No longer reserved for tech giants such as Google, Amazon, and Facebook, financial instruments such as synthetic power purchase agreements (PPAs) are becoming popular among smaller to mid-sized corporations as a tool to reduce energy cost volatility while meeting clean energy goals.  In what began as a movement to limit corporate carbon footprints and which initially took the form of the purchase of renewable energy credits, more and more companies are procuring renewable energy through the purchase of solar and wind power.  Last year, 43 companies spanning 10 different countries contracted roughly 5.4 gigawatts of clean energy – significantly surpassing global annual volume in 2016 and beating the prior record set in 2015.  [source: BNEF}

Corporate buyers procure renewables, in large part, through synthetic PPAs with terms of 10 to 20 years, akin in length to more traditional, physical PPAs.  These synthetic deals are often structured as contracts for differences whereby: (1) the parties set a strike price, (2) the power producer sells power into the market rather than directly to the corporate counterparty and (3) the price at which the power sells into the market is settled against the strike price.  If the sale price in the market is higher than the strike price, the corporate counterparty realizes the positive difference, while the power producer is protected from the downside if the power sells in the market at a price lower than the strike price.  These contracts for differences often, but do not necessarily, include the sale of renewable energy credits and allow corporations to effectively purchase renewable energy far away from where the companies may have demand for physically delivered power.

2018 is shaping up to be another banner year for these deals.  The Business Renewables Center tracks publicly reported corporate procurement in the United States. Year-to-date, BRC is reporting 21 U.S. deals totaling approximately 2.04 gigawatts, which puts 2018 on course to set a new record for U.S. annual corporate procurement.

BRC’s tracker also evidences a steady expansion of the companies participating in this market.  Technology companies such as Google, Amazon, and Facebook were early drivers and remain among the top corporate users of renewable energy in the world.  But the market is rapidly diversifying as more businesses seek predictable clean energy costs.

To some extent, this diversification is the natural evolution of a maturing marketplace.  But there are three important drivers further fueling that growth:

  • The U.S. announcement of its intent to withdraw from the Paris Climate Agreement has spurred hundreds of companies to ratchet up their clean energy goals, including through initiatives such as We Are Still In. The RE100, a coalition of companies committed to go 100% renewable, now touts 131 partner companies – more than doubling the number in the last two years.  As more and more companies set increasingly robust sustainability goals, additional business are employing offsite corporate procurement as a strategy to reduce emissions and source clean energy.
  • Increasingly, in regulated markets, utilities are stepping up to provide green tariffs that allow corporate customers to source renewable energy directly from projects in the same service territory. While synthetic PPAs are well-suited for deregulated wholesale electricity markets, corporate customers have demanded greater clean energy sourcing options from vertically integrated utilities. Since the first green tariff was proposed in 2013 by NV Energy, the World Resources Institute now reports 21 green tariffs across 15 states either in place or under negotiation.
  • New deal structures are emerging to open the market up to smaller corporate purchasers. During the last 18 months, we have seen several innovative structures to enable greater participation by companies that themselves may not have appetite for the entire offtake of a project.  Structuring options include syndication of the PPA to a purchaser’s suppliers and partners, as well as a consortium approach that allows otherwise unrelated parties to aggregate their renewable energy demand while preserving the simplicity of a single counterparty to the PPA.

No longer just the domain of tech giants seeking to green their enormous energy consumption, the corporate renewable energy market has grown dramatically in recent years.  With 2018 U.S. deal volume on track to be the highest ever, the maturing market is fast expanding to new participants, including smaller consumers and increasingly those in vertically integrated territories.

As part of the Bipartisan Budget Act of 2018 (the “Act”), Congress extended and increased the 45Q tax credits for carbon capture and storage (“CCS”) projects. The Act increased credits for enhanced oil recovery from $10 per ton to $35 per ton and increased the credits for geological carbon storage from $20 per ton to $50 per ton. Raising capital for CCS projects has long been an issue, and developers of CCS projects often do not have the tax appetite to take full advantage of the tax credits available. The extension of the 45Q credits would allow large CCS projects to generate hundreds of millions of dollars a year, incentivizing tax equity investors to step in and provide funding for projects in order to reap the considerable tax benefits, similar to the tax equity deal structures seen in the renewable energy sector. While the 45Q credits makes CCS projects more viable, CCS technology is still very expensive and cost-cutting advances will likely need to be developed before a CCS project market is able to thrive.

 

By Brian Harms and Emily Prince

On April 6, the California Public Utilities Commission (CPUC) unanimously approved an order doubling the budget of California’s Self-Generation Incentive Program (SGIP). The order directs California’s three investor owned utilities to double their collection of SGIP fees from ratepayers. Together the utilities will collect $166 million dollars annually through 2019 to fund the SGIP, resulting in an addition $249 million for project funding.

The Order implements California’s Greenhouse Gas Reduction Act (AB 1637), which Governor Brown signed into law in September, 2016. The Act directs the PUC to increase the maximum collection for SGIP and extends the net energy metering program for fuel cells that commence commercial operation on or before December 31, 2021. The law updated the qualifications for the battery storage program by increasing the individual project cap to 5 MW and increasing the statewide cap by approximately 76 MW. Continue Reading California Seeks to Transform the Market: Doubles Funding for Distributed Generation with a Vision for Massive Battery Storage Growth

Introduction

The emerging trend of energy private equity (“EPE”) funds is revolutionizing the renewable energy field, as renewable energy joins leveraged buyouts, venture capital and hedge funds as asset classes that institutional investors and high net worth investors are using to deploy their capital in a diversified manner, with the added “social good” of investing in a sustainable energy future. Sophisticated energy sponsors are increasingly eschewing the traditional project finance structure, in which capital stacks are created for each deal, in favor of a private equity fund structure in which committed capital is deployed by the sponsor in accordance with a specified investment strategy.  From the sponsors’ perspective, the goal is the “holy grail” of all private equity sponsors – permanent capital.  This trend can be seen as further evidence of renewable energy maturing as an asset class within the larger investment world.  Since this trend is so new, the terms of EPE funds vary tremendously.  However, some common terms are summarized below. Continue Reading A Revolution Coming in Renewable Energy Finance: The Emergence of Energy Private Equity Funds