Getting ahead of the energy transition

Regulations around the globe are evolving and will require companies to develop ambitious decarbonization plans. Under increasing pressure to decarbonize, companies should expect to undertake more direct management of their energy consumption and use more renewable energy. There are various ways to source renewable energy and KPMG professionals’ experience shows that Power Purchase Agreements (PPAs) are effective. PPAs not only speed up decarbonization journeys, but also increase competitiveness, as they are nearly always the most cost-effective option.

As companies consider their decarbonization strategies and their net zero ambitions they should aim to reduce their energy consumption and source higher amounts of low carbon or green energy. The recent energy crisis is also making companies reconsider their energy strategies - in terms of both consumption costs and the security of energy supplies. There are various renewable energy supply options available which all companies can consider. These include buying Renewable Obligation Certificates and Renewable Energy Guarantees of Origin. These will, however, have price premiums and their value can fluctuate according to market conditions and government targets. Companies can also generate their own renewable energy, but this is often not a realistic option as it can be expensive, will impact the balance sheet and will more often fulfill only a limited part of the energy needs . For companies looking for a secure long-term supply of renewable energy, PPAs offer the most cost-effective method of sourcing large amounts of renewable energy, at competitive prices.

A PPA (Power Purchase Agreement) is a long-term contract signed by a company with a renewable energy supplier to buy electricity and its certificates of origin. The energy is purchased at pre-determined price and volumes over a given period. There are generally two types of PPA – physical, where power is supplied to the company directly from the grid, and virtual, which is a pure financial transaction, exchanging a fixed-price cash flow for a variable-priced cash flow and renewable energy certificates. Virtual PPAs are also known as Synthetic PPAs or “Contract for Differences”.