Around the world, business leaders’ enthusiasm for green energy continues apace, with corporate wind and solar power purchase agreements accounting for 25% of global solar and wind capacity additions in recent years. Renewable energy projects are primarily supported through the revenues generated by power purchase agreements (PPAs), a long-term contract between the project owner and an offtaker, be it a utility, a company, or a government agency.
Renewable energy PPAs help mitigate risks associated with market fluctuations and relieve offtakers of project operations and maintenance responsibilities. It follows, then, that their popularity will only grow as decarbonization efforts ramp up, fossil fuel prices rise, and governments look to phase out renewable subsidies and feed-in tariffs.
Amid surging demand, however, regulators, developers, investors, and executives will have to adapt to a rapidly changing market. Here’s what they need to know.
Connecting renewable energy projects to the grid remains a significant obstacle for players on both sides of a PPA. For instance, in the United States (U.S.) alone, nearly 2,600,000 MW of generation and storage – more than 95% of which is for solar, wind and battery storage projects – are currently in interconnection queues across the U.S., with a median duration of 5 years. A recent report from the United Kingdom’s (UK) National Audit Office reflects similar problems in the UK.
Fortunately, regulatory reform appears to be on the horizon. In the U.S., the Federal Energy Regulatory Commission continues to work on reforms that would shift the interconnection process from a “first-application-in, first-in-place” system to a “first-ready, first-served” cluster approach. And, in Germany, officials earlier this year said they will push four major grid companies into a merger to better facilitate transmission upgrades.
More broadly, the European Union (EU) has proposed revisions to its internal market design aiming to “make it easier for corporates to buy renewable power, create long-term contracts, and provide flexibility for consumers.” Emerging markets, from Brazil to Vietnam to South Korea, are also developing reforms to better enable corporate PPAs.
Fluctuating prices and new entrants are accelerating alternative deal structures. Smaller countries and companies are getting involved, catalyzing new avenues for dealmaking. In Asia, for instance, cross-border renewable PPAs – like Singapore’s Lao PDR-Thailand-Malaysia-Singapore Power Integration Project – are on the rise. In the U.S., the use of virtual power purchase agreements has fueled the significant growth of corporate renewable PPAs, which provides a beneficial structure for the renewable project owner and the corporate offtaker.
At the same time, renewable PPAs may start to be negotiated differently as energy prices shift. Delays stemming from labor shortages, construction issues, and supplier commitments only add to the complexity, as do the price sensitivities of certain customers (e.g., landlords may be less sensitive to higher prices, as they can pass on added costs to renters). The use of price reopener clauses, which can be triggered in a number of different ways, is, therefore, an important tool in dealmakers’ toolboxes.
A heightened focus on renewable energy certificates (RECs), which represent the property rights to the environmental and social attributes of renewable energy generation, will persist in the U.S. as offtakers look to avoid “greenwashing” claims. This emphasis might require REC suppliers to take on additional obligations, such as providing representations and warranties that assure they are in compliance with various protocols related to the reporting of RECs, as well as agreeing to take action should issues arise.
Increasingly, companies also want named assets in their PPAs (and the RECs that stem from them), as it creates an audit trail that can be more helpful should they face critiques. On the developer side, meanwhile, some project developers in the U.S. are starting to decouple RECs from the projects’ broader environmental attributes, with the hopes that these attributes may generate additional value down the road.
Despite the evolving nature of renewable PPAs – and the growing number of corporations taking advantage of them – there remains a substantial untapped market of potential buyers. If you haven’t explored the potential of these agreements, now is the time to enter the fray.