Corporate procurement has emerged as one of the most exciting trends in renewable energy: corporate (nonutility) buyers have brought over seven gigawatts (GW) of additional renewables online in the U.S. and Mexico in the past seven years, and Google recently announced it will be 100 percent renewable in 2017, with over 2.6 GW of projects globally.
But what really happens behind the scenes to get these deals to the ribbon-cutting stage? Imagine you are the head of energy or sustainability at a Fortune 500 company. Your CEO has recently announced a goal to be 50 percent renewable by 2022. You do your research and realize that to meet that 50 percent goal in the next five years you will need to sign a utility-scale power purchase agreement (PPA). So you decide to issue an RFP to learn what renewables projects and pricing might be available. However, you recognize that these transactions are complex and your organization has no experience with them. Where should you begin putting together an economically viable transaction to procure renewable energy?
Consider some of the common deal terms:
- Do I ask for a deal period of 12 or 15 or even 20 years?
- Do I ask for delivery to the hub or the bus bar?
- How do I structure this to avoid derivative accounting?
- How can I protect my company against market risk?
A few months down the line, you’ve narrowed it down to three different projects and are in the last stages of negotiating terms with developers. It’s time to take the deal to your CFO for approval. How do you even begin to explain to your CFO what the prevailing market standard on each term is, let alone if it is standard to have, say, a price floor for economic curtailment, set at the grossed-up negative PTC value for wind?
RMI has developed practical tools to help
As the above hypothetical shows, the challenge of pursuing a PPA can be daunting. To address this, staff from Rocky Mountain Institute’s Business Renewables Center (BRC) held a three-day boot camp last August with new corporate buyers who were in the middle of navigating the PPA process. That session helped those buyers to get up to speed, but we also realized that many new buyers could use practical tools to make the process quicker, easier, and less risky.
Addressing this need dovetails with the BRC’s work to build industry consensus on risk allocation and on how standardized terms could accelerate deal pace. That work has led to today’s announcement of two new practical tools that should help to reduce transaction times—a term sheet template that is publicly available, and an RFP template available to BRC members.
- Corporate buyers can use and modify our RFP template to solicit proposals from project developers. The RFP template provides a starting point for understanding the range of terms that might be included in an RFP.
- Buyers and developers can use and modify our term sheet template during negotiations. The term sheet template provides a starting point for understanding the range of terms, as well as some indication of where the prevailing market standard may be on some of these terms, and introduces corporate buyers to the ways in which a term sheet and deal with a market maker—a financial institution or other intermediary—might differ from one with a project developer.
"Renewable energy power purchase agreements are complex and involve significant commitments from corporate buyers," said Michael Barry, Head of Sustainable Business Operations at Bloomberg. "These tools are based on the extensive knowledge and experience of BRC members who have negotiated deals from both sides of the table. They will help buyers understand what the options are, what terms have been used in other transactions and what is acceptable to make these deals bankable. The RFP template and term sheet template will help streamline the transaction process for new corporate buyers, particularly as they seek internal approvals."
The BRC developed these templates with significant input from a variety of member organizations, including experienced buyers, developers, investors, market makers, and law firms with substantial experience in these transactions, including:
- Project developers that have developed an aggregate of 43 GW of wind and solar capacity
- Project financiers that have invested an aggregate $48 billion in renewable energy projects
- Renewable energy transaction lawyers that have represented corporate buyers, project developers, and project financiers in deals for more than 3 GW of wind and solar capacity
All participants made it clear that the point is not to have a one-size-fits-all approach for corporations. Rather, the term sheet and RFP templates allow buyers to understand where they have options and choices, and where they should spend their time negotiating.
“The BRC Term Sheet is a valuable advancement in the corporate PPA market," said Jim Howell, SVP for Commercial Power Marketing at SPower. "Until now, corporate PPA structures varied significantly deal to deal; there wasn’t a standardized template based on best practices and market evolution. The BRC Term Sheet, however, is a well-informed tool that will support corporates and developers – with proper risk sharing. It will make it easier for corporates in their decision making process and will help developers fine tune their offering so projects get built with the most efficient financing."
Financing corporate PPAs: Key insights from financiers
During development of these templates, our discussions with financiers yielded the following key insights. We hope they will help both developers and corporate buyers to think of their signed contract as being the key to unlocking affordable capital—both equity and debt to finance their new wind and solar farms.
- Involving financiers as early as possible can help to identify the most efficient way to structure a deal.
- PPAs that are signed but that will not be financed are a tragedy—and are largely avoidable. (Our term sheet template includes a list of terms to avoid in contracts in order to lessen the chances that the contract will fail to attract financing.)
- Many financiers view risks as a holistic package, rather than focusing on specific issues in isolation.
- In the first stage, developer credit/execution risk is most important. In later stages, one needs to decide what risks one wants financial players to take, and how to price capital for that risk.
- Ultimately, a financier is running a sensitivity analysis: is there enough value in the project to address the risks that are present?
“By designing a clear baseline for buyers, developers, and the investment community BRC is providing a vital tool for accelerating the adoption of clean renewable energy by Corporate America,” said Eli Hinckley, Partner at Sullivan and Worcester and leader of the firm’s Energy Group. “BRC’s thoughtful approach to draw on the experience and expectations of all parties to a renewable procurement deal in building this term sheet has resulted in the creation of a model set of terms that can be both a transparent measure of the market for these transactions, as well as a valuable educational tool for new entrants to this growing market.”
As we look forward in 2017, the outlook is positive; 87 companies have committed to be 100 percent renewable, 91 corporate buyers have joined the BRC community, and levelized costs for renewable energy are at record lows, per Lazard’s LCOE v10.0 report. And now, the market for corporate renewables has two new practical tools that should help to reduce transaction time and cost and, perhaps most importantly, increase transparency to ensure that a fair deal is had by all.
To download the term sheet, click here.
If you have any feedback or are interested in engaging with the Business Renewables Center, contact us at firstname.lastname@example.org
Image courtesy of iStock.