introduction

Corporateppa is a new power purchase agreement, which is different from the traditional power purchase agreement signed between the power producer and the power grid company. The enterprise direct power purchase agreement is signed directly between the power plant and the final power consumer, large industrial users. The direct power purchase agreement of enterprises originated from developed countries such as the United States, northern Europe and the United Kingdom. High energy consuming enterprises such as data center enterprises (IDC) directly signed power purchase agreements with power plants to ensure power supply and achieve environmental benefits. Enterprise power purchase agreements have developed more mature in European and American countries. Large multinational companies, banks, retailers, catering industry and telecommunications enterprises in developed countries are increasingly practicing enterprise direct power purchase agreements for the comprehensive consideration of improving economic efficiency and environmental transactions and giving full play to the advantages of the supply chain. In recent years, the enterprise direct power purchase agreement has also been further developed in Asia, Africa and Latin America. As a financing tool and an environmental rights trading tool, the enterprise power purchase agreement is more and more widely used in the practice of power consumption in all walks of life.

Starting from the definition of enterprise direct power purchase agreement, this paper introduces its advantages and characteristics in practical application, and summarizes the modes of enterprise direct power purchase agreement in different jurisdictions. This paper also analyzes the risks that enterprises may face in direct power purchase agreements, and gives relevant risk tips for Chinese enterprises to sign and perform direct power purchase agreements when investing in new energy projects overseas.

1、 What is the corporateppa?

Corporatepagreement refers to the written agreement on power purchase and sale and environmental rights and interests transaction between the power plant and the final power user, large industrial users, in the form of direct transaction without going through the power grid company. The enterprise direct power purchase agreement has become the basis for the purchase and sale of electricity, financing and environmental rights and interests transactions between the buyer and the seller.

In the vertically integrated completely monopolized power market and single buyer power market, there is no bilateral trading mechanism between power plants and power users. The power sales objects of power plants are mainly public utilities (such as grid companies), so power purchase agreements are usually signed by power plants and public utilities (utilityppa). In the wholesale competition and retail competition power market, the competition mechanism is introduced into the power selling side, and power plants can directly sell power to large industrial users, resulting in the enterprise direct power purchase agreement.

The initial practice of enterprise direct power purchase agreement in Europe and America is data center (IDC). Due to the high energy consumption attribute of the data center, the operating enterprises of the data center usually guarantee the power supply of the data center by signing the enterprise direct power purchase agreement, and achieve environmental benefits through the transaction of environmental rights (such as renewable energy certificates RECs). In addition, various other enterprises, such as banks, oil majors, retail industry, TMT enterprises, are also increasingly practicing and announcing their plans to sign enterprise direct power purchase agreements for the purpose of carbon emission reduction. For example, apple signs a private line PPA to power its data center in Nevada [1]. In addition, the enterprise direct power supply agreement has also been applied to the roof photovoltaic projects in Southeast Asia and other countries we have recently dealt with.

2、 Advantages of enterprise direct power purchase agreement

Different from the traditional power purchase agreement between power plants and grid companies, the enterprise direct power purchase agreement has the following characteristics and advantages:

1. Contracting flexibility: both parties to the enterprise direct power purchase agreement have great flexibility in the selection of contract text and the negotiation of contract terms, while the text format of the traditional power purchase agreement is usually specified by the grid company and the negotiation space is limited.

2. Enhance economic benefits: the direct power purchase agreement of enterprises has important economic benefits for both power producers and power purchasers.

For power producers, in the context of the reduction or elimination of renewable energy government subsidies in countries around the world, most direct power purchase agreements are long-term fixed price (subject to inflation index adjustment) power purchase agreements, which provide support for renewable energy power generation enterprises to obtain bank financing [2]; In addition, power producers may reach a price with more return on investment than the power price of grid companies through bilateral negotiations.

For the power purchaser, the enterprise direct power purchase agreement allows the trading parties to directly negotiate and communicate the trading terms of electricity price and electricity, which may be more economical and effective, and can hedge the risk of future electricity price rise of the grid company. In developing countries, for areas not covered by the national grid or with unstable power supply, the enterprise direct power supply agreement provides power supply guarantee for the power purchaser.

3. Realize the commitment of environmental sustainable development: in the context of global carbon emission reduction, large enterprises often set targets for renewable energy procurement or carbon emission reduction. Direct power purchase agreements of enterprises are usually combined with environmental rights and interests (such as green card) transactions, especially in the virtual PPA mode, the content of the transaction is environmental rights and interests rather than the actual electricity. Therefore, signing the enterprise direct power purchase agreement will help the power purchaser to realize the commitment of environmental sustainable development, and it is also an important way to achieve the ESG goals of enterprises.

3、 Mode of direct power purchase agreement of enterprises

Direct power purchase agreements have different market practices in different countries. In developed countries such as Europe and the United States, the system and market practice of enterprise direct power purchase agreement have been relatively mature; In emerging markets, in May 2022, Vietnam's Ministry of industry and trade MoIT submitted to the Vietnamese government a draft resolution on direct power purchase agreement (DPPA) for renewable energy projects, which stipulates that wind power and photovoltaic projects can directly sign direct power purchase agreements with large power users, which has attracted widespread attention in the industry.

According to our summary, the enterprise direct power purchase agreement usually includes the following three modes:

1. Physical power purchase agreement: physicalppa or sleepedppa

In this mode, both parties have actual and physical power sales, and both parties complete the physical transaction of power through the public grid. Physical power purchase agreements are usually long-term fixed price power purchase agreements for 10-15 years. In addition to the relevant terms of power purchase and sale, the physical power purchase agreement usually also covers the distribution terms of renewable energy interests.

In some countries (such as the UK), under this mode, the power purchaser will also sign a back-to-back mirror agreement with a qualified power supplier (usually the power grid company), authorizing the power grid company to handle power collection and payment on behalf of the buyer. The power grid company is also responsible for purchasing balanced power and has the right to charge the power purchaser a sleepingfee. This arrangement alleviates the electricity price risk borne by the power purchaser, but it is more complex and time-consuming because it involves the negotiation between the power producer, the power purchaser and the grid company.

2. Private line power purchase agreement: privateweireppa or behindthemeter

In this mode, both parties also have actual and physical power transactions, but unlike physical PPA, in this mode, power does not need to be transmitted through the public grid, but through the power transmission facilities built by the parties themselves. In practice, it is often used when large enterprises are physically close to power plants or at the same site.

3. Virtual power purchase agreement: virtualppa or syntheticppa

In this mode, there is no actual and physical power transaction between the contracting parties. Virtual contracts are usually financial products in the form of contracts for differences, which play the role of long-term electricity price hedging. At the same time, because the seller does not actually deliver electricity to the Buyer under this mode, it is impossible to prove whether the electricity sold is actually generated by renewable energy power plants. Therefore, for the buyer's enterprises for the purpose of green power procurement, virtual power purchase agreements usually include environmental equity transactions such as RECs or guaranteesofforigin. In Singapore, power and environmental interests can be sold "virtually" in different energy markets.

It should be noted that the details of the above model vary in different countries according to the regulatory systems and market practices of different countries. According to different classification standards, there are other modes of enterprise direct power purchase agreements. For example, according to different power purchase arrangements, they can be divided into fixedvolumeppa or as productedppa. In addition, the contracting parties of specific transactions can set various specific contract mechanisms according to commercial negotiations.

4、 Risks of direct power purchase agreement of enterprises

At present, Chinese enterprises' overseas investment in new energy projects is increasing. For projects involving direct power purchase agreements, it is recommended to pay attention to the following risks and consider controlling risks through contract terms design, hedging arrangements and other ways:

1. Price risk: price risk is one of the most important risks of direct power purchase agreements, especially for long-term fixed price agreements. If the spot price in the open market is lower than the price agreed in the enterprise power purchase agreement for a long time, the power purchase enterprise will face price risk. Under the virtual power purchase agreement mode, the power purchaser needs to pay the price difference to the power producer. Similarly, for power producers, price risk also exists;

2. Electricity risk: the power generation capacity of renewable energy power stations is greatly affected by external factors, natural causes and weather conditions will affect the power generation capacity of the power plants. In addition, the problem of power rationing has always been a prominent problem in new energy projects, so it is necessary to consider how the buyer and seller bear the electricity risk in the power purchase agreement;

3. Market rules are not perfect: European and American countries have relatively mature experience in this field, but in developing countries such as Vietnam and the Philippines, although some preliminary rules or draft bills have been formulated for the enterprise direct power purchase agreement, the system construction and market practice are not perfect, and there is the possibility of frequent legal changes, which brings difficulties to the negotiation and implementation of the enterprise power purchase agreement;

4. The support of public utilities is limited: the essence of the power purchaser signing the power purchase agreement is to allow the power plant to directly sign a contract with the power purchaser, so as to save intermediate costs. Therefore, for the host country's power grid companies and other utility level enterprises, they do not have enough power to fully participate in the process of signing the enterprise direct power purchase agreement and provide support;

5. Contract counterparty risk: from the perspective of power producers, the credit of power purchasers of most enterprise direct power purchase agreements is lower than that of public utilities (such as power grid companies), and the long-term power demand of enterprise power purchasers in the future is less stable than that of public utilities. Therefore, on the whole, enterprise direct power purchase agreements pose a higher challenge to financing;

6. Accounting risk: according to the applicable accounting standards, the direct power purchase agreement of enterprises (especially the virtual power purchase agreement and the private line power purchase agreement) may have an impact on the balance sheet and Financial Rating of the power purchaser. It is suggested that the power purchaser should evaluate it from the perspective of Finance and accounting.