The hunt for PPAs

The hunt for PPAs

August 09, 2018 | By Robert Eberhardt in New York and Keith Martin in Washington, DC

Three prominent wind developers and the head of electricity procurement for a utility talked about lessons from recent utility procurements, corporate PPAs and hedges at the 29th annual global energy and finance conference in June. Corporate PPAs accounted for all the wind PPAs signed in the last quarter of 2017. They are on a pace this year to set a record. The levelized price for wind electricity was under $20 a megawatt hour in 2017. Prices are lower still in 2018.

The panelists are Laura Beane, CEO of Avangrid Renewables, Paul Gaynor, CEO of Longroad Energy Partners, Tim Kawakami, director of purchased power for Xcel Energy, and Dennis Meany, president of Lincoln Clean Energy. The moderator is Rob Eberhardt with Norton Rose Fulbright in New York.


MR. EBERHARDT: Tim Kawakami, Xcel ran a closely watched request for proposals to supply 1,800 megawatts of electricity. More than 100,000 megawatts were bid. The results were announced this week. Tell us what happened.

Xcel numbers

MR. KAWAKAMI: I am not here to announce winners, and prices and even the losers, but we did file a couple days ago. We worked on the solicitation for the past year. It was big deal.

Keith Martin and I were talking last night about the large amount of capacity bid. It was actually 112,000, but that is a little misleading because a bid can be the same project priced 10 different ways, and a lot of bidders did that.

We had 238 projects bid, which was about 58,000 megawatts. That is also a little misleading because a project can be defined in different ways, too. Variations of the same project are driving those numbers up.

The pricing was tremendous. We liked it so much that we are taking a lot. The median prices were wind, $18 a megawatt hour, and solar $29. Obviously, we are looking at winning bids in the low teens for wind with low 20s for solar. Batteries were bid in at $7 premiums, mostly sited with solar.

We filed to take 1,100 megawatts of wind, 600 megawatts of that being PPAs and 500 megawatts where ownership will be transferred to Xcel through a build-transfer model where the developers build the projects and then sell those projects to us at commercial operation. There are 700 megawatts of solar, all PPAs.

For my friends who were on the panel yesterday discussing storage who said that utilities do not know how to integrate solar, we will take 275 megawatts of utility-scale solar. That is four projects. They vary in size from 50 to 100 megawatts. We are excited to see how the storage projects can be used in our system, especially since we do not have an ancillary market. We are modeling the value to the system and are excited to do that.

We are also taking 300 megawatts or so of electricity from thermal power plants. Those are mostly existing facilities that have or will come off contract.

MR. EBERHARDT: We have three developers. What do you conclude from the results of this RFP?

MR. GAYNOR: I didn’t get a letter. [Laughter]

MR. EBERHARDT: Dennis Meany or Laura Beane, did you get a letter?


MR. GAYNOR: No, we didn’t bid, but I think that . . . [Laughter] . . . think about the math. If you take out the multiple bids from one project, it is still a pretty low batting percentage.

That has been our experience, not with Xcel, but with others, and certainly in the corporate world with the corporate RFPs. You have to take a lot of swings to get a hit, and that is costly: it is time consuming and frustrating for the people who did not get a letter. It is great what Xcel is doing. It is hard to be on this side of the table.

MS. BEANE: We did bid many iterations of projects, and we remain hopeful. Tim, you know what to do . . . . [Laughter] I’m joking. But really, it is a buyer’s market, and it is extremely competitive. Just when you think you found the bottom, the prices keep falling. I don’t know whether it is credible, but I heard the other day that a sub-$10 PPA was signed. I don’t know if any of others have read about that.

MR. MARTIN: We know of $12.

MS. BEANE: One was $9.98 or something like that. There are many different players in the market. They have different business models and risk profiles. We are a long-term owner and operator. That’s what we do. We want to continue to own our assets for the full duration of their useful lives, which is now extending further and further with new technology and repowering opportunities. For us, the pricing is a return question.

We are not going to make a long-term investment in something on which we cannot get a reasonable return for shareholders. It is a tough market. You really have to work hard and spend a lot of time and resources even to find out whether you are in the game.

MR. EBERHARDT: Dennis Meany, anything to add?

MR. MEANY: The only thing I would add is that none of what Tim said is surprising. The pricing and the amount of demand, as the other folks have said, are functions of a very competitive market.

MS. BEANE: But on the positive side, because I am a glass half-full type of person, I think this is a great example of RFPs where utilities are decarbonizing their fleets. They are moving in that direction despite what is happening at a federal level. They have decided that renewables are inexpensive to purchase and bring lower operating costs.

I will also put in a plug for PPAs. We are seeing a trend for utilities wanting to own renewable assets. I was on the regulated side before. I know why. They have rate bases. But PPAs should be attractive as well because they shift risks away from the utilities and utility ratepayers to us, as developers and owners.

Customers essentially pay only if the wind blows or the sun shines. The utility does not have to worry about its ability to use the tax subsidies. I am encouraged that regulators seem to be taking the risk-shifting element seriously. We just saw evidence of this in the PacifiCorp RFP. It is the best solution for customers overall to have some combination of utility-owned assets and PPA projects.

BOT projects

MR. EBERHARDT: Tim Kawakami, how has Xcel thought about PPA versus build-own-transfer, and what mix are you seeking?

MR. KAWAKAMI: We are just trying to catch up a little bit, as far as the ownership goes. Our model is basically to replace coal with renewables. We are shutting down coal plants under what we call the Colorado energy plan. The reason we have an ownership component in that plan — if it gets approved — is because we are going to take 660 megawatts of coal off line.

We retired 700 megawatts of coal in the last five years. PPAs are still good, I agree. I think the commissions like a mix of ownership and PPAs. We will have about 12,000 megawatts of wind by 2021. We will own about 5,000 megawatts of that. We do not want to own it all. We are not like other utilities that prefer to own everything.

I believe in PPAs. My job is to negotiate the PPAs, so I would be without a job without them. We like balance. I agree with Laura that the commissions also like balance.

MR. EBERHARDT: Paul Gaynor and Dennis Meany, how attractive are build-own-transfers as opposed to PPAs?

MR. GAYNOR: We are indifferent. We may end up owning some assets, but our business model is to develop and sell, so frankly we would rather develop and sell to someone like Xcel or Berkshire Hathaway Energy or somebody like that than to have to run a process to sell. Xcel is a good buyer of assets. It has the right cost of capital and a built-in tax appetite, so that’s all great.

MR. MEANY: We are long-term owners. There is a store near me in Connecticut that has two rules set in stone. Rule number one is the customer is always right. Rule number two is if the customer is wrong, see rule number one. We will respond to the market.

MS. BEANE: We are in the same position. We have been bidding both PPA and build-to-sell options because, ultimately, you do what the customers want. I could envision at some point in the future purely build to sell.

MR. EBERHARDT: Laura, your company had some exciting news a few weeks ago about the offshore wind solicitation in Massachusetts. Do you want to tell the audience about that?

MS. BEANE: You bet! Massachusetts had both an onshore and an offshore RFP. Our joint venture project, Vineyard Wind, is owned half by Avangrid Renewables and half by Copenhagen Infrastructure Partners.

We bid in and were awarded an 800-megawatt contract, and we are very, very excited about that. We were a little surprised, to be honest. A view appeared to be taking hold that the best thing to do in this market to kick start a new industry is to make awards to two different developers so that instantly you have a diversified supply chain.

We actually thought that was a good idea. That said, we are thrilled to have been awarded the full project. It will give us some advantages in terms of scale.

There is so much offshore activity in the Northeast. You have a Connecticut award that will be announced later. New York will release an RFP this fall. I think it is starting with 800 megawatts. New Jersey has made commitments to offshore. There is all of a sudden tremendous momentum in the offshore market. Ours is a very large project. The first phase is targeted to come on line in 2021. That is a very aggressive timeline.

By 2022, we will have the full 800 megawatts on line. I have become a real believer in offshore in the Northeast. The fundamentals have come together in a way that genuinely make offshore cost-competitive relative to the alternatives in those regions. You should see a significant build-out in future years.

PPA mix

MR. EBERHARDT: Dennis Meany, do you see traditional utility PPAs being an important part of your business for the next 12 to 24 months?

MR. MEANY: Yes, because they remain a strong part of the offtake market. The traditional utility PPAs are very competitively priced because they put less risk on the developer than the corporate PPAs do.

MR. EBERHARDT: What percentage of your development pipeline do you think will be contracted with a traditional offtake arrangement as opposed to corporate or hedge alternatives?

MR. MEANY: Given the markets we are in — SPP and ERCOT — we will be seeing a lot more corporate PPAs. We did a very large 228-megawatt PPA with Amazon for a project that came on line last July.

At the moment we have a mixture of corporate PPAs and hedge contracts and no utility PPAs. We have done utility PPAs in the past.

MR. EBERHARDT: Paul Gaynor, what percentage of your pipeline will be traditional PPAs?

MR. GAYNOR: If we are moderately successful with the utility RFPs, less than 20%. Most of our offtake arrangements going forward are likely to be corporate PPAs or hedges.

MR. EBERHARDT: Laura Beane, setting aside the offshore market, do you have a different percentage?

MS. BEANE: No. We have been bidding aggressively into utility RFPs and are certainly hoping for continued success there. Last year, all but one contract that we announced were with corporate customers. We definitely see a lot of demand in that area, and I fully expect it to increase. We have not seen much aggregation yet of corporate customers, but when it comes, it will really expand the market.

There are a lot of companies that want to move to 100% renewables, but they are too small to require all the output from a single wind project.

MR. EBERHARDT: So for the 80% of the projects in the pipeline that are not going to have traditional offtake arrangements with utilities, you basically have three options: a bank hedge, a corporate PPA and a proxy revenue swap. Paul Gaynor, how do you evaluate the three options? Do you have a general preference or is it project-specific?

MR. GAYNOR: On the corporate side, it is an RFP world. With hundreds of companies bidding in, the hit rate is probably less than 10%. But you have to chase them because some of the contracts are sizeable and interesting and in places where we think we already have a project that might suit the buyer. So they will remain a pretty big part of what we do.

Hedges are like a roller coaster ride. We just closed a deal a couple weeks ago in ERCOT and you end up biting your nails all the way to the finish line waiting for bankers and tax equity guys to sign off on documents. You hope that the natural gas market will not tank in the last couple weeks before the closing.

The potential volatility feels dangerous to me. So we do not want to say our whole business model will be based on the hedge market because you are held hostage to fluctuating prices.

We have looked at proxy revenue swaps. I am on the board of RESurety. Lee Taylor is in the back of the room. It is a super interesting product, but we have not had a project yet where the benefit outweighed the cost.

MR. EBERHARDT: Dennis Meany, anything to add?

MR. MEANY: Each one of the alternatives has its own problems. Paul mentioned the hedge contract problems. There are two big issues with corporate PPAs. The credit story is often difficult, particularly when the offtaker does not want the rated entity to be the counterparty to the contract or if the offtaker is simply not investment grade.

The proxy revenue swap has issues around how the proxy part of it is calculated. We are comfortable with it. Like Paul, we spent a lot of time on the product, and we are getting close to making one work, but you have to explain to your investors why you are giving up the upside. They are also limited to 10 years, which can work, but the term affects your financing and how your tax equity is sized.

MR. EBERHARDT: Laura Beane, anything to add?

MS. BEANE: I relate so much to what both of you have said. I feel like I have two new friends that I just want to hang out with at some point. I think we have a lot in common and a lot to talk about! You can come too, Tim. [Laughter]

MR. KAWAKAMI: Look at the smile on your face. Don’t tell my executives.


MS. BEANE: None of the three products is easy, and hedges and proxy revenue swaps are expensive. But hanging out in the ERCOT market on a hot day with a project that is not generating is also expensive.

There are tradeoffs. Sophisticated risk management has become an absolute necessity in our world. If you do not have a full energy management desk with people dedicated and living and breathing those markets every single day and you do not have a wide portfolio of options and tools in your tool belt to help manage that risk, it will be tough to play.

The market is becoming increasingly risky for developers with corporate PPAs because you wear the basis risk. You wear the risk of the project. You either need very sophisticated people and tools in order to manage that effectively or to have a really high risk tolerance. There is a lot of risk involved.

MR. MEANY: Laura is spot on. It has become a much more complicated business than it was 10 years ago. Every new RFP for a corporate PPA seems to involve a new idea for how to push risk back on the developer.

MR. GAYNOR: I am excited to see how the market changes when the tax credits expire. It will be interesting to see what kind of revenue contracts will be financeable and doable from an economic point of view, what kind of risk tolerance project investors and bankers will have for a five- or seven-year PPA.

I think that is where this market is headed. It is moving to a sub-10-year revenue world. That could probably work without the constraints that the tax equity investors have been putting on projects.

MR. EBERHARDT: That is how the combined-cycle market works, so there is no reason to think once you take away the tax credits that you will still need 10- and 12-year PPAs.

MR. MEANY: That world carries a lot more risk associated with the back-end electricity price. Right now, we have to worry about what electricity prices will be outside the hedge term after year 12, but once the production tax credits expire, we may have to worry about what it will be after five, six or seven years.

MS. BEANE: I echo that. The shorter the duration today, often the more attractive the project looks because you are banking on a back-end curve that historically has looked attractive when, in reality, we have seen it fail to deliver. What happens after the contract period for projects with thin margins where the hoped-for prices do not materialize? That is an interesting question.

MR. KAWAKAMI: We have been trying to help with that. We could be the aggregator that you described by aggregating customers who are interested in renewables.

We have pilot programs in a couple states where we are trying to do that. There is a lot of demand, but our regulators have not really embraced it yet. Any time you see a regulatory filing like that, try to support it. It would be good for the industry. It would be good for the developers, too.

We can manage the basis risk that you would otherwise have if you dealt with corporate offtakers directly. By doing it through the utility, the basis risk is on us. By doing that, we minimize the cost of electricity and socialize the risk to our ratepayers because they benefit, too.

MS. BEANE: I like that idea.

MR. KAWAKAMI: Can I be your friend now? [Laughter]

MS. BEANE: You can come and have drinks with us now, too. [Laughter]

Hedge availability

MR. EBERHARDT: Let’s talk about a few things that are going on in organized markets. Are hedges viable in ERCOT and SPP today for long-term deals? Are the tenors and prices being offered workable?

MR. GAYNOR: There is a whole fear versus greed thing. Developers like us have went out and locked in PTC-qualified turbines, and now there is a race against the clock to find a place to put them. Where are we going to get a permit to build? Where are we going to get an interconnection agreement signed? Where will we have a PPA?

Everybody is pointing their guns at ERCOT or SPP because projects can be built more quickly there. Frankly, that is what has happened to us and why we are concentrating all of our wind efforts in ERCOT.

The question is what is available there. We just did a 15-year hedge on a project called Rio Bravo. We closed it a couple of weeks ago. It was a P99 hedge, and Citibank was the offtaker. Citi had some appetite to go a little longer than the conventional hedge. We hope the market likes that part of it.

The project is in a part of Texas that has a great curtailment and congestion story. It is in south Texas, so the wind is not as strong, but you do not have the congestion and curtailment baggage of the panhandle or west Texas.

We think there are spots that still make sense. However, pricing is continuing to soften. It is that nail-biting thing I talked about earlier. Prices have come down 25¢ to 50¢ in the last month or so. It gets close to the margin where deals are go-no-go.

MR. MEANY: I agree with that. Hedge prices were over $26 or $27 two years ago. Gas prices have fallen since then, and hedge prices are below $20 today or maybe better than that in the south. Hedges at those prices generally still work, which is good news and bad news.

It is good news because they work because turbine prices have fallen enough to make them work. The bad news is that so many projects can still be built, so you have a lot of wind and now solar being built in ERCOT, and that creates congestion issues and puts further downward pressure on prices.

MS. BEANE: My view is you have to look at individual projects to tell whether the current pricing works. A lot of projects are being built, so clearly it works for some projects.

MR. EBERHARDT: So today there are hedges available for the right project. You can do a hedge in ERCOT and SPP.

MR. MEANY: The hedge providers really like the product. They offer to do tax equity if we will take their hedge. Pricing is an issue, but hedges are generally available.

MR. GAYNOR: I don’t think there is an inexhaustible supply of hedge counterparties for the number of wind projects that are trying to get done. Not every wind project will be able to attract the attention of a hedge provider.

MR. MEANY: SPP is very different from ERCOT. SPP South is a much less liquid market than ERCOT. Hedges are done, but there are not many counterparties to do them. In SPP North, hedges are probably not available at any length, and certainly not for terms of 10 years.

MR. EBERHARDT: A hot summer is expected in ERCOT. Reserve margins there are tight. Electricity prices are expected to spike in some hours at as high as $9,000 a megawatt hour. What are developers with projects doing? How do they view the $9,000 an hour? Is that a good thing or is that a bad thing? [Laughter]

MS. BEANE: It depends. We saw prices over $4,000 just the other day, so the fear is real. Whether or not the market is a little overheated now remains to be seen.

It will be interesting to see whether ERCOT gets through the summer unscathed. There is a lot of fear today. If you have merchant capacity to sell, the high prices are a wonderful thing. If you have a hedge, it is probably really depressing because you are giving up a lot.

MR. MEANY: With the hedge, the fear is that the price hits $9,000 at a time when there is no wind. Prices spiked at the beginning of February. They spiked again a few weeks ago, but in the past week, the forward curves are off $40 for August.

It is true there have been some high intervals, but I think the market may be calming down. The volatility is mostly a 2018 and even a 2019 problem. Prices in the forward market for 2021 and 2022 have not moved much.

Corporate PPAs

MR. EBERHARDT: Another trend in the corporate PPA space is that some of the major corporate buyers are balking at the idea of as-generated volumes. They are looking for firm volumes. Microsoft, in particular, is being pretty vocal about this. It says the as-generated PPAs that have been signed over the past five years have not been a great deal for corporate offtakers.

Are any of you involved in those discussions? Are you seeing corporates pushing you for firm output or to pay for firming services behind the scenes?

MR. MEANY: The corporates have an accounting issue. If they fix the quantity and fix the shape, then all of a sudden they are in the world of hedge accounting, and they do not want to be there. That is good news for us because they have to take an as-generated PPA. However, many of them are trying to figure out how to take a shaped product while getting the accounting treatment they want.

Lee Taylor with RESurety, who is in the back of the room, has been working on bolt-on products that remove some of the shape risk from the corporates. It gets very complicated. You have multiple hedges.

MR. GAYNOR: That goes to the point that was made earlier about the level of complexity now in this market. It has become rocket science in many ways for sophisticated buyers like Microsoft, Amazon or Google to procure electricity. These guys finally understand what they have bought. They do not want to do it again, and they are saying, “You go fix the problem. You bring me a solution.”

Perhaps you do it with a trading desk or some other exotic solution to try to insulate them from shape risk. If you can make a complex problem easy and present a simple package to someone like Microsoft, I think you will find an eager customer. It is incumbent on people like us to try to find solutions.

MS. BEANE: I agree. Another thing that we have seen is an appetite for directly delivered. A couple of the big corporate customers are not just committing to 100% matching of renewable energy credits with their demand, but they are also saying, “We do not want any brown power anywhere.” It is a new challenge on which we are working with our balancing authority in the Pacific Northwest to meet their load directly and be able to show them that what we are delivering is wind or hydro or something else that is carbon free.

I think there is more to come on this. They are very sophisticated business people. They were not in the power world until recently, and they are becoming sophisticated buyers very quickly and demanding solutions to difficult problems.

Merchant solar?

MR. EBERHARDT: There have been corporate PPAs signed for solar, but I think the bulk have been for wind projects. The overwhelming majority of hedged deals have been wind deals.

Paul Gaynor, your company is working on a hedged solar deal in ERCOT. Are we about to see a flood of merchant solar projects?

MR. GAYNOR: Not yet. It still feels like wind is leading the charge. About 90% of the corporate activity that we have seen is solar. Most such contracts are arranged by brokers.

Outside of ERCOT, in places like Virginia and Utah, most new offtake contracts are corporate PPAs.

MR. EBERHARDT: Laura Beane, are we about to see a string of merchant solar projects?

MS. BEANE: We have not been exploring hedges for solar projects, but I do not rule them out. If hedges become widely available, then a market will develop around them.

MR. EBERHARDT: Dennis Meany, is Lincoln Clean Energy doing any solar?

MR: MEANY: Yes, and it is a difficult product for us given how it is being priced. It will vary by market. There are places that are not terribly windy where solar is the competitive alternative.

In ERCOT for the last three or four years, the solar hedge price has been just $2 too low. Solar costs are falling, but so are solar hedge prices. Paul, you are closer to this, but my impression is some solar projects are moving within striking distance of being in the money for hedge contracts.

MR. GAYNOR: We signed a solar hedge in ERCOT. We are trying to get the deal closed. The hedge is definitely in the money. It is almost as competitive as wind. I would have not said that 10 years ago.

MR. EBERHARDT: Another trend lately has been the need to aggregate multiple offtake arrangements in a single project. There might be three or four different offtakers. Are you seeing 350- and 400-megawatt projects that have to have more than one offtaker to work?

MS. BEANE: We are not working on any. That said, we have a California asset right now that is 12 years old that has six offtakers. So we have done it before, but I would not want to do it again because you are managing separate PPAs with all those different customers off of a single asset and it gets really complicated, especially if you need to do anything with the asset and then have to get consent from so many different parties. It is not a very manageable structure.

MR. GAYNOR: We see this in solar. We have a 100-megawatt project. We bid into an RFP and got selected for 50 megawatts, so we have 50 under contract and 50 not sold. You hire a broker to try to find more. The broker is providing an aggregation service, so to speak. That is the only thing we have seen.

Audience questions

MR. EBERHARDT: Let’s see whether there are any audience questions.

MR. SAXENA: Himanshu Saxena, CEO of Starwood Energy Group. Great panel, guys. This question is for Tim Kawakami. We saw very low electricity prices a few years ago in California where the PPA pricing was at a point where investors like us were looking at the numbers and concluding the projects no longer make sense. So somebody is doing it for volume, and not for profitability. As a buyer of energy, do you worry that some of these projects with really low-priced PPAs are not going to be able to get built because deals at those electricity prices are out of the money?

MR. KAWAKAMI: We do, particularly now at these prices. What we have tried to do to mitigate is tighten our security requirements, like on pre-construction security. Developers who have not dealt with us before say, “You are so far out of the market with your security requirements,” but they are our protection against wasting time on projects that are not going anywhere. We make developers post security earlier in the process and give them a strong incentive to get the job completed.

Once the project reaches commercial operation, we will lower the security. Until then, we want them to perform.

MS. IGLESIAS: Silvia Iglesias, NextEra. No one mentioned PPAs with the US government. Would any of you care to comment on those and their financeability?

MR. GAYNOR: When we were called First Wind, we were an approved vendor on both the wind and solar side to the US government, but it turned into nothing. The procurement rules and processes are super cumbersome, often multiyear kinds of processes. I don’t have that time in my life. I don’t.

MS. ALLEHAUT: Benoit Allehaut with Capital Dynamics. We are coming off a 40-year-plus cycle of low interest rates. As you develop projects, do you worry about the hike recently in the Treasury yield curve and cost of capital?

MR: MEANY: The short answer is yes. It has been offset somewhat by margin compression from the banks. The bank market is very competitive, so LIBOR has gone up, but the spread above LIBOR has been narrowing. In the longer term, it is something that we all have to watch closely.

MR. GOARMON: Bernardo Goarmon, CFO of EDP Renewables North America. You addressed the growing number of corporate PPAs. There is no question that a corporate PPA is preferable to a hedge. Where we sometimes struggle is with credit risk. Fifteen years are a long time. How do you think about credit risk when evaluating a corporate PPA versus a hedge? No one worries about the creditworthiness of the big banks that are the hedge counterparties.

MS. BEANE: Our risk group has taken a much harder look at the credit issues and risks associated with the corporate market. There isn’t a long history with corporate PPAs, and we have all seen profitable companies diminish overnight.

We have been out of the tax equity market since 2008. We are moving back into it. The banks that are tax equity investors may have more experience evaluating corporate credits.

MR. GAYNOR: It is a huge issue. Most of the corporate solicitations that have hit the street have been with investment-grade offtakers. There may have been one or two non-investment-grade, but we have not been faced yet with the dilemma of landing a great PPA from a double-B credit and having to choose between that corporate PPA and a hedge with CitiBank or JPMorgan. Hopefully the investment-grade appetite remains so that we do not have to cross that bridge. It is a significant issue.