What are renewable power purchasing agreements?

A renewable power purchase agreement (PPA) is a long-term contract for the purchase of solar, wind or other forms of sustainable energy at an agreed quantity and a stable price. The parties to such contracts are usually the developer of the project and the purchaser of the renewable power.

The developers in such arrangements are the entities that install, own and maintain the renewable energy project (e.g. a solar power plant or a wind farm). In conventional PPA arrangements, purchasers are public entities or utility suppliers which then distribute energy to local consumers. However, more recently, corporate buyers (including large technology companies such as Microsoft, Google and Amazon) have begun to enter into PPAs directly with project developers to purchase renewable energy. In 2021 alone, 31.1 gigawatts (GW) of renewable energy were purchased by corporate entities, an increase of 24% compared to the previous year. The unprecedented growth in the corporate PPA market over the last few years means that these arrangements should be closely studied from the perspective of how they may impact state duties to protect, and corporate responsibilities to respect, human rights.

PPAs are important for project developers in order to secure finance to construct and maintain renewable projects, while meeting any obligations to repay lenders, and earn profits. PPAs may set out certain conditions such as dates for construction and operation, and in some cases, requirements that project developers abide by the laws of the country where operations are being implemented. These contracts often include promises to purchase renewable energy for long periods of time, such as 10 or 20 years. PPAs may be entered into with existing projects or those yet to be built.

There are many reasons for corporations to engage in renewables power purchasing, including:

1. Pricing benefits: The demand for renewables is highly likely to increase considerably, meaning that companies not entering into PPAs may be at a competitive disadvantage in the future. The length of PPA contracts (which can be for up to 20 years or more) means companies also benefit from long-term price certainty.

Direct purchases of renewable energy from developers through PPAs may be a cost-effective way to reach sustainability goals compared to purchasing from an energy supplier. This is because the project developer sells the power to the corporation at a lower fixed rate than the energy supplier.

2. Sustainability: Businesses are facing increasing pressures from investors, consumers and employees to make sustainable practices a priority, and in particular to reduce their carbon footprints in order to tackle climate change.  Making commitments to “green” their operations is one way businesses can improve their public sustainability profiles (cf the RE100 initiative, the Climate Pledge and others). Making long term renewable energy commitments through PPAs meets these objectives.

For technology companies in particular, the huge growth in electricity loads and usage means that large companies need to balance sustainability commitments with increased energy needs. The deployment of renewable energy through instruments such as PPAs will be important to striking this balance. ICT companies account for half of all corporate renewable PPAs – Amazon, Microsoft, Meta and Google are the four largest purchasers of corporate renewable energy PPAs.

3. 'Virtual' PPAs and matching: Companies may enter into PPAs to offset their own carbon footprints, rather than to actually consume renewable energy in operations. This is sometimes known as a “virtual” PPA. The corporation purchases renewable electricity through PPAs to be distributed into the broader electricity grid to offset non-renewable electricity from its local utility supplier. Google “matched” 100% of its non-renewable electricity use in 2020 with an equivalent amount it purchased of renewable energy.

Corporations purchase from producers of renewable energy across the world. In the ICT sector in 2021 for example, 137 companies had PPAs in 32 different countries. Large corporate PPAs have been agreed in Chile, Argentina, Peru and Brazil. India is another growth market for renewables PPAs - 74 RE100 members reported having PPAs in the country as of 2020.

Companies may assume that buying renewable energy is enough. However, such project must also meet human rights criteria:

1. Project impacts on human rights: Renewable energy projects have come under scrutiny for their links to human rights violations. Adverse impacts include land grabs, harm to indigenous communities and livelihoods, threats and killings, as well as poverty wages. These harms have been reported across all sectors of renewable energy development and in numerous countries where projects are being developed.

By investing in renewable PPA projects where there are human rights harms, companies are indirectly contributing to such violations. The UN Guiding Principles on Business & Human Rights (UNGPs) make clear that companies have a responsibility to respect human rights across their operations, products, and services, and through their supply chains.

Example: The Cerro de Oro hydroelectric project in Oaxaca, Mexico would have produced electricity for a number of private companies in a neighbouring region. However, the project threatened to destroy the freshwater spring Arroyo Sal, an important source of drinking water, fishing and cultural identity for the Indigenous communities in the region. It was through mediation with all parties involved in the development and procurement of the renewable energy, including the investors and the Indigenous communities, that all parties agreed to stop the project. Today, the Arroyo Sal remains “a thriving ecosystem.”

While project developers themselves should be responsible and accountable for rights abuses in their operations, corporations investing in, or procuring renewable energy from, such projects must ensure that those projects are human rights compliant. Where businesses hold significant purchasing power, they can choose to demand greater respect for human rights in the implementation of the project as a condition of continued engagement.

2. Human rights impacts of “de-risking” renewable projects:

Host governments can be tempted to undertake “financial de-risking” in order to attract more investors to their renewables projects. Public de-risking includes measures to expedite and streamline the regulatory processes of obtaining land rights, power generation licenses, and environmental impact assessments. Financial de-risking does not seek to address direct project risks project but rather to insure investors from such risks.

In some investor-state contracts, contractual clauses might require states to “freeze” laws or regulations that may apply, or to compensate the investor for costs of complying with such laws. A study of numerous investor-state contracts observed that such “stabilisation clauses” can have a negative impact on a government’s ability to implement social and environmental protections. Although the phrase “stabilisation clause” has been replaced with “de-risking” in the renewable energy space, the practical outcome for human rights is the same.[1]

The UNGPs make clear that companies have a responsibility to respect human rights across their operations, products, and services - in their business relationships and through their supply chains. This also applies to the process of negotiating, executing, and renewing any PPAs.

In the case where a corporation enters into a PPA with a project that has not yet started construction, the corporation may have enough leverage to stipulate in the contract that the project developer undertake human rights due diligence. This is critical where there is a need to protect the rights of traditional landowners and indigenous communities for example, and to ensure that the right to free, prior and informed consent (FPIC) has been meaningfully upheld.

Where a PPA is entered into after construction has commenced or the project development is completed, the corporation should ensure that human rights due diligence is implemented on an ongoing basis throughout the lifetime of the contract. This includes identifying any actual or potential human rights harms caused by the operation of the renewable project, taking appropriate action, tracking the effectiveness of its actions and ensuring remedy is available where required.

With respect to derivative contracts such as “virtual” PPAs where the corporation does not receive any physical energy from the renewable project, the responsibility to respect human rights still applies.

Businesses entering into renewable PPAs should consider where they can use their leverage with project developers to ensure human rights are respected and upheld - whether at the stage of choosing from where to purchase renewable energy, or renewing the term of an existing contract. Companies should ensure that robust due diligence is being undertaken and that project developers are meaningfully engaging with potentially affected groups.

Corporate PPAs for renewable energy is an emerging field, but one that has received insufficient attention from a human rights perspective. The speed at which companies are seeking to fulfil their net-zero commitments means that renewable PPAs are in ever greater demand. But companies should not benefit from an improved environmental profile or achievement of net-zero goals at the cost of human rights abuses linked to renewable projects they invest in.

[1] For an example of the negative impacts of de-risking on development in Zambia, see Elsner, Carsten, et al. "Room for money or manoeuvre? How green financialization and de-risking shape Zambia’s renewable energy transition." Canadian Journal of Development Studies/Revue canadienne d'études du développement 43.2 (2022): 276-295.