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What could luxury fashion house Prada possibly have in common with the likes of gritty cement maker Holcim? Or Ferragamo with aluminium producer Alcoa?
They have all joined the growing list of European companies deciding they can’t wait around for countries to expand renewable energy capacity. They are deliberately using their purchasing power to enable new large-scale solar and wind farms to be built, in a bid to meet their own decarbonisation targets. Prada and Ferragamo are two of 12 leading textile brands that three weeks ago signed a collective long-term power purchase agreement with renewables developer, Lightsource bp.
Such contracts were the subject of a lively debate last week at the Financial Times Energy Transition summit. They lock a company into paying for a large volume, if not the majority, of renewable power for 10 years or more from a project yet to be built, making it easier for developers to fund new green projects without the usual government subsidy.
Such market-led procurement is helping to drive badly needed expansion of renewables capacity in Europe. According to the International Energy Agency, unsubsidised projects — mainly corporate PPAs — are expected to account for 22 per cent of the new renewable capacity in Europe over the coming years.
European companies are racing to strike these deals in a search for price stability after last year’s energy crisis, and to accelerate their own transition away from fossil fuel. According to RE-Source, a platform for green energy sourcing in Europe, corporate customers had used these contracts to secure more new renewable power by the end of the third quarter this year than in the whole of 2022 or 2021.
Along with price stability, these contracts can offer significant financial savings, according to Phil Dominy, who leads the PPA advisory service of accountant and consultancy firm, EY. On average they can cut the commodity costs of corporate energy bills by 5-10 per cent over the lifetime of the contract, he says.
But one of the biggest drivers of recent activity is the pressure on companies to report progress on decarbonisation. About 44 per cent of the 9,189 global listed companies tracked by MSCI’s investable market index had set decarbonisation targets by the end of March — a rise of 8 percentage points in just seven months. Meanwhile, the 400 global companies that form the RE100 initiative have promised to source 60 per cent of their energy consumption from renewable sources by 2030.
Setting the target isn’t the problem. Finding enough renewable energy to fulfil it is. S&P estimates the annual funding gap in renewable energy investment at about $700bn a year to 2050.
Using corporate PPAs to lubricate development financing is a good way to help close that gap. But these long-term power deals are far from the whole solution. They come with risk for both sides. The more renewables that come online the lower the price will go.
They also work best in liberalised electricity markets, where the private sector can drive capacity expansion. And they tend to suit the largest energy-hungry companies, which can commit to sizeable enough volume to make a difference and that have the credit profiles to give comfort to financiers.
PPAs are less tailored for the millions of midsized and small companies. Finding ways to involve these companies is imperative for the energy transition to succeed.
Some large companies, such as Walmart with its Project Gigaton in partnership with Schneider Electric, are helping suppliers to pool power needs that will enable them to access the benefits of PPAs. That in turn helps Walmart address the thorny issue of reducing indirect emissions in its own supply chain.
But governments too can play a role. Taiwan recently announced it would offer credit guarantees for green PPAs to widen the pool of potential customers for long-term power purchase, and to help developers secure financing for new projects. They can also help by setting out consistent, long-term energy policies compatible with corporates taking long-term bets on power purchasing.
The multi-corporate PPA signed by the fashion houses last month is a sign that there is still a lot more potential for innovation. Having a healthy B2B contract in which both sides benefit is far more sustainable for business and the energy transition than relying on government subsidies.
peggy.hollinger@ft.com
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