Corporate PPAs

Corporate PPAs

August 11, 2016 | By Robert Eberhardt in New York and Caileen Gamache in Houston

Utilities are working to squash net metering, but missing the larger picture. Seventy-five percent of the 1,800 megawatts of new power purchase agreements signed by wind companies in the United States in Q4 2015 were directly with large corporate offtakers. Have we reached a tipping point where most contracts in the future will be with corporate buyers? What does it mean for the financing of projects? The following is an edited transcript of a discussion about these and related questions at the Chadbourne 27th annual global energy and finance conference in early June.

The panelists are Quayle Hodek, chairman of Renewable Choice Energy, Paul Kaleta, executive vice president and general counsel of First Solar, James Pagano, CEO of Terra-Gen Power, Mitchell Randall, president of Recurrent Energy, and Michael Storch, executive vice president and chief corporate development officer of Enel Green Power North America. The moderators are Rob Eberhardt in our New York office and Caileen Kateri (“Kat”) Gamache with our Washington office.


MR. EBERHARDT: Quayle Hodek, give us a sense for how significant a market there is for corporate PPAs.

MR. HODEK: In 2013, there were roughly 500 megawatts of power contracts signed by large corporations directly with developers. The contract terms might run 12, 15 or even 20 years.

In 2014, the market grew to about 1,100 megawatts and then, last year, we had 3,200 megawatts. In the wind market, more than 50% of all new PPAs signed last year were corporate PPAs. It looks like 2016 will be even bigger with something like 4,000 megawatts of contracts expected to be signed this year.

My company, Renewable Choice Energy, has been advising corporate purchasers for 15 years on their renewable energy options. They have a lot of options. They can do onsite solar. They can do renewable energy credits. They can do carbon offsets. They look at a lot of things and, while PPAs are just one of those, they are by far the most interesting option today for companies trying to hit long-term sustainability goals.

Of the Fortune 500, you have more than 220 companies that have made specific carbon reduction, renewable energy or sustainability targets, and the question is how best to reach those targets. Several industry groups and non-profits have been formed to bring these large corporate buyers together. These are high-level gatherings. This is a CFO-level decision when a company is looking at committing to a $150 million long-term contract. The Rocky Mountain Institute is projecting 60,000 megawatts of new wind and solar projects will have to be built between now and 2025 to serve the corporate market.

MR. EBERHARDT: We have four representatives from project developers. Jim Pagano, what has been your experience to date with corporate offtakers?


MR. PAGANO: We have been in discussions with several corporate offtakers, but we have not gotten one over the line yet.

We see a couple of trends over the last 18 months. Corporations were interested initially in the sustainability objective and the additionality that implies. We have operating projects that are uncontracted. They do not want megawatt hours from those projects. They want new megawatts so they can advertise the additional renewable energy that is being built as a consequence of the contract they are signing.

Companies with this focus were hurt as gas and, therefore, wholesale power prices fell throughout 2015. They are now a little more focused on their ability to hedge basis risk, or the value relative to the wholesale market price. They have become more sophisticated.

The private financing side of the house has become more concerned about some of the positions. We see a trend toward greater risk on the developer. Arguably that is where it belongs because corporate offtakers lack the expertise to evaluate basis risk in the same manner that a utility would.

MR. EBERHARDT: Mitch Randall, has your experience been the same?

MR. RANDALL: We have found utilities willing to buy long-term power. We have about 1,000 megawatts under construction, and it is all contracted with investor-owned utilities, municipal utilities and community choice aggregators. We are starting to talk to potential corporate offtakers in ERCOT, PJM and CAISO. We have not gotten anything over the line yet. Negotiations started fast and then bogged down as offtakers identified some of the risks. They are trying to wrap their heads around the basis risk. We did some behind-the-meter deals a few years ago.

MR. EBERHARDT: Mike Storch, what about Enel?

MR. STORCH: We are constructing a 200-megawatt project with a corporate offtaker as we speak. That was the first corporate PPA we signed in the US. We have several in other countries. We are seeing more opportunities for global plays with large multinationals like General Motors.

The process is painful. It is very long and drawn out. It is price driven. The terms are very different than in a utility deal and you have to be sensitive to making sure you end up with a financeable transaction when all is said and done. The credit issues are different. As we all know, a AAA credit today can be a bankruptcy in a relatively short period of time. The tax equity market does not have a real understanding of those kinds of issues.

I believe corporate PPAs will account for the lion’s share of contracts for the next 18 months to two years. Utilities are holding back to see what happens to the Clean Power Plan. They are focused on use of rate-based assets to meet clean power goals for now and are signing fewer PPAs with independent generators during this grey period.


MS. GAMACHE: Mike Storch, how important is the location of your project to a corporate offtaker?

MR. STORCH: Corporate offtakers are more focused on the location of a project relative to their needs. They want it at least to be in the same RTO. Many PPAs are actually contracts for differences or hedges. The offtaker pays a fixed price in exchange for a floating price for the electricity for which it has contracted. The offtaker buys the actual power it uses from its local utility. Offtakers are sensitive to basis risk, or where you inject your power compared to where the contract price is set for purposes of payments under the contract for differences. Those can be horrific challenges.

MR. HODEK: Many offtakers are multinational corporations. They have a lot of load globally. They look for the best opportunities in all the countries in which they operate. They might start off by thinking, “Here is one of our data centers, here is one of our big manufacturing facilities, here are our corporate headquarters. Can we do something nearby that makes sense?” That is usually the first look.

What happens after that is a search for opportunities to bundle widely distributed load together to do a utility-scale deal of 100 to 200 megawatts. Some physical transactions get done with a large enough load base in a certain area. Or it may be possible to do a virtual transaction by bundling together load in disparate areas. is a great example of this. It does not even own its data centers. Everything is co-located data center load and yet it is able to contract for a large-scale wind PPA in a different region than where most of the load is with a virtual transaction.

The virtual PPA structures have opened a market for companies to do deals in geographically distant regions.

MR. STORCH: One of our first corporate PPAs was with a large company with a household name, with manufacturing facilities all over the world, several in the US, and it was committed to doing something within the communities where its facilities are located in terms of whatever jobs and economic benefit would come from the additionality associated with the facility.

In the end, it did a deal tied to a power plant in ERCOT, where it had no facilities whatsoever, because the electricity price was so much lower than the prices in other parts of the country.

MS. GAMACHE: Is retail choice a big obstacle or are virtual PPAs or hedge able to overcome those issues?

MR. HODEK: The largest deals have been in places with organized electricity markets. Offtakers want multiple ways to liquidate the power into the market if they are not taking physical delivery. In such arrangements, retail choice is not so important.

California has some unique challenges and barriers to doing deals, but there have been large-scale deals done. The biggest barrier is lack of experience among corporate offtakers. For the vast majority of the companies entering into corporate PPAs, this is the first deal. We have had 28 large corporate deals announced so far; fewer than half of those are with Fortune 500 companies. They are almost all first-time deals, except for Google, Amazon, Microsoft and Facebook, who have done more than one.

It is a heavy lift. You mentioned how long it takes for companies to figure out what they are doing. We work with most of our clients for more than two years to get them to the point where they are ready to transact.

MR. RANDALL: It is a completely different negotiation when you have a utility that is compliance-driven versus a corporation that has a lofty goal. The corporate negotiation is price-driven. The company can defer the deal until the price meets its objectives. The process drags out. There is not the same motivation on the part of a corporate purchaser to get across the finish line.

Stranded costs

MR. EBERHARDT: Paul Kaleta, First Solar had some interesting experiences in Nevada with NV Energy and Switch.

MR. KALETA: There is a lot of activity. We have participated in a number of deals. We have two public deals in process. One is in Nevada and looks to be a win for both the utility, NV Energy, and the customer, Switch. Switch is a big data-server farm. It is privately owned. It was looking to leave the NV Energy system. NV Energy is a good customer of ours.

Nevada has a law that was put in place after the western energy crisis in the early 2000s that allows NV Energy customers with a certain amount of load to leave the system, but they have to reimburse the utility for its stranded costs.

Switch went to the regulatory commission, and the battle over stranded costs started. The staff said one thing. The utility said another thing. Switch said a third thing. And then the commission effectively said we think, under the circumstances, we are not going to let you leave the system.

NV Energy has a green tariff that was put in place years ago when it was entering into a lot of higher-priced contracts to buy renewable energy. The utility had customers, both residential and businesses, coming to it saying, “We want green power.” And NV Energy responded with the green tariff. Prices have now come down very dramatically.

In this situation, what happened is we ended up in a three-way deal with NV Energy and Switch that relies on the NV Energy green tariff. We have two PPAs with NV Energy for 170 or so megawatts. NV Energy, in effect, delivers the power to Switch and charges Switch under the tariff. We are essentially doing a utility deal from our perspective. This avoids many of the risks that we have been discussing on this panel.

Sleeve deals

MR. HODEK: There are many ways for us in the audience and all of our companies to serve this growing corporate load. There are regulated states where you have to work through the utility, and you have to help it set up a green tariff. These are called sleeve deals.

There is a group called the RE100 made up of 50 global companies that have promised to get 100% of their electricity from renewable energy. Roughly another 60 companies have signed on to the World Wildlife Fund’s Buyers’ Principles. These are companies that want to save on electricity by buying renewable energy.

Sustainability is an important driver, but for a company to transact, it must see a good deal for its shareholders. There are many ways to transact. It can be through physical delivery of power. It can be a virtual PPA using a contract-for-differences structure. It can be through a utility with a green tariff. It can be separating out the renewable energy credit stream. These companies have massive demand, and they want to be supporting brand new projects. They want to be able to claim additionality.

MR. RANDALL: There are several utilities with the green tariffs, but none seems to have gotten traction yet. A corporate buyers conference in Seattle this year identified improving green tariffs as one of the top three initiatives. Green tariffs could solve problems for utilities on stranded assets because they are a way to keep the commercial and industrial customers. They can put the basis risk on the right party and solve financeability issues for the developer. They avoid forcing a very complicated negotiation on a team at a C&I customer that has never done this kind of thing before.

MR. KALETA: I agree. Utilities are our principal customers. I think we will see more and more utilities get more creative by necessity. They have to do it because they are seeing big customers with big, steady load looking to leave.

In Nevada, MGM, which is one of NV Energy’s largest customers, announced publicly that it is looking to leave the system, and it said it will just pay the stranded cost and leave. Other casinos appear to be teed up to do the same thing.

The casinos see a marketing benefit, but costs are also coming down dramatically for both wind and solar so that pricing has become very attractive on its own. We have a deal in California with Apple, which was announced publicly some time ago. It is a single project with 150 megawatts going to Apple under a 24-year PPA and 130 megawatts going to PG&E under a 15-year PPA. Apple is a sophisticated customer that has done other deals. One of its first deals was in Nevada with NV Energy. I was general counsel of NV Energy at the time.

Green tariffs offer a good opportunity, but it can take time to get such tariffs approved by state regulators.

Off ramp

MR. STORCH: We worked pretty hard on sleeve deals that are basically back-to-back PPAs where the customer is buying directly from the utility and we are supplying through the utility. Those PPAs are a nightmare from my experience, and financeability issues become real challenges due to credit issues and the like.

You want an off ramp in the contract. You are willing to pay a certain amount of money if you cannot finance the project, if you cannot get a critical permit, if your interconnect does not come through or it comes through at a ridiculous cost. It is rare to have a project construction ready at the point where you are seeking a PPA.

Our experience is that corporations do not want to provide any off ramp. They say, “We are telling our customers that we will be 100% green with our energy and there is no alternative. If we contract with you, we want to know that the project will be built.”

And the conversation continues. “Look, if you can’t build it, then in addition to liquidated damages, we want RECs for three years equivalent to what you would have produced so that we have time to contract with somebody else.” It is a very different standard than we are used to in the utility market. It is a chicken-and-egg kind of problem. You have to decide how far advanced a project has to be before you are ready to contract and then how much risk are you willing to take to get the contract based on where you stand.

MR. PAGANO: We are seeing the same issues with investor-owned utilities. To bid into utility RFPs, you have to have a more developed project than you needed perhaps three or four years ago or even two years ago. The corporates want it tomorrow, but it takes a long time to negotiate a contract. You will be working with them for a year, and things will change dramatically during that period.

As a general rule, the more developed your project is and the quicker you can represent that you can get it online, the more interested corporations are in talking to you, which puts a lot more risk on the developer in terms of the expenditures it must make on the front end.

MR. STORCH: I couldn’t agree with you more. We are trying to explain to our home office in Rome why we need to pour so much money into a project before we have a PPA. Far more development capital is required on the front end. The good news is the corporates are finally getting to the point where they are ready to sign contracts. Folks like Renewable Choice Energy and Altenex have educated them about the accounting challenges and other issues.

It is difficult to bring a whole new business model to these companies that is not their core business. It is a little like what happened years ago when we were peddling inside-the-fence deals. A new business model sprang up because companies did not pay much attention to the utility side of their businesses. They would say, “I can earn a 20% return on a new pulp and paper machine, but I am going to earn 7% to 8% on putting in a new boiler? No thank you.”

So I am saying we finally got over those hurdles. Now if we can just get Renewable Choice Energy to do this for nothing, it will be almost perfect. Right? They actually expect to get paid. I don’t understand that. [Laughter]


MS. GAMACHE: To pick back up on the financeability issue, we heard the bankers say yesterday that they have a hard time pricing the risks in corporate PPAs, and Ray Wood said, “Get used to it.” From a developer’s standpoint, how are you helping the bankers get used to corporate PPAs?

MR. PAGANO: I don’t think it is the job of the developer to help them get used to it. The market reacts to opportunities. We have seen a pattern through the history of the industry where the bankers will take risks tomorrow that they would not take yesterday. This is another example of that.

The banks will build in cash traps for credit trips and things of that nature. The term loan B market is a great example of something that did not exist when this industry was in its middle stages. You can get a lot of things done today that you could not get done 10 or 15 years ago.

The market will evolve. It will come up with structures to box this risk. The developer may help some, but it will be done largely on the financing side. The banks will come up with creative solutions for an opportunity that they want to pursue. That is what we have seen in the past.

MR. HODEK: Among the things that have to happen for a large corporate to get into a deal are it has to hire the right counsel, it has to understand the dynamics of the PPA market, and it has to understand how the contracts are structured because getting them financed is a key part of their consideration. They want to know where the project is, what type of resource it is, what term they can get and what the economics look like.

They want to feel confident the project can be financed and will actually get built. They realize that they have to conform to the standards of how PPAs are done. One of the requests that by and large all corporates have is to have a hub-delivered or hub-settled product, much like if they are doing a hedge. They do not want to take delivery at the bus bar, and that is a fair request, but it obviously makes financing the project more challenging. You have to have the right sponsors involved to make that work.

There is an opportunity here for our whole industry. There are potentially another 60,000 megawatts of demand from corporate customers, but we will have to work hard on educating all the financing parties and help the corporates understand what is financeable and what is not. They want to get deals done, too.

MR. PAGANO: The key is the 60,000 megawatts. This is a real opportunity. It is not a fad. It will be around for the foreseeable future. The banks are going to have to get used to it and figure out how to finance it because there is a lot of opportunity in front of them. Between the corporates bending a little and the financing parties getting creative, I think people will learn how to take advantage of the opportunity.

Corporate credit

MR. STORCH: We have one thing you will almost never see in a utility PPA, which is the offtaker posting a letter of credit to secure its obligation to purchase. Look at California posting a year of revenues in a typical PPA to secure the obligations under the PPA. With corporates, we have found a willingness to post security if their credit falls below a certain level, even though the credit remains investment grade but falls to something like BBB+. Then we require a letter of credit to secure the obligation for a reasonable period of time.

They are not puking all over that. Corporate credit is one of the bigger challenges in these contracts. We all know the drill with what makes a deal financeable. For a company like Enel, we can underwrite the PPA by just indemnifying everybody that the counterparty under the PPA will meet its obligations, but we still have to get comfortable with that credit ourselves, and we would much rather that credit risk be covered under the contractual arrangements directly with the counterparty.

MR. KALETA: The same credit issues are coming up in other contexts, like with the rise of aggregators, particularly in California. Dealing with General Motors or somebody like that is going to be easier than dealing with an aggregator. It is the same set of issues that we see across the board.

MS. GAMACHE: Jim Pagano said this is not a passing fad. Does everybody else on the panel agree with that? Speak also to whether expiration of renewable energy tax credits will have any effect on the future of corporate PPAs.

MR. PAGANO: I think what is embedded in your question is how much of this is economic and how much of it is for the marketing side of the organization. It is moving more to an economic decision. In the case of wind, production tax credits are a critical factor in being able to offer a product that is cost competitive.

The corporates have become more focused on whether projects are under construction in time to qualify for tax credits. However, having said that, I think we can offer a competitive price even without tax credits. The price does not float like the retail electricity rate over the contract term. Obviously the willingness of the developer to commit to a competitive price depends on his or her view of the forward curve for gas or the general energy markets. My sense is that if you have a reasonable forward curve and you have safe-harbored wind turbines, you can see these projects making good economic sense over the next three to four years before the tax credits go away.

The equipment manufacturers see costs coming down and energy capture increasing so that they can offset the loss of production tax credits on the wind side. We think there is room for optimism even after the tax credits expire.

The pressure will remain within these organizations to make sure that PPAs are cost effective. This may force developers to move projects to better wind regimes. California has decent wind resources, but not the wind resources of ERCOT or SPP. Proximity may become less important, and folks may look for production that is cost effective even though they may start with the objective of proximity to their load.

MR. RANDALL: I agree. It is not a passing fad. The contracts are economic. There has not been as much penetration of the market by solar as there has been by wind, and I think that is price driven. As the price of solar continues to come down, solar will get more traction.

MR. STORCH: I am a big believer in what has been happening from a technological standpoint. Look at where wind and solar have gone in terms of price performance and what it costs for a typical megawatt hour of output today versus 10 years ago. The cost reductions are staggering.

Despite the fact that wind is more mature than solar in terms of movement down the cost curve, more movement is still to come. We are seeing 120-meter towers today, and they are more likely than not going to become the norm where air restrictions do not limit their use. Construction techniques will make it more economic to maintain and build towers at that height and to install nacelles of three-and-a-half and four megawatts.

We still have 50-kilowatt units running in California, but these will disappear as the tax credits run out.

I think the turbine vendors will move costs to the point where wind is competitive without tax credits relative to thermal alternatives. It will always be an issue of price. The industry will be able to meet the expectations of its customers, and corporates are going to account for a bigger and bigger part of the market.

The biggest competitor is going to be the utilities themselves. One utility executive years ago said a PPA to me is like kissing your sister. It is just not how I want to spend my day. They do not make money on PPAs and if they do a sleeve deal, it is just not the same as a rate-based asset delivering power to a customer.


MR. HODEK: Last year, more than half of all the wind PPAs signed were with corporates and that trend will continue. When you sit down with a corporate executive and he or she looks at the list of major corporations that have already done renewable energy deals, the executive asks, “What am I missing? How do I do this? How is it possible? In what markets is it possible?”

The tax credits may cause the market to shift more to solar over time since the solar tax credits have a longer runway than wind credits. Corporations will weigh which of wind and solar is the better deal.

The United States is a great market today for these companies to transact for a lot of reasons, but as the cost curves change, companies will be looking more and more at global markets. All of these companies have massive global load.

MR. KALETA: The economics work. Demand is driven by low costs. The tax credits were tremendous accelerants to get the industry started both in wind and solar, but right now, we are seeing so much demand being driven just purely on price. The driver is not a state RPS. It is not a feed-in tariff. It is the electricity price that these projects are able to offer.

We now focus on utility-scale solar. You are going to see new products and approaches that address electricity market needs. The power industry is going to become fairly creative.

MR. STORCH: My company just won a huge award in Mexico for 1,200 megawatts, and we are doing solar there for electricity prices in the low $30-a-MWh range. There are no tax credits.

The cost of doing business in the United States continues to be somewhat of a challenge. Labor is more expensive. But the Mexican example points to what is possible.