U.S. corporations are steadily increasing purchases of renewable energy, establishing themselves as major drivers for the development of new, high-quality energy projects. The predominant vehicle for these purchases is the “virtual” power purchase agreement, explain Ram Sunkara and Joshua Belcher, of Eversheds Sutherland (US) LLP in Houston.
Over the last five years, U.S. corporations have steadily increased purchases of renewable energy, resulting in record procurements in 2018 and establishing themselves as major drivers for the development of new, high-quality energy projects.
Multiple renewable power purchase agreements and sustainability commitments already have been announced in 2019, and corporate purchases are only expected to grow over the next several years. At the same time, they’re also driving innovations in contracting for power.
Purchases of renewable energy can take many forms, and a company may or may not be buying the actual electricity that is produced by a wind or solar project.
The predominant vehicle for corporate purchases of renewable energy remains the “virtual” power purchase agreement (VPPA).
With a VPPA, instead of buying the actual electricity, the company pays a fixed price per megawatt/hour (MWh) for the electricity that the project produces and sells into the wholesale market. In return, the project transfers to the company the “renewable energy certificates” (RECs) associated with that electricity, essentially credits for the energy produced from a wind or solar project that match the company’s actual consumption of traditional power, thus making it “green.”
The renewable energy project also pays the company the price for the power it received when selling the actual electricity into the wholesale market, which may be higher or lower than the fixed price the company is paying. Companies use these “contract for differences” to hedge their overall cost of power.
This approach provides flexibility by removing constraints traditionally imposed by the geographic location of the renewable resource relative to a purchaser’s load. This flexibility has, in turn, fostered the development of contract mechanisms to provide more options in the VPPA that benefit one or both parties.
One provision that is appearing on a more regular basis would allow the developer of renewable energy to substitute one project contracted under a VPPA for another (or assign the agreement to an affiliate) if, for example, it turns out that another proposal in a different location has better economics or fewer roadblocks to development.
Such an approach may also allow the parties to maximize the value of declining federal tax benefits by shifting resources to the most advanced projects.
This type of provision works well for renewable energy producers with an extensive portfolio of uncontracted projects in the development pipeline at varying stages of maturity. The terms around “project swaps” need to be clearly and carefully drafted, and both buyer and seller ultimately need to be satisfied that the provision operates to their mutual benefit. Neither wants to be forced into a substantially different or disadvantaged economic position.
Although a feature in VPPAs from even the earliest days, the option to provide temporary deliveries of physical electricity or even a full conversion to a physical contract seems to be making its way into more VPPAs and is even a standard requirement in form VPPAs used by large corporate purchasers.
These can be useful in instances where the renewable energy project will be delivered into the same grid on which the company’s facilities are (or will be) located and further illustrate the geographic optionality that VPPAs offer.
Larger buyers with sophisticated energy trading desks may also have an interest in gaining the option to buy physical power. In either case, these physical delivery options can take many forms, but all must anticipate the involvement of a market participant that is licensed to take delivery of the renewable energy in the wholesale market and deliver retail electricity to a buyer’s load.
Another trend reflecting the flexibility offered by VPPAs is the varying ways RECs are used to meet corporate sustainability goals.
The increasingly used REC “swap” allows the seller to monetize the value of compliance market credits, which can be used to meet a mandatory renewable portfolio standard produced by the project, for example, and deliver less expensive voluntary market RECs to the buyer.
This approach does not work for some, particularly larger corporate purchasers who value trumpeting their supporting role in the development and financing of a specific renewable energy project (and who must also be particularly careful not to run afoul of Federal Trade Commission prohibitions on false marketing claims).
As more and more companies adopt sustainability and renewable energy targets, purchasing renewables in smaller volumes and through aggregated or consortium arrangements, REC swaps can allow multiple, regionally diverse buyers to nevertheless agree to contract with a single project that may or may not be local to each buyer’s operations.
For example, a wind farm in West Virginia could execute a VPPA with several buyers located in Oregon, Michigan, Pennsylvania, and Florida and provide them all with voluntary market RECs. Many simply want to ensure that the RECs are retired against their load and are more than happy to capture some of the value of compliance RECs through a lower fixed price.
When contracting with projects that will have an extended commercial operation date, buyers looking to satisfy near-term sustainability goals will often ask the seller to provide voluntary market RECs as “bridge” RECs to be delivered during the development period. This allows the buyers to meet their goals in the period before the renewable project begins.
Bridge RECs also may be required if the commercial operation of a project is delayed beyond what was estimated when the VPPA was first executed.
Similarly, “gap” RECs become due either when a project that has been unable to obtain its permits or secure financing exercises a right to terminate the contract or when a buyer terminates the VPPA because the sponsor has failed to meet the guaranteed commercial operation date.
These gap RECs are intended not only to help buyers meet their sustainability commitments but also to help satisfy those goals while they look to contract with a different renewable energy project.
With significant announcements in 2019 from companies like Verizon regarding their commitments to carbon-neutrality, This may be another big year for corporate procurements of renewable energy.
Companies will keep pushing the envelope in terms of both flexibility options, as well as other commercial developments around aggregated purchases, upside sharing, pricing mechanisms to capture new adders and incentives and mitigation of market disruptions. As the markets continue to grow and evolve, expect the commercial and contracting innovations to continue.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ram Sunkara is partner and Joshua Belcheris counsel in the Houston office of Eversheds Sutherland (US) LLP. Ram and Joshua represent both large corporate buyers and project developers in renewable energy deals across the country and have the market-leading practice in the development and negotiation of physical and virtual PPAs.
