counterparties, they are well understood, and potentially better for disaggregated demand.
Unlocking corporate demand
There is still a knowledge gap among certain corporates. PPAs are a fundamentally different way of buying power, and it needs to be understood what the main risks and challenges around that are.
Aggregating demand will be critical for unlocking the market for small or medium enterprises, especially if technology can be used to implement or automate the process.
“For medium enterprises, aggregation is one model that we could explore further. Standardisation will be important as well as it can take a long time to transact one of these deals. The ability to offer and provide products which aren’t 15 to 20 years long will be paramount,” said Levent Gürdenli, Partner at Weightmans.
What is more, the basket PPA deals are sometimes being looked at. The anchor corporate – having one key corporate with a strong credit rating can bring other corporates into these deals.
“Generators are exploring hedging their power across a number of routes to market — part CfD, part merchant, part CPPA — and by doing that and diversifying it reduces some of the stringent credit requirements of the counterparties that are there for some of that,” said Tim Dixon, Lead Analyst Assets and Infrastructure at Cornwall Insight.
However, the credit worthiness of the counterpart does affect the bankability of a project. Even with relatively secure counterparties, the PPA will typically require independent security or financial stress tests which is an important consideration for generators and their funders. Potential liabilities, especially in an early termination scenario are quite significant.
There is potential for storage to help smooth out generation profiles which can help with unlocking PPAs for corporate offtakers. What is more, insurers are increasingly moving more into this space, taking on the risk of performance and volume of the project, and settling against a proxy generation.
Route to market options for storage projects
Routes to market agreements or optimisation agreements are increasingly offered by major suppliers, combining a number of revenue-generating options within a single agreement and with a single counterparty. These agreements go beyond a traditional PPA and can include access to the forward power market, Balancing Market (BM), ancillary services markets and minimum revenue guarantees.
More of these routes to market optimisation agreements are set to be used going forward, offering generators the benefit of transacting with a single counterparty, but having the potential to maximise or optimise their revenues along with access to multiple revenue streams. This represents an advantage for generators when trying to secure debt funding.
There are more well-trodden routes into the capacity market, BM and ancillary services markets. Competition among assets is strong in these markets and prices are affected accordingly, as the frequency response market is becoming increasingly saturated.
Battery storage has some cause for optimism as the growth in intermittent renewable power creates some inevitable need for storage assets. Co-located energy assets have seen a growth in importance in the energy mix, and batteries can now compete in the BM.
“We’re beginning to see some large scale and long duration projects coming to market, and some innovative debt financing to help them develop. Co-location of battery storage, particularly by a developer with a strong track record, is likely to be attractive to investors,” said Nick Fothergill, Partner at Weightmans.
Co-location has advantages of being compatible with existing subsidy regimes and can benefit from under-used grid connections, shared grid connection costs with other assets as well as there being minimal competition with the other co-located assets.
Large scale and long-duration electricity storage assets, which can balance the grid over long periods of time, are coming, and will be needed in conjunction with the rise in intermittency. Given that renewable generation must inevitably increase if climate targets are to be met, more routes to market will inevitably have to be found.
Looking forward
Hybrid approaches are set to become more frequent. Some projects may not need a full 15-20 year CPPA to get them over the line, so we will see more shorter term PPAs being entered into. This could help with corporate offtakers and then asset owners relying on merchant risk models for the tail end of a project life.
There are now innovative structures in terms of pricing or volume arrangements, such as floating prices with floors or more volume or profile fixing, particularly with solar generation.
Interestingly, blockchain technology has been used for the first time in this space, where a PPA was entered into for all demand which was matched with renewable generation on a real-time basis.
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