For most industrial companies, electricity has historically been procured the way other inputs are procured: by a category team, on a one- to three-year horizon, against a benchmark. The reformed market design assumes something different. By promoting long-term instruments — corporate power purchase agreements on the private side, two-way contracts for difference on the public side — it invites industrial buyers into commitments measured in decades.
A ten- or fifteen-year fixed-price commitment for a variable volume of a volatile commodity is not a procurement contract in any meaningful sense. It is a derivative, with a counterparty, a mark-to-market and an accounting treatment. Companies that route these decisions solely through procurement tend to discover this late.
The three risks that actually bite
Corporate PPAs disappoint for reasons that are rarely about the headline strike price. They disappoint because of shape, because of volume, and because of counterparty credit.
- Shape. Renewable generation does not follow an industrial load curve. A contract that fixes the price of the energy a wind farm produces does not fix the cost of the energy a factory consumes, and the residual has to be bought or sold at market.
- Volume. Pay-as-produced structures transfer generation variability to the buyer. Baseload-equivalent structures transfer it back at a price. Neither is wrong; buying one while modelling the other is.
- Credit. A fifteen-year contract with a single-project counterparty is a fifteen-year credit exposure to a special-purpose vehicle with one asset.
None of this argues against long-term contracting. It argues for pricing the whole package rather than the strike, and for having someone in the room whose job is to think about counterparties.
A fifteen-year fixed-price commitment for a variable volume of a volatile commodity is a derivative. Calling it procurement does not change its risk profile.
China Everbright Bank Europe — Financial Markets Desk
What CfDs do to project debt capacity
On the financing side, the promotion of two-way contracts for difference changes the composition of a project’s revenue stack. A CfD-backed revenue line is more stable than a merchant one, which supports higher leverage and longer tenors — but it is stable in a specific way, and lenders will size debt against the contracted component while treating the residual merchant exposure conservatively.
This has a knock-on effect for corporate buyers. Projects with a well-structured contracted revenue base can offer more competitive long-term pricing, because their own cost of capital is lower. Buyers who understand the financing structure behind an offer are better placed to judge whether the price is durable or a function of an assumption that will not survive the project’s first refinancing.
Settle the accounting before the commercial terms
The single most common expensive mistake we see is agreeing commercial terms and then asking the accounting question. Whether a long-term power contract is treated as an own-use arrangement, a lease, or a derivative measured at fair value depends on details of the structure — optionality, delivery obligations, settlement mechanics — that are negotiable at the outset and effectively fixed afterwards. A structure that produces earnings volatility a board has not agreed to accept is a structure that will be unwound at a loss.
Our financial markets and corporate lending teams work alongside clients on these transactions from the structuring stage, precisely because the financing, hedging and accounting consequences are decided in the term sheet rather than at signing.
What it means for clients
- Bring treasury and technical accounting into PPA negotiations at term-sheet stage, not at signing.
- Price shape and volume risk explicitly rather than benchmarking the strike price alone.
- Assess the generator counterparty as a long-dated credit exposure, including its own financing structure.
