Direct power procurement is the new key to unlocking real estate development

As the global population grows, accompanied by a commensurate increase in demand for housing and 21st century facilities, the public power grid is under immense pressure to generate sufficient power to drive all this new infrastructure. New homes mean new electric vehicle charging points, more electric boilers as fossil fuel boilers are phased out, and more internet users, online gaming, and video streaming, which all require increasing amounts of power.

This rising demand for energy, juxtaposed against increased political pressure to address climate change, means that renewable energy solutions are of growing importance for the real estate industry.

Developers need to consider adopting effective energy procurement strategies, not just to hit sustainability targets, but also to persuade planning and other authorities that their developments will not be a drain on the grid. This is of particular importance to energy-intensive developments, such as new housing estates and data centres.

Renewable power purchase agreements (RPPAs) may well provide the answers.

What are RPPAs?

RPPAs are contractual agreements between energy buyers and sellers. The energy buyer agrees to buy an amount of energy at a fixed price, to be generated by a renewable power plant, like a solar plant or wind farm. RPPAs are traditionally signed before construction of the renewable power plant for a long-term period of 10-25 years. In their most basic form, the energy sellers under RPPAs thereby secured a guaranteed future revenue stream that was ‘bankable’, allowing them to obtain the financing they needed to construct a renewable power plant in the first place. On the flip side, energy buyers achieved price security in an energy market with volatile electricity costs while also demonstrating their ‘green’ credentials.

While fluctuating electricity prices over the last 12 months made the fixed price on offer under an RPPA even more attractive, developers are increasingly turning to the renewable power sector for an even more fundamental reason: necessity.

National grid at capacity

RPPAs offer real estate developers an alternative energy procurement strategy that does not put a strain on the national grid. This is of increasing importance. Recently in West London, applications for the development of new homes were rejected until 2025 due to the electricity grid being at capacity. The Greater London Authority stated that “housing developments, commercial premises, and industrial activities will have to wait several years to receive new electricity connections”. RPPAs offer a viable alternative to assure local authorities that future developments will not put pressure on an already overloaded national grid. Savills revealed that putting solar panels on 40% of the roof spaces of the new 250m sq ft of industrial warehouses planned between now and 2030 could generate enough power to replace 97% of the energy they consume. If new developments can supply themselves with the appropriate level of energy to satisfy their consumption profile, this can support real estate developers in gaining statutory approvals.

By way of example, Google appears to be at the forefront of a push to use RPPAs in respect of its more energy-intensive real estate, such as its data centres. Google purchased 60% of the energy generated from the largest wind farm in Finland, which was completed in November 2021. Its early commitment to purchase the power was essential to the financial viability of the wind farm and the energy procured is now being used to power Google’s Hamina data centre. The potential of RPPAs to power energy-intensive real estate is vast; five of Google’s global data centres are operating with nearly 90% carbon pollution-free electricity, and they are giving customers the choice to use those data centres because of their ‘green’ credentials.

Investors finding solutions

In turn, infrastructure investors can take advantage of this trend by providing the renewable power facilities that will supply electricity to these developments. These facilities can range from the simple and local, to the national and complex, with different kinds of RPPAs available to suit each situation.

However, investors are now also looking at much more exciting holistic solutions, such as buying up land and working in partnership with the local planning authority to have it designated for a particular use, for example, a housing estate or business park, then building the renewable energy plant(s) that will power the completed site onsite or nearby, thereby creating a valuable piece of real estate that can be sold to one or more developers who can build the rest secure in the knowledge that their finished asset’s energy supply is both secure and environmentally friendly, and that planning permission is accordingly more likely to be obtained.

Although RPPAs can help provide the solution to the energy supply crunch that is already affecting new developments, while at the same time also helping the real estate industry improve its carbon footprint, it cannot be forgotten that the availability of renewable energy from the two main sources (wind and solar) is inconsistent as weather conditions vary. Intermittent power supplies have a devastating effect on infrastructure like hospitals and data centres where the reliability of supply is critical, while also being politically unacceptable to a public accustomed to a largely uninterrupted power supply. As such, RPPAs are not yet a total solution as they need a backup option, currently likely to include at least some non-renewable power from the grid.  However, even this ought to be resolved over time as innovative solutions are invented and in turn become attractive to infrastructure investors, whether it be large scale lithium battery storage or the ‘sand batteries’ recently designed and installed in Finland.

As power grid capacity issues become ever more pressing around the globe, and governments are forced to address those issues while also ensuring that their carbon-cutting targets and deadlines are met, developers will be forced to secure their own sustainable energy solutions.  That in turn will provide plenty of opportunities for investors to fund and supply the necessary infrastructure, whether it be in generation, distribution, or storage.

Oliver s’Jacob and Danielle Hirsch are real estate partners at Morrison Foerster. Nafeesa Deen, trainee solicitor at Morrison Foerster, also contributed to the drafting of this article