Power Purchase Agreements, Electric Vehicles and the Electrification of Heat: Storing a Problem?

read time: 4 mins

There is an established trend of businesses and other organisations taking steps to reduce their carbon footprint. 

In the current general context of the climate emergency, high gas prices and the reporting of carbon emissions - we can expect an acceleration in the rate of electrical vehicle charge points (EVCP) installations and adoption of electric heating.

The case for the installation of EVCPs and the electrification of heat

Installing EVCPs at a property has many upsides for a business, such as:

  • adopting an electric fleet can reduce operating costs and help decarbonise transport and related operations; and
  • provide a green benefit to staff, visitors and/or members.  

In terms of electrification of heat, organisations may be encouraged  to electrify heat in order to:

  • move away from the volatility in gas prices; and
  • decarbonise their energy usage. 

In either case, where the organisation already produces electricity on a behind-the-meter basis, increasing demand for electricity through EVCPs and electric heating systems can deliver better value. The logic here is that behind-the-meter usage is more valuable than exporting electricity to the grid, especially where the electricity is being exported under a typical smart export guarantee (SEG) export tariff. 

The potential issue  

Some behind-the-meter generation projects are set up though a leasing or service arrangement, where the solar assets are owned by a separate company to the building owner/occupier. That separate entity sells the electricity to the building owner/occupier under a power purchase agreement (PPA). 

One aspect that can be overlooked is whether the building owner/occupier is permitted to use the electricity, for the purposes of charging electric vehicles (EVs) and as a heat source under the terms of the PPA. 

PPAs will often prohibit the storage of electricity (sometimes this prohibition may be expressed in terms of “energy” rather than “electricity”) or the location at which the electricity/energy may be used (Site). 

In the case of EVs, the issue arising from such a prohibition/restriction is obvious. An EV stores electricity and uses that electricity at a location beyond the confines of the Site, at which the electricity is generated. 

The impact of these clauses will depend on the exact drafting of the PPA, however:

  • in an EVCP project, the issue is easily understood. The EVs will store electricity and once the EVs leave the Site, the electricity will be used away from the area where it is permitted to be used; and 
  • on an electric heating project, the issue may be less obvious. But where there are night storage heaters or electrically-heated buffer tanks, the energy (if not the electricity) will be stored. 

Resolving the difficulties identified

Faced with such provisions in a PPA, the organisation has three main options:

  • abandon the EVCP/heating project; 
  • proceed with the project in any event, in the hope that the generator will not object as and when the breach of the PPA comes to light; or 
  • seek to renegotiate the PPA and/or seek a variation of the relevant terms.. 

Each option has its drawbacks and the approach adopted in any particular case will need to be considered in its specific circumstances, balancing:

  • the downside associated with abandoning a project. This includes the impact of the organisation of failing to complete a net zero project, continued carbon emissions and lost PR and business development opportunities; 
  • the risks of the generator seeking losses for breaches of contract for a failure to comply with the terms of the PPA, together with potential legal fees and management time in defending a claim; 
  • the risk of the generator seeking a wholesale renegotiation of the PPA and the scope of negotiations ‘snowballing’; and 
  • whether a generator would be more receptive to an amendment to the PPA prior to the implementation of the project, as opposed to when a breach of the PPA has been discovered. 

Good governance would demand that an organisation planning on installing an EVCP or electrification of heat project:

  • examines and takes advice on the PPA, in order to establish the risks associated with implementing the EVCP/electrification of heat project; 
  • takes its decision on which course of action having carried out an analysis of the risks and where possible, making provision in case those risks should precipitate into reality; and 
  • maintain an auditable record of the decision making process. 

If generators under PPAs are asked to vary their agreement to accommodate an EV or heating project, they should consider whether agreeing to an amendment will have any adverse effects on:

  • the business model that relates to the assets in question; and
  • the longevity and operating costs of the relevant assets. 

Any amendments to the PPA should be formally documented in a binding variation agreement/amended PPA. 

How Ashfords can help

Our energy efficiency and decarbonisation team are specialists in advising on the installation of EVCPs, the retrofit of heating solutions into buildings and the terms of PPAs, having acted for both offtakers, generators and funders.

If you are involved in the installation of an EVCP or electrical heating system powered by electricity supplied under a PPA, please contact our team to discuss how we can support the due diligence and negotiation relating to your project.

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