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Pioneered in US, 'virtual' renewable power deals start to make inroads in Europe


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Pioneered in US, 'virtual' renewable power deals start to make inroads in Europe

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While its two new solar farms are being built, BayWa r.e. will provide AB InBev with 75 GWh of guarantees of origin from its La Muela wind farm in Zaragoza, Spain, pictured here.
Source: BayWa r.e.

Two new solar farms in Spain will soon be used to brew more than 55 million kegs of beer every year at 14 breweries across 12 Western European countries — but the electricity itself is not part of the equation. Instead, the project developer and brewing company have signed what is described as one of the first "virtual" renewable power contracts in Europe.

Anheuser-Busch InBev SA, which makes more than 50 beer brands, will purchase 250 GWh of electricity per year under a 10-year agreement with Germany's BayWa r.e. renewable energy GmbH. The two solar projects, totaling 200 MW, will be connected by March 2022. One will even be named after AB InBev's flagship brand, Budweiser.

"[The deal is] based on the individual loads of AB InBev in several countries," Andrea Grotzke, global director of energy solutions at BayWa r.e., said in a Jan. 10 interview. "With one deal, they can now claim to be 100% renewable."

Large corporates signing up to buy renewable power at a time when government subsidies are being phased out in many countries is nothing new. Globally, there were 13.4 GW of such deals in 2018, according to BloombergNEF. But the BayWa initiative is significant for being one of the first in Europe to mirror a financial off-take structure pioneered in the U.S. that could spur a wave of similar transactions across the continent.

Virtual power purchase agreements, or PPAs, sometimes described as synthetic PPAs, allow developers to sell their renewable electricity certificates to corporate or industrial off-takers without delivering the physical power.

The model — undertaken by large corporations such as McDonald's Corp., AT&T Inc. and Walmart Inc. — works across borders or energy markets, so a plant in a sparsely populated state such as Arizona can sell to a customer with several facilities in California. Both parties get price certainty and the off-taker assumes the renewable energy credentials, but the picture isn't complicated by the physical delivery of electricity.

In contrast, Europe has so far largely favored sleeved, or physical, PPAs, where electricity is transferred from a project to the end-use consumer via a utility acting in a sleeving capacity. Unlike the virtual model, which can work in a disaggregated market like the U.S., the project and the buyer in a sleeved structure are typically on the same aggregated grid system.

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But the virtual model is slowly infiltrating the European market's consciousness. In February 2019, Nike Inc. did a virtual PPA with Iberdrola SA, agreeing to buy 40 MW of Spanish wind power for its facilities across Europe. The earliest example, more than a decade ago, saw Marks & Spencer Group PLC purchase renewable electricity for its stores, offices and distribution centers in the U.K. and Ireland.

Diverging paths

The reasons for the diverging paths taken by Europe and the U.S. go beyond the aggregated, or disaggregated, setups of the two markets — not least the fact that in the U.S., if there is physical delivery of power under a sleeved PPA, both the buyer and seller would need a license from the Federal Energy Regulatory Commission. Since a virtual PPA is effectively a financial hedge, with no physical delivery of power, the parties don't need to be licensed.

There has been a sense of following the crowd — opting for a certain PPA structure because that is the prevalent model in a particular market. "The physical delivery [of power] in the [sleeved] PPA structure ... is closer to what [European] corporates are used to," said BayWa's Grotzke.

In Europe, "there's been a deeper history of the utilities and the midstreamers providing package deals and physical supply of renewable energy," added Jason Tundermann, vice president of business development at Seattle-headquartered PPA broker LevelTen Energy Inc. "We're starting to see that in the U.S., but Europe has had a head start."

Another explanation is accounting standards. European companies use International Financial Reporting Standards, under which virtual PPAs typically qualify as derivatives, creating a more complicated environment, which is not the case under U.S. GAAP principles. As such, sources say U.S. corporates will likely be among the early adopters of virtual PPAs in Europe.

"A lot of the initial wave of activity [in virtual PPAs] would likely come from GAAP-based buyers who are familiar with the structure from their North American divisions and as an overall corporation are still reporting via GAAP," said Tundermann of LevelTen, which has procured more than $1 billion worth of U.S. renewable energy deals with Fortune 500 companies since 2018, and is now expanding to Europe.

The market consensus is that the virtual or synthetic structure is simpler and more flexible than doing a physical or sleeved PPA, given it is just a price hedge.

"Most corporates would take the view that in either structure, you would still achieve additionality and price certainty, so the drivers are much stronger to go for the synthetic structure, rather than sleeved," said Elizabeth Reid, partner and co-head of the international renewables group at law firm Bird & Bird LLP.

Direction of travel

The favorable landscape in the U.S. has made it a more fertile ground for corporate PPAs than Europe. Corporates in the U.S. signed 9.1 GW of PPAs with renewable energy projects in 2018, compared with 2.3 GW in Europe, according to BloombergNEF data. As of July 2019, the U.S. had transacted a further 7 GW of PPAs, compared with 1.6 GW in the rest of the world combined.

"In general ... the market compared to the U.S. is not as mature yet," said BayWa's Grotzke. "In Europe, the tariff systems in the respective countries were prevailing."

Indeed, subsidies can set a "high pricing benchmark" in a market, which can make corporates reluctant to enter into PPAs, said LevelTen's Tundermann. In contrast, while the U.S. has its renewable energy tax credit scheme, there is no guaranteed electricity price — something that can be structured into a PPA.

But the take-up of corporate PPAs in Europe, and the virtual model specifically, could be boosted by the EU's Renewable Energy Directive, or RED II, which will require member states to recognize guarantees of origin — the certificates that prove electricity has been generated from a renewable source — issued by other member states. "The RED II directive is a really positive thing for the growth of the corporate PPA market," Reid of Bird & Bird added.

And, driven by green targets and shareholder pressure, the buyer side is now warming up. "[We have] previously seen their tiptoes in the water ... but now we're seeing lots of different buyers — corporate entities and public sector bodies," said Nithin Rajavelu, partner at consultancy Everoze Partners Ltd. "The direction of travel seems to be in the right direction."