Project Development, Solar, Wind Power

Corporations Are the New Drivers for Renewable Energy Growth

Issue 8 and Volume 19.

In mid-May, The Dow Chemical Company said that it was raising its 2025 corporate clean energy target from 400 MW to 750 MW. Launched in 2015, Dow’s original 2025 sustainability goals included using 400 MW of clean power but after meeting the target in just one year, Dow reset the goal to 750 MW. The company said it is the first company in the U.S. to power manufacturing sites with renewable energy at this scale.

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Image: NRG and Dow’s 10-year PPA will provide clean energy from the 150 MW Goat Mountain I and II wind farms, which will power Dow’s Freeport, Texas facilities. Credit: NRG.

NRG’s Erik Linden declined to disclose the price Dow will pay per kilowatt-hour (kWh) or the financial terms of the deal. He said that NRG’s deal with Dow will be “solely wind” but that NRG has similar solar power purchase agreements (PPAs) with Whole Foods and Unilever.

Dow’s announcement is not unusual. According to a May 2016 report from law firm Orrick, from 2012 to 2015, contracted capacity under corporate PPAs doubled year-over-year. Even more telling, in 2015, corporate PPAs exceeded 50 percent of the overall PPA market – more than traditional utilities.

Gigi John, one of the authors of the Orrick report, “Corporate PPAs – Market Trends and Opportunities,” said that PPAs of this type are more than a trend. He called 2015 a “watershed moment” and said that he and his colleagues wrote the report because “everybody needs to understand how PPAs work.”

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Figure 1: Publicly announced contracted capacity of corporate PPAs, Green Power Purchases, Green Tariffs, and outright project ownership in the U.S. and Mexico 2012-2016. Updated May 10, 2016. Credit: Rocky Mountain Institute / Business Renewables Center.

How Do They Work?

When an entity other than a utility purchases power directly from a power generator, that’s a corporate PPA. There are two types: a physical PPA in which the power is actually delivered to the buyer or a virtual PPA in which the corporation purchases the output of a renewable energy plant that may not be located adjacent to its facilities.

Orrick’s John said that buying power from a generator instead of a utility isn’t part of a corporate business model so the report helps to highlight some of the “pain points” that both developers and corporations may encounter when developing a deal.

First, from the corporation’s perspective, it may come as a surprise that certain credit requirements are necessary. “This gets into things that big fortune 100 companies aren’t used to procuring,” said John. A corporation would generally require its own suppliers to prove credit-worthiness but they aren’t used to having to prove their own, which a developer will need in order to sign a deal with, for example, the tax-equity partner.

From the developer perspective the same is true, said John. Developers need to determine how much they need from a corporation to get the deal done. Since “there is no utility on the back end to provide all of this wonderful credit support,” said John, developers need to ask themselves, “what can I live with for this off-taker, what will tax equity live with? How do I structure something that is good enough for them?”

Another issue that needs to be worked out contractually is what happens when the renewable energy generator is curtailed and produces no power. Curtailments occur when there is too much power being produced for the grid to accept – at these times the electricity spot price goes negative and wind turbines are generally shut down. John explained that corporations might ask “why would I ever have to pay dollars or ‘true up’ financial differences when there is no product?”

When these situations occur, explained John, it doesn’t mean that the corporation has stopped using power, just that the power it is using is generally very cheap. So contractually it is really about figuring out how to structure the deal, said John: “So I [the corporation] got really cheap power because there was too much on the grid so I need to give a little back to the developer to keep the economics ok,” he explained.

Along those same lines, one of the newer pain points for developers is settling the basis between two different spot markets. In certain situations, a generator is feeding into the grid at one interconnection point but the off-taker is using power from a different connection point. For developers, the problem is this: “If I put energy on the grid here at this connection point but I am settling here, how do I manage this basis between the two because there can be natural swings,” said John, adding that this is “a big issue.”

Why Not RECs?

Legally from the perspective of a utility, because renewable energy certificates (RECs) represent the attributes of renewable energy, corporations could simply purchase RECs and be able to claim that their operations are powered by clean energy. While that was happening in the earlier days of renewables, the rise of corporate PPAs again points to an evolving industry.

First, said John, with a PPA a corporation can “point to a wind farm and say ‘that’s my wind farm, all my energy comes from there,'” but he thinks corporate PPAs are actually more about the price of renewable energy. The sustainability officer in a corporation might be satisfied with RECs but “the CFO steps in and looks at the economics,” he said.

John said that the CFO views the deal differently, thinking “If I do a 10-year, 15-year, 20-year deal, then what does my 20-year horizon look like for power prices?” With that in mind, the corporate renewable PPA becomes a way to “hedge against the future to make sure I can lock in the power prices,” he said. “You can’t do that with just RECs.”

Up to now, corporate PPAs have mostly been done with wind projects in markets where there is a lot of liquidity and price transparency, said John, like the ERCOT market in Texas. “But there is no reason that I can think of that you couldn’t do it with solar,” he said, adding that the C&I deals that are being done today are very different from those that were done in 2013.

“I learn something on literally every PPA,” said John.

In 2015 corporate buyers contracted for almost 3.5 gigawatts of new renewable energy PPA capacity, according reports, and that number is expected to grow again in 2016. Keep your eye on the corporate renewable energy procurement and if you are a developer looking for an offtaker, you might try calling up CFOs of large corporations and see if they want in on the deal.