Aggregated PPAs

Aggregated PPAs

April 12, 2021 | By Caileen Gamache in Houston and Robert Shapiro in Washington, DC

A number of project developers in the last few years have signed multiple PPAs for a single project. These are referred to as "aggregated PPAs."

There are benefits to having multiple offtakers for a single wind or solar project.

It expands the market for renewable energy by aggregating smaller companies that do not need as much electricity individually as would be required to support a 100- or 200-megawatt power project. Outside of certain state mandates that require utilities to sign power contracts to meet specified state goals, investor-owned utilities increasingly prefer to build their own renewable power plants or buy such power plants from developers at the end of construction under build-transfer agreements. Developers have been able to fill the gap caused by loss of utility PPAs with long-term PPAs with corporate buyers. However, many of the large corporate buyers have already filled much of their procurement quotas. Aggregated PPAs are a way of reaching deeper into the corporate market.

Lenders will finance a project with multiple buyers if each buyer has an adequate credit rating or credit support or if the developer is prepared to have some of the revenue serve as a cushion to support a financing without being taken into account fully in debt sizing.

Corporations sign PPAs to help meet environmental or sustainability goals. They also do it to lock in electricity prices for an extended period. Solar and wind power prices are now competitive, and sometimes lower, than electricity from comparable fossil fuel-powered power plants. Aggregated PPAs not only allow corporate buyers with relatively small load requirements to secure these benefits, but they also let larger buyers diversify supply risk by procuring electricity from multiple projects.

The most significant barrier to aggregated PPAs is negotiations with each buyer can be labor intensive since each has unique demands. Some developers have determined that small offtakers are just not worth it. Financing also becomes more difficult and costly because each unique PPA requires diligence.

Two models

Nevertheless, there has been an uptick in interest in such arrangements. We see two models emerging.

The first involves multiple buyers signing essentially identical PPAs for shares of the output from one project. This is a multi-PPA model. Some brokers specialize in combining like-minded offtakers and matching them with a developer and then leading negotiations on behalf of the group of buyers. Some developers do their own aggregation by offering a form PPA on essentially a "take it or leave it" — or a "take it for the most part" — basis to smaller corporate buyers.

Another common model is where a single buyer signs a single PPA on behalf of multiple buyers who all have separate back-to-back PPAs with the principal buyer. This is called the consortium model. It is less common with corporate buyers, but more common for municipal or cooperative aggregators. For example, municipal utilities or other state entities may join together to buy the output from a single project and allocate the output among themselves. Utilities sometimes also play this role where utility customers ask a utility to procure renewable energy on their behalves in exchange for paying an increased retail rate.

The key for successful PPA aggregation is to reach consensus on the principal PPA terms and method of output allocation. There is an atypical level of transparency in these transactions. The buyers usually know the identities of the other buyers. All buyers must accept the same terms, including contract price and collateral provisions. There is no room to negotiate a competitive advantage in pricing or terms absent collective action.

Common questions

The following are answers to common questions about aggregated PPAs.

Q: Are there limits to how many corporate buyers can be combined in this manner?

A: No more than 100% of the project capacity may be contracted, so the size of the project is a natural limit. The more offtakers, the more difficult it may be to build the necessary consensus as to PPA terms.

Q: Are these physical-delivery contracts or virtual PPAs that are financially settled?

A: A typical corporate PPA is a financially-settled contract for differences, or "virtual" PPA. The corporate buyer pays a fixed price for the electricity physically delivered by the project into a competitive market and receives in return the market price the project receives from selling the output to the grid. Consortium-model contracts are more likely to be physically settled. The aggregator offtaker takes physical delivery at an interconnection point and then allocates transmission responsibilities among the consortium members from that interconnection point to the point of delivery for each member.

Q: Do the offtakers all have to be in the same state or ISO?

A: The location of the offtaker is irrelevant for virtual PPAs. However, individual offtakers may have internal corporate requirements that the project must be located in the same region as the corporate load.

Q: Does each offtaker have to take a fixed percentage of the actual output or is there a notional output to which offtakers commit?

A: Corporate offtakers often have a fixed capacity procurement goal. Anyone with such a goal usually prefers to contract for a notional amount of electricity, and it takes all the energy and other products attributable to the contracted capacity. Issues arise when the project ends up being smaller than anticipated. Each offtaker's share may be decreased pro rata, or certain offtakers may have priority rights. This issue is mitigated if the buyer agrees to a percentage share of the total installed capacity, which is another popular model.

Q: What happens to renewable energy credits under state renewable portfolio standards and ancillary services payments?

A: A corporate buyer is normally entitled to all RECs associated with the share of actual output electricity the buyer takes (1 REC = 1 MWh of electricity). If ancillary services are part of the "product" that is sold, they are also allocated based on the share of electricity taken by the buyer. Buyers may also request "bridge RECs" or RECs purchased from the market in a set quantity before the project goes into commercial operation to satisfy internal corporate goals, particularly if the commercial operation date is delayed.

Q: How does storage fit into the picture?

A: The PPA may be identical unless the buyer has dispatch rights, in which case things get more complicated and the developer may not find it advantageous to have multiple offtakers. In simple terms, a single large project with multiple buyers having dispatch rights must be configured and metered in a manner that essentially breaks it into multiple small projects that can be operated separately from one another. Dispatch rights do not apply to VPPAs.

Q: What happens if one or more offtakers fail to pay on time?

A: Buyers will rarely agree to assume liability for the actions or inactions of other buyers. The good news for project owners and lenders is that the other buyers continue paying even when one defaults; thus, only a percentage of the project revenue is affected.

Under the consortium model, the project-facing single buyer is responsible for the full cost of the electricity, even if some of the secondary buyers with whom it has back-to-back PPAs default.

Q: How do lenders and tax equity investors view aggregated PPAs?

A: Lenders are likely to accept multiple buyers and may actually like the diversification of credit risk, provided that none or only a small portion of the revenue is tied to entities with weak credit outlooks. Lenders lending against a consortium-model contract will be keen to understand how liability is spread among the consortium members for debts of the aggregator.

Q: Is there a danger of the project company being considered a utility because it is making multiple sales?

A: No. The project owner will not be regulated any differently based on the number of wholesale buyers that it has.

Q: Are there other differences in key terms compared to single-offtaker arrangements?

A: Not generally. Curtailment, electricity output and other matters affecting the project as a whole will normally be allocated to each buyer on a pro rata basis.

Some buyers ask for priority rights: for example, a right to the first capacity that comes on line or the right to be curtailed last. This is difficult to administer and is rarely accepted by developers. Sometimes a single large project will be "chunked" into separate metered portions, with each buyer having rights to its separately-metered portion of the project to address this type of issue.

Aggregated PPAs occasionally limit the types of other buyers with whom the developer can sign PPAs for the same project. For example, a buyer may prohibit a developer from selling to its competitors. This may limit the lenders' foreclosure options for transfer of the equity interests after an event of default under the financing agreements. Preferably, the broker presenting a group of buyers will have vetted this issue before approaching a project developer.

The aggregator under a consortium model may offer shorter terms to its members if it has the ability to substitute new members relatively easily.

Q: Under the broker model, brokers find the corporate offtakers. Is this like a double auction where the broker narrows down potential developers for a pool of corporate buyers and the corporate buyers then press for even more concessions?

A: Yes, this is often the case. There are a few brokers that use algorithms to help match buyers and projects.

Q: How else do aggregated PPAs differ from traditional corporate PPAs or utility bus-bar contracts?

A: The most significant difference is that an aggregated PPA is usually "middle of the road" on all terms to reduce negotiations. It is important to leverage experience on all sides — developers, lenders and corporate buyers — to determine what "must haves" the PPA requires. From there, the person drafting the PPA strives to make the terms as fair and balanced as possible so that buyers can feel comfortable signing without significant negotiation.