Private wire power purchase agreements: Market update and key considerations

General trends in the private wire power purchase agreements market

Over the last five years interest in PPAs has grown. Walker Morris has acted for public sector, private sector and utility clients on a range of PPA structures (onsite/offsite generation, private wire/‘sleeving’) with different technologies (rooftop solar, ground mounted solar, hydro, anaerobic digestion, energy from waste). Corporates and public sector bodies are increasingly driven by sustainability goals and commitments, as well as cost savings and financial certainty.

Financial drivers behind private wire power purchase agreements

Attractive pricing remains a key driver of private wire PPAs. A private wire PPA offers savings in the form of avoided grid charges and policy costs applied to electricity imported from the grid. The generator and the consumer (or “offtaker”) share these savings, as the offtaker buys electricity below the retail cost of grid electricity while the generator sells above the wholesale market price.  Falling technology costs combined with escalating wholesale energy prices have strengthened the financial case for renewable generation.

Regulatory changes in the power purchase agreements market

The financial case for private wire PPAs subsists despite regulatory changes in recent years which have increased network charges and supplier levies. In 2019 Ofgem published its final decision on changes to network charging arising from its “Targeted Charging Review”, which removed certain credits received by larger generators and reduced ‘embedded benefits’ received by smaller embedded generators.

It’s expected that savings available from avoided network and policy costs will reduce further in the future. Ofgem is currently reviewing network charging rules [1], the outcome of which is expected to reduce the cost which can be avoided by a private wire arrangement where a back-up connection to the grid is still required. The government may also seek to limit avoidance of supplier levies by private wire generation.  Policy costs are also expected to rise to cover an increase in Contract for Difference (CfD) charges.

In November 2022 the government announced the Electricity Generator Levy, a new, temporary 45% levy on the extraordinary profits made by electricity generators due to high wholesale gas prices.  Renewables industry representatives have described the levy as a windfall tax which will deter investment in much-needed new renewable energy projects.

Grid connections

Renewables developers are facing increasing delays and high costs to connect to the regional distribution networks because of constraints on National Grid’s network. This makes a private wire model more attractive provided that the generation equipment is connected to the consumer “behind the meter” and doesn’t need a grid connection. However, grid constraints are affecting private wire projects that need to connect to the grid, e.g. to export excess generation and/or import power.

Renewables projects are also being required to pay more for connections to cover the network reinforcement needed to enable the shift from a system designed for large coal-powered plants to a more decentralised system of renewable generation. These charges can vary greatly depending on where the project is located. In many cases these chargers for will render smaller-scale projects unviable.

Net Zero, sustainability, ESG and private wire power purchase agreements

Sustainability and ESG (environmental, social and governance factors) have risen up the corporate and public sector agenda. That is particularly so since the government’s 2019 legally binding commitment for the UK to achieve net zero greenhouse gas emissions by 2050. Corporate energy users are increasingly recognising the benefit of trackable and renewable energy to help meet sustainability targets and carbon reporting and accounting commitments.  Buying electricity from a named local renewable source via a private wire power purchase agreement helps corporates strengthen their ESG credentials.

‘Sleeving PPAs’

As focus on ESG and sustainability has grown, corporates have increasingly looked to purchase renewable energy from off-site generation. Often called a ‘sleeving’ PPA, power is supplied at the metering point through the grid via a licensed supplier (acting as intermediary). The licensed supplier will typically charge the buyer a sleeving fee in return for facilitating the transaction, mitigating the risks associated with wholesale market fluctuations and providing grid balancing services.

An important distinction amongst sleeving PPAs is whether the energy is generated by a brand-new facility (that would not otherwise have been developed) or an existing plant. If the former, the PPA may be regarded as providing ‘additionality’ by adding new renewable capacity to the grid, and may therefore have a more robust claim to environmental or sustainability benefit.

How we can help businesses with power purchase agreements

The market for renewable energy PPAs – whether private wire or other corporate PPA models such as sleeving PPAs – remains buoyant. The benefits of price certainty, competitive pricing and sustainability credentials are key drivers for both public sector and corporate clients.  Suitable sites with planning, grid connection and a creditworthy offtaker are key to private wire projects. Similarly, rooftop solar PPA projects can be attractive for freehold and long leasehold owners / occupiers of commercial and industrial premises such as warehouses and factories.

However, the PPA market continues to face challenges. Energy price volatility makes negotiating long term pricing difficult, and expected policy shifts and network reform will be a factor on developments in the market.

Walker Morris’ Infrastructure & Energy specialists are experienced and expert in navigating all aspects of the PPA market. We can advise businesses as to the most appropriate power purchase agreement model for them, and we can help to negotiate and secure the best terms. Please contact Ben Sheppard or any member of the team for tailored advice and assistance.

[1] https://www.ofgem.gov.uk/publications/distribution-use-system-charges-significant-code-review-launch