Replacing electricity generated from burning fossil fuels with electricity from wind and solar is a good business strategy

Renewable Energy Procurement: Trends, Outlook & Strategy

Elias Hinckley | Sullivan & Worcester

 

Please tell us about the Energy Group at Sullivan & Worcester, who you are and what you do in the alternative energy industry

At Sullivan & Worcester we have built an energy practice that is focused on helping investors navigate the evolving options as our energy marketplace transitions from the historic approach of burning fuel to make power using plants all built on a centralized control model to a new model where clean renewables will dominate the energy landscape and consumers will take control of their energy needs through innovative financial structures and on-site power generation.
 
 

Why are corporations pursuing direct purchases of renewable power?

Reasons range from pure cost per kwh purchased, to market and regulatory certainty, to the brand value of reducing reliance on fossil fuels, to concerns over the future of specific markets in the face of a changing climate.  Consistent in every one of theses reasons is an underlying economic case – replacing electricity generated from burning fossil fuels with electricity from wind and solar is a good business strategy.
 
 

Are some sectors of the corporate world more active than others in this pursuit?

So far, yes.  Very large technology companies with very large energy demands and sophisticated energy procurement capabilities and significant sustainability or climate goals have been the most significant portion of this market (e.g., Google, Apple, Amazon, Equinix), but a huge variety of companies – from refiners (Valero) to auto manufacturing companies (GM) have also done these deals.  As we look forward we expect to see a significant portion of the Fortune 1000 entering into these kinds of deals over the next few years.
 
 

How are these corporate PPAs structured?

These are generally financial transactions.  The corporate buyer does not take physical delivery or title to the power produced at the wind or solar plant.  Instead they enter into a financial arrangement where they commit to a set price between the power plant and the transmission grid.
 
To the extent the price between the plant and the grid drops below the agreed contract price, the corporate buyer pays the plant owner the difference.  This gives the plant owner revenue certainty which it can use as the basis for obtaining the huge sums of capital necessary to build the plant.
 

On the other side, the corporate buyer also gets pricing certainty (it won’t pay more than the set price once power purchases and any payments to the plant operator are netted).  In addition the corporate buyer typically gets the rights to any environmental attributes, such as renewable energy certificates produced by the plant.

 
 

Will corporate buyers cause a meaningful change in electricity markets?

Sort of.  This new model actually supports the traditional model of large centralized generation facilities, with power delivered to end users through a transmission and distribution system.  That said these deals can further reduce the participation of traditional electric utilities in the economics of the power markets.  The result is likely one of two dynamics, more pressure on the traditional utility business model or utilities will get much more aggressive in their build out renewable power assets to meet market demand.  
 
 

How can a solar system integrator make his company stand out as a resource for this movement?

The key to success in this market is bridging the different expectations around risk allocation (things like where the price will be set for the power to be sold into the grid, or who carried the risk of the output from the system being curtailed because of transmission constraints) and the economic fundamentals (like price and tenor) between the corporate buyers and the investors and lenders that will actually supply the necessary capital to build the plant.
 

In addition, identifying the best target customers and being able to educate the buyers on both the operation of the energy market and the value proposition of these financial transactions will be vital in creating opportunity in this market.

 
 

What are the biggest challenges to getting successful corporate PPA done?

Bankability - finding the balance between a deal that works for the buyer economically and providing the terms and economics that investors (especially tax equity investors) and lenders require.
 
 

If you were to advise an in-house corporate energy strategy—where would you start?

You need a good team that understands energy markets and the value proposition for renewables.  That team needs to work with executive management to set a clearly defined strategy, with real targets and metrics.  The strategy needs to be mindful of location, resource constraints, good projections for electricity demand and should consider the value of non-core benefits (i.e., the value of a natural volatility hedge for a sustainability driven buyer, or the value of resilience for a buyer focused strictly on price).
 
 

About Elias Hinckley
Elias B. Hinckley leads the Energy Group in Sullivan & Worcester's Washington, D.C. office. Mr. Hinckley focuses on helping his clients navigate a changing energy, tax, and finance landscape by efficiently and creatively structuring deals. He incorporates tax, policy and market insight to solve complex financing challenges for public utility, banking, private equity, real estate, engineering, construction, manufacturing and alternative energy companies. He has experience representing clients across energy sectors, including solar, wind, geothermal, biomass, biofuels, hydroelectric, batteries, fuel cells, energy efficiency, demand response, electric transmission, natural gas and advanced coal.
 
 
 

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