Jul 07, 2023

CSR: The Rise of Direct Purchasing from Green Energy Producers

Companies are taking action to face climate change. The most important initiative they are taking is the Power Purchase Agreement (PPA), which involves buying green energy directly from the producer, for fighting a backdrop of inflation in traditional energy prices and increasing CSR regulations. In its new “Observatoire des transitions énergétiques”, De Gaulle Fleurance reviews the situation in France and in a dozen other countries, thanks to exceptional contributions from foreign law firms: Siqueira Castro (Brazil), Brigard Urrutia (Colombia), Plesner (Denmark), Rokas Law Firm (Greece), AZB Partners (India), Lexel (Madagascar), SCPA LBTI AND PARTNERS (Niger), Shakespeare Martineau (United Kingdom), KMU Law Office (Turkey).

Key figures

+ 39 %. This is the annual growth of the global PPA market between now and 20311.

10. The production costs of solar energy can be up to 10 times lower than those of nuclear energy2.

2024. This is the date from which the CSRD directive will come into force, extending the extra-financial reporting obligations to 55,000 European companies and, indirectly, to all their suppliers.

In the same way that the direct purchase of fruit and vegetables from farmers has developed among private individuals, we are seeing a craze among businesses for the direct purchase of green energy from producers. Introduced in the United States in the early 2010s, this scheme has won over businesses. Concluded for a period of 3 to 30 years, it allows companies to benefit from negotiated tariffs that are generally fixed over time, to green their balance sheet, to secure the energy producer’s business model and to accelerate the ecological transition.

According to a study by Transparency Market Research, the average annual growth rate of PPAs is estimated at 39% by 2031, with a forecast market value of 399.2 billion dollars worldwide. Solar energy accounts for 51.9% of these direct purchases, ahead of wind power and other renewable energy sources. Asia-Pacific, led by India and China, is in pole position with a 48% market share, ahead of Europe (23%) and North America (16%) in 2021.

The reason for this success? The increase in CSR regulations, with, for example, the implementation from 2024 of the CSRD directive extending the scope of companies covered by extra-financial reporting obligations. And the increasingly competitive price of renewable energies, with solar power costing up to 10 times less than nuclear power3.

Focus on some of the regulatory measures in place to encourage the development of direct purchases from green energy producers.

The regulatory framework is evolving in favor of the development of PPAs. The government is gradually relaxing the conditions required for consumers to operate directly on the unregulated energy market and take out PPAs.

Today, only players with an average monthly consumption of at least 500 kW have access to this unregulated market. Those who do not meet this condition may, however, join together and operate on this market, provided they buy only renewable energy.

A growing number of projects are also financed by operations structured to benefit from the financial aid provided for self-consumption schemes (i.e., where the consumer is also a shareholder or owner of the power plant).

Today, almost 70% of Colombia’s electricity is hydroelectric. This source is subject to increasing climatic risks, such as the El Niño phenomenon, which causes the reservoirs of hydroelectric power stations to dry up, so that they can no longer produce electricity, or only at very high prices. In this case, thermal power stations, whose prices are also high, have to take over. As a result, the diversification of production sources, such as solar, wind or geothermal energy, is in great demand and benefits the entire market.

There are a number of tax breaks to encourage the production of renewable energy: 50% of the investment in renewable energy is deductible from taxable income over a period of 15 years, VAT is exempt on dedicated equipment, customs duties are exempt on imported equipment, etc.

A reform currently under discussion should considerably facilitate the development of PPAs. Consumers will be able to negotiate and sign contracts directly with producers, without going through the intermediary of suppliers.

Finally, the forthcoming introduction of a regulated market in carbon credits will stimulate the development of PPAs, by requiring companies to offset each ton of greenhouse gases with these credits.

There are two methods for supporting the development of renewable energies in France: the feed-in tariff mechanism and contract for difference. Only small-scale energy projects can benefit from the feed-in tariff mechanism.

The feed-in tariff mechanism (purchase obligation) is a mechanism whereby EDF undertakes to buy the electricity produced by producers at a fixed price over a long period (15 years on average). The contract for difference is a mechanism whereby the State pays an ex-post premium that supplements the income of producers following the sale of their energy on the market.

Contrary to the effect produced in other countries such as the United Kingdom, the contracts for difference acts as a brake on the development of PPAs insofar as the producers who benefit from it in France cannot sell their electricity via a PPA – because they cannot sell the guarantees of origin associated with the electricity produced. However, to partially remedy this shortcoming, the law on the acceleration of renewable energy production now authorizes producers to enter into a PPA and a subsidized contract for the same project.

In addition, a new regulatory constraint could slow down the development of direct purchase from a green energy producer: from 1st July 2023, producers will have to hold a purchase for resale authorization, as defined by article L.333-1 of the Energy Code, or delegate the holding of this authorization, if they wish to enter into PPAs.

With the ARENH mechanism (Accès Régulé à l’Electricité Nucléaire Historique – Regulated Access to Historic Nuclear Electricity), which caps the price of a volume of nuclear-generated electricity at €42 per MWh, coming to an end on 31 December 2025, market players could see their interest in PPAs increase. The end of ARENH is likely to push up the cost of electricity for businesses and bring it closer to its real cost, estimated at nearly €60 per MWh (an increase of around 40%!). Against this backdrop, the use of PPAs and renewable energy could be an effective way of keeping bills under control.

A fund, the Recovery and Resilience Fund, has been set up by Greece and the EU to enable the Bank of Greece to finance renewable energy projects, which can sell their electricity via PPAs.

In Greece, too, the government is considering the creation of a dedicated PPA sales platform, enabling contracts to be concluded between producers and consumers.

The Indian government offers numerous incentives to encourage investment in renewable energy. Although these incentives are not specifically formulated for PPAs, they make it economical to produce and transport renewable energy.

Examples include: a requirement for companies to purchase a minimum amount of renewable energy as a percentage of their total energy consumption; a one-stop shop for obtaining permits, tax benefits, etc.; exemption from transmission charges for renewable energy; green energy corridors in each state that carry renewable energy and make it cheaper to distribute and purchase renewable energy; priority given to renewable energy over non-renewable energy when scheduling energy transmission….

The market trend is therefore very favorable to PPAs. The price of renewable energy in India has reached parity with the price of non-renewable energy. And companies are adopting ESG policies that encourage the use of renewable energy, either in line with the existing regulatory framework or through voluntary initiatives.

Of particular note is the development of individual and collective self-consumption, in response to growing demand from stakeholders and also benefiting from government support.

Finally, the Indian government has taken several initiatives to promote the manufacture and use of Battery Energy Storage Systems (BESS). These include linking the manufacture of BESS to the system of incentives linked to the production of green energy. With the increasing use of BESS, businesses will be able to store renewable energy for use at peak times or during production stoppages.

United Kingdom

The Contracts for Difference scheme is the Government’s main support mechanism for low-carbon electricity generation. These contracts are managed by the Low Carbon Contracts Company (LCCC), a private company wholly owned by the Secretary of State for Business, Energy and Industrial Strategy.

These contracts allow eligible generators to stabilize their income at a pre-agreed level (strike price) for the duration of the contract (usually 15 years). Under CfD, payments can flow from the LCCC to the generator, and vice versa: when the market price of electricity produced by a CfD generator is lower than the strike price set in the contract, the LCCC makes payments to the CfD generator to make up the difference; when the reference price is higher than the strike price, the CfD generator makes payments to the LCCC.

CfDs encourage investment in renewable energy by offering eligible developers direct protection against price volatility. They have reduced the perceived risk associated with renewable energy investment, making projects more attractive to developers and financiers. The stability offered by these mechanisms has encouraged the growth of the PPA market by providing buyers and sellers with a secure environment in which to enter into long-term agreements.

Public support mechanisms have encouraged the diversification of PPA buyers in the market. While traditional utilities and accredited suppliers have always been the main buyers, the availability of support mechanisms has attracted new participants. Businesses, public sector bodies and other entities seeking to achieve sustainable development objectives have entered the PPA market to procure renewable energy. This diversification has broadened the pool of potential buyers and contributed to the growth of the market.

Public support mechanisms have facilitated the development of large-scale renewable energy projects, resulting in a significant reduction in the Levelized Cost Of Electricity (LCOE) for renewables. As a result, renewables have become increasingly competitive with conventional forms of electricity generation, encouraging their adoption by the market and attracting more buyers to the PPA market.

Turkey has introduced a support mechanism for renewable energy resources (“YEKDEM”). A fixed support price per kWh has been set for each green energy source for 10 years. In addition to feed-in tariffs, the Renewable Energy Act provides for additional tariff incentives for licensed producers who use at least 55% domestically produced mechanical and electromechanical components in their installations.

Other measures introduced to encourage the development of renewable energy include an 85% reduction in the cost of permits, rent and other costs associated with obtaining rights of access to and use of state-owned land for a period of 10 years. These facilities are also exempt from paying the tax on the development of forest villages and the tax on reforestation and soil erosion control.

Green energy producers benefit from priority connection to the grid. And their application fee for an advance license is only 10% of the license fee charged for non-renewable energy. For a period of eight years, they are exempt from annual license fees.

Renewable energy projects can be developed in protected areas such as national parks, nature parks, nature conservation areas, protected forests and wildlife development sites, provided the necessary permits are obtained from the relevant authorities.

All these measures have created a new, highly dynamic renewable energy market that is of interest to producers and consumers alike, as well as domestic and foreign investors.





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