Corporate power purchase agreements (CPPAs) for renewable energy, particularly solar PV, represent a small but growing market in Africa. CPPAs allow commercial and industrial customers to purchase renewable electricity directly from independent power producers (IPPs) at a pre-agreed price for a pre-agreed period (long-term).
These contractual arrangements provide benefits to both parties: generators have the possibility to circumvent the off-taker risk inherent in PPAs with financially strained public utilities and to find new opportunities to access the market beyond public tender programs; while end-customers benefit from a cheaper, more reliable electricity supply. This business model proves very advantageous in markets where the end-user tariffs on the main grid are higher than possible CPPA tariffs or where outages and
grid unreliability oblige clients to rely on costly back-up solutions or suffer a loss of output.
Agreements are broadly divided into three categories:
- Private wire CPPAs, whereby the end-customer purchases power from an on-site or near-site project behind-the-meter;
- ‘Physical’ or ‘sleeved’ CPPAs, whereby generators wheel electricity to end-customers through a grid operated by a third party; and
- ‘Virtual’ or ‘synthetic’ CPPAs, which do not involve the physical delivery of electricity, but are a financial derivative under which payments from end-customers to generators are determined by comparing an agreed-upon strike price against a market reference price.
In 2021, the nascent C&I market for solar comprised approximately 717 MWp of installed capacity, with the majority of projects located in South Africa, Egypt, and Nigeria. In general, African markets have thus far favored private wire PPAs thanks in part to their simplicity from a regulatory and commercial point view, as they do not rely on any intermediary between generators and end-customers. Sleeved CPPAs are more complex, requiring multiple contracts between the involved parties (IPP, endcustomer
and grid operator) and are subject to wheeling costs. As a consequence these contracts are primarily confined to more developed markets like South Africa. In the absence of more sophisticated electricity market designs, virtual PPAs are notably absent.
Despite the potential for renewables deployment through C&I solar, barriers to the establishment of CPPAs persist. Dedicated financing for the C&I market and appropriate de-risking tools to enhance the creditworthiness of private off-takers are lacking. The absence of net-metering regulations limits the possibility of selling surplus electricity to the grid, preventing the generation of revenues at times of peak production and low consumption. Similarly, inadequate grid access and wheeling regulation, as well
as the lack of transparency of use of system tariffs, prevent the development of CPPAs.
Addressing these barriers through regulatory reforms that increase market openness, attractiveness and readiness towards CPPAs would unleash the vast potential of the C&I market and contribute to achieving SDG7 across Africa.