John Powers leads the Strategic Renewables Division at Renewable Choice Energy and has helped corporate, industrial, and institutional (C&I) clients achieve their renewable energy goals for over 12 years.
This is the second in a 4-part series of blogs on the explosive renewable growth currently underway in the commercial & industrial market sector.
Everyone can agree that 2015 was a historic year for the renewable energy industry. From the outcomes of the COP21 negotiations in Paris to record-breaking wind installations, we watched the market take crucial steps toward ever greater accessibility and adoption of renewables. The pinnacle of an amazing year was the long-term renewal of the Production Tax Credit, which will bolster the momentum of the wind industry and keep growth accelerating through the next five years and beyond.
However, 2015 was notable for another critical reason: buyers in the C&I sector participated in the renewable market like never before. These companies executed Power Purchase Agreements (PPAs) in excess of 3,400 megawatts of new wind and solar. Three months into 2016, the market shows no sign of slowing down.
C&I buyers are driven to enter long-term contracts for a variety of reasons. They are a unique group, comprised primarily—but not exclusively–of buyers in the Information & Communications Technology (ICT) and manufacturing sectors. In many cases, they are opting for virtual PPA structures that allow them to bypass utility-provided green power, while others, like Google and Apple, are working with utilities to develop distinctive tariff programs. While some buyers prefer to quietly announce their deals, others are taking a pronounced role in helping to develop policy recommendations. They all like saving money, and they’ve all either made public commitments to reduce their carbon footprints, or have come under pressure from NGOs to do so.
The unique nuances of the C&I buyer present a new challenge for the developer and financial services communities. Whereas PPAs have been a contracting mechanism in use by utilities for over a decade, C&I buyers have only come to the fore in the past couple of years. These buyers are hungry for solutions, but may be nascent in their understanding of the process.
Here are five key considerations to keep in mind when working with this emerging customer class:
1. Stakeholder engagement is mandatory
Unlike utility buyers, energy brokers and financiers, most C&I buyers come to the table with minimal direct experience with the energy market, renewable technologies and contracting structures. While deals might have a strong internal champion familiar with PPAs, to execute a deal, engagement across the organization is mandatory. Expect representation on project teams from accounting, finance, treasury, and legal along with, in some cases, marketing/public relations and the executive suite. By working to educate and involve this group, deals have a much higher likelihood of getting done.
2. Deals designed to address risk mitigation are crucial
Given the pace of change for most businesses, it is rare for a C&I buyer to enter into a supply contract for 12 to 20 years for anything. It’s therefore imperative for developers and advisors to successfully address project execution and operational risks on any C&I PPA deal.
C&I buyers will look for specific deal terms when finalizing PPAs. Developers can expect that C&I buyers will prefer contract settlement to occur at the hub, as they are less equipped to take on basis and congestion risk than a utility buyer. C&I buyers will also prefer the shortest possible contract term. Finally, while C&I buyers will accept power “as generated,” most will prefer a contract for a fixed volume to avoid the risks inherent in a low offtake price, particularly for projects located in ERCOT or PJM.
3. Deals will take time and require flexibility
No long-term renewable deal happens overnight, but expect C&I buyers to work particularly methodically and to look for credit flexibility. With the need to engage multiple stakeholders and conduct considerable financial analysis of the contract and credit terms, while also managing internal expectations, relationships with advisors like Renewable Choice or NGOs, and potentially press, a C&I PPA must have meticulous execution. Assume the process will take anywhere from six to 18 months from start to finish.
4. The reasons C&I buyers pursue a PPA vary widely
While most C&I buyers are motivated by the potential financial savings inherent in a long-term PPA, their other reasons for doing a deal can vary widely. Many have made public commitments to carbon neutral operations and are looking for the environmental benefits that come from the renewable energy credits associated with their deal. Others may care deeply about the communities in which they operate and are motivated by improving the air quality in those areas. Still others may be looking for the novelty of their financial support leading to the development of a new project—and the positive press associated with that additionality. Understanding the value drivers behind each C&I purchase can smooth the way for developers to get deals done.
5. A deal isn’t assured
No deal is done until the ink is dry—and sometimes not even then—but there are many variables that can lead a C&I deal to go sideways. Powerful stakeholders with the ability to slow progress on a deal may stall the process or even terminate it altogether if their fears aren’t adequately addressed or if market factors change. It’s important for developers to stay the course when working with C&I buyers, understanding that time and attention will help shepherd a deal over the finish line.
Without a doubt, C&I buyers will remain a powerful force in new wind development—if anything, we’ve only seen the beginning of this trend. Particularly as market demand for energy continues to rise, C&I buyers will have increasing appetites for reliable, affordable electricity. With a nuanced understanding of the unique needs of C&I buyers, developers stand to profit alongside these powerful off-takers.