PPAs: placing risk where it sits best
By Tomas Tuominen, European PPA Lead, Green Investment Group
In 2018, the volume of clean energy purchased by corporates rose to new highs, reaching over 13GW – nearly double on 2017. While North America remains at the vanguard of corporate PPA procurement, the wind and sun of change is blowing and shining across Europe. Large tech and energy-intensive industries in Europe are leading the PPA revolution, but other sectors and mid-market corporates remain less active. Why? It’s about risk.
Equity investors are working hard to understand the risks associated with investing in merchant projects coupled with PPAs, re-calibrating what an appropriate risk-adjusted return should be for these non-standardised, more complex structures. At the same time, the project finance community is also having to get used to a world of new revenue structures and sources, and a multitude of different complexities in contractual arrangements. On the other side of the deal, corporates are suddenly facing a plethora of investors and financiers asking them to buy renewable energy on long-term contracts, whilst simultaneously being asked to prove their investment grade credentials. Even for a corporate with good credit, the path is not easy.
As the fledgling European market matures, what must the industry do to get both buyers and suppliers comfortable with PPA risks? Risks must be placed where they sit best.
Mitigating credit risk and aggregating volumes
A frequent roadblock faced by corporates when trying to sign PPAs is a below investment grade credit rating, or even a lack of an external credit rating. By aggregating PPAs, this risk can be spread between offtakers, opening the PPA market to more buyers. The aggregation of PPA volumes also allows smaller companies to pool together to buy energy from a larger project, giving the corporates access to a broader set of projects than they could have dealt with alone. It also provides the projects with an ability to match their production volumes with an appropriate group of customers instead of having to find the perfect match in a single offtaker.
This flexibility reduces the risk that buyers will be unable to find suitable projects and that project developers cannot find a creditworthy, suitably sized buyer for their power. A successful example of a multi-buyer PPA structure is the Murra Warra project in Australia, with Macquarie Capital and Renewable Energy Systems (RES) as sponsors, which entered into PPA arrangements with a group of corporates including Telstra, Australia and New Zealand Banking Group (ANZ), Coca-Cola Amatil, Monash University and the University of Melbourne.
With more parties at the table, successfully managing these types of processes is not simple. But multi-buyer aggregation is going to be key to mitigating credit risk as well as unlocking the market for more buyers and projects to come together.
Fine tuning the tenor?
The second significant issue corporates face when negotiating PPAs is the tenor of the agreement. Larger energy-intensive industrials have been specifically looking to PPAs to take advantage of long-term price predictability. The 29-year PPA with Norsk Hydro structured by Macquarie’s Green Investment Group for the Overturingen onshore wind farm in Sweden is a good example of this strategy in action.
However, for smaller corporates that are less used to locking in power prices for very long term, the risk and uncertainty increases with longer PPA tenors as fixing prices becomes more complex and difficult to model.
Longer is not inherently better. One length of tenor does not fit all, and the risks need to be matched to the goals and strategy of each organisation.
Overcoming power generation unpredictability
Finally, variable power generation patterns from renewables is an obvious, but unavoidable consideration. A common concern is that other sources of generation will be required to ensure a constant flow of energy to the final consumer. New technological solutions like batteries and hybrid power plants, already provide opportunities to deliver firm power to consumers from renewable energy projects. However, these technologies will not be the right solution in all markets and in all cases.
Bringing a third-party into the PPA discussions can provide an alternative way forward. Market players, such as utilities, traders, banks and even re-insurance companies may be able to warehouse or trade energy in a more efficient way than the project company or the corporate PPA buyer themselves. It is therefore important that buyers and sellers of corporate PPAs do not ignore other market players, but instead look to build partnerships and embrace the concept of placing risk where it sits best.
While it may not always be easy, the barriers to entry are far from insurmountable. The appetite for access to clean, green energy continues to increase, the European policy backdrop remains strong, and with markets around the world continuing to move towards no and low subsidy policies, corporate PPAs have never been a more attractive option.
Green Investment Group is committed to working with corporates to structure PPAs in a way that is best suited to their specific needs. By helping all market participants understand and get comfortable with PPA risks, we can unlock the wall of capital waiting to invest in low-carbon energy and accelerate the transition to a greener global economy.