1st Renewable Corporate Power Purchase Agreements (“PPA”) Workshop-Executive Summary
Numerous sectorial stakeholder companies have taken part in the 1st PPA Workshop (the “Workshop”) which was held on 20 February 2020 in cooperation with TurSEFF and Solarbaba. The Workshop was convened for the purpose of discussing and exchanging opinions on ensuring the adaptation and widespread use of Renewable Corporate Power Purchase Agreements (“PPA”) which are utilized globally in many countries as a financing model in the renewable energy sector.
II. PPA AS A NEW FINANCING MODEL
A PPA is a generally long-term electricity supply agreement which has been entered into between an electricity generation company and a consumer and which ensures the purchase of green energy. In global markets, different types of PPA structures exist, depending on the relevant technological specifications and localized features as well as on financial modelling.
Basically, the most commonly used PPA types are physical and financial PPAs which are named in accordance with the relevant type of supply. In the case of physical PPAs, electricity is supplied from a specified renewable energy power plant to a designated consumer facility. By utilizing this type of PPA, a renewable energy power plant project can be developed, and the commissioning and the continued operations of the relevant power plant can be financed. In such case, a sale and purchase agreement will be entered into usually with a single customer (offtaker).
In turn, financial PPAs where no physical supply of electricity takes place, and which form a contract for difference aimed at providing a guarantee against electricity price uncertainties by means of an electricity price that will be determined by the contracting parties. With financial PPAs and by using competent tracking systems, the electricity which has been generated at a facility can be sold to multiple customers (offtakers). Therefore, by utilizing PPAs and depending on the parties’ needs and the specifications of the power plant (such as an existing power plant that is currently in operation, a new on-site investment or a new off-site investment) which will be subject to the implementation of a PPA, different business models can be developed.
At physical PPAs, the term of the contracts is usually longer than at financial PPAs. But however, physical PPAs are more suitable for Turkey, because they are similar to the currently existing electricity purchase agreements which are used in Turkey. Nevertheless, at the first stage, financial PPAs might be a better choice for promoting such structures in Turkey. In Europe, physical PPAs are usually preferred and get promoted by governments in some countries through various methods. At his point, in a directive which has been published in 2018, corporate PPAs have been defined and standardization has taken place. Even though template PPAs which have been prepared by institutions such as EFET and SolarPower Europe exist, because PPAs’ specifications will change in accordance with each concrete transaction, standardization is open to further development. In each concrete transaction, the PPAs must be individually structured by taking the relevant parties’ requests into consideration. When the practices which are prevalent in international markets are considered, we anticipate that, also in Turkey, PPAs might eventually replace the guarantees which the incentives that are granted by utilizing YEKDEM provide and that, in this way, a capacity increase in renewable energy can take place without becoming a burden to the state/country.
III. WHY PPA?
(i) The parties of a PPA could prefer a PPA for various reasons. The most important factor for both parties are economic reasons. For instance, financial PPAs which are prevalent in the USA are preferred by customers (offtakers) that cannot anticipate the possible fluctuations of the electricity prices and that do not want to commit themselves in this respect, in order to reduce their financial risks. Moreover, in the USA, tariff models such as “Green Tariffs” and source-based solar specific Renewable Energy Certificates (REC) also exist. While physical PPAs provide electricity for the consumers fully from a renewable energy power plant, the financing for the renewable energy power plant which will be operated will be provided by means of a PPA.
(ii) Besides economic reasons, another reason why the consumers of electricity might prefer PPAs are so-called “green” reasons. Commitments such as “Zero Energy” and “Zero CO2 emissions” by institutions and their preference to purchase “green” energy show that PPA structures will be definitely used also in Turkey.
(iii) Customers who wish to source the energy that they will consume from green energy, will request in the PPAs which they will enter into that the fact that the energy which such customers will use has been obtained from green energy is supported with a certification system and monitored (tracked). The said request should also be taken into consideration in the Turkish market. International renewable energy certificates (I-REC) have prevalence in this respect. For the purpose of preventing double counting, at operational power stations, mechanisms such as VER (voluntary emissions reduction) credits, I-RECs and YEKDEM should be managed well and reported correctly.
(iv) When Turkish practices are considered, projects whose 10-year incentive terms have expired/will expire and renewable energy source area (YEKA) projects which have won tenders with negative prices can be financed without placing additional burdens on the state/public. Moreover, new renewable energy projects, i.e. capacity increases can also be financed by the private sector by means of the aforementioned structure. Therefore, a maximum amount of renewable energy projects can be realized with minimum costs.
IV. PPAs IN TURKEY AND THE SUMMARY OF THE WORKSHOP
(i) With the new Regulation on the Unlicensed Generation of Electricity (the “Regulation”) which was promulgated in May 2019, the number of businesses that wish to obtain their own electricity from clean energy sources and in particular, from solar energy have quickly increased. Moreover, projects which will be leaving YEKDEM because their 10 year guaranteed purchase terms have expired, RESA projects which have won tenders with negative prices, the fact that after 2020, the future of YEKDEM is uncertain and that the incentives are lower than expected or the possibility that incentives might not available for some technologies has brought into consideration alternative financing mechanisms with respect to new investments.
(ii) Furthermore, rapid energy price increases also form a main reason for the demand for new financing models by companies and institutions. Commitments such as “Zero Energy” and “Zero CO2 Emissions” which many global brands that generate energy in Turkey have made to their shareholders and customers also constitute another significant motivation. This, in turn, induces the suppliers of the said brands to reduce their respective carbon emissions. Thus, with decreasing energy generation unit costs and reduced carbon emissions, renewable energy sources will come to the forefront.
(iii) “Self-consumption” which also gets encouraged in the new Regulation, i.e. on-site power generation which takes place at the site of consumption appears to be the most useable method. However, in cases such as roof/façade areas failing to meet the demand for electricity consumption or if the generation potential is low, business models where green energy can be purchased or if this also is not sufficient, where carbon can be reduced to zero would come into question. The PPA model which is used in international markets provides an important opportunity for purchasing green energy.
(iv) The following ideas have been discussed at the Workshop with respect to the Turkish energy sector: – The currently existing energy market legislation does not pose an obstacle to the execution of a PPA in licensed applications. This type of agreements are being implemented into with respect to power stations which are currently in operation. The reason for PPAs’ coming into prominence in Turkey is that PPAs form a mechanism which is based on the private sector, with the exception of the purchase support that the state provides. However, the demand for PPAs can be increased by means of incentives such as carbon credits and the promotion of renewable energy. On the other hand, YEKDEM constitutes a guarantee element for accessing financing. However, the developments and uncertainties in the renewable energy sector have caused the participants in the relevant sector to prefer business models which the legislation can only steer at a minimum level. In addition to satisfying consumer demands while also protecting the public interest, the PPA structure can be regarded as an optimum solution for the provision of project financing by energy generating companies.
– The parties may, in accordance with their mutual understanding and the principle of freedom of contract, regulate and determine issues such as the term of the relevant agreement, the parties’ ability to amend the relevant provisions during the term of the agreement, the methods for reducing the risks for the opposing party, the termination fee as well as the penalty clauses in a PPA, in accordance with their own needs. Exempting the energy which will be purchased in accordance with a PPA, from YEKDEM costs can be suggested as a convenience which might be provided by means of legislation.
– Moreover, as it also forms a subject of discussion in markets where the PPA practices are developed, restrictions arising from competition law should also be considered for PPAs which will be drafted in Turkey.
– With respect to financing, the rating of a PPA’s parties would come into consideration. Because, in Turkey, the rating of companies is insufficient, company balance sheets will be taken into consideration when financing a PPA structure. Even though letters of guarantee which have been issued by banks constitute a type of guarantee which are known to sectorial stakeholders and which sectorial stakeholders use frequently, they should be considered as a cost item that, at long-term PPA structures, would increase the costs.
– On the other side, government-supported credit insurance policies which will be issued on a sectorial basis and which are commonly used in developed PPA markets and moreover, which are supported by a state should, in particular, be taken into account for the purpose of eliminating the opposing party’s risk and increasing the widespread use of PPAs.
– During PPA processes, financial institutions should, as it is also the case in international markets, be involved in the process right from the beginning. Transparent tracking of the process by financial institutions and the notification of the parties of a PPA about the minimum requirements which are needed for financing, is essential for creating long-term PPA structures.
In the afterward of our first Workshop where we have discussed the status and the future of PPAs in the Turkish market for the primary purpose of paving the way for a capacity increase in renewable energy, our work will incrementally increase and will continue with an accelerating pace with the participation of different and more numerous stakeholders. The work schedule which we will create in this respect will be shared with sectorial stakeholders as soon as possible.
Organizers: Solarbaba and TurSEFF
Participants: Borusan EnBW, EGE Attorneys at Law, EnerjiSA, Engie, Entek, Esko Enerji, Foton Enerji, Limak Enerji, Pure Energy, RES Anatolia and YBT Enerji