History should teach us not to underestimate the creativity of the US corporate office or its financial markets, nor should we underestimate the resilience of the renewable energy industry. For example, US tax equity investments in wind power projects plunged more than 80% after the 2008 recession, and the next year Google announced the country’s first corporate PPA.
Many companies are currently facing challenges similar to those during the 2008 recession: liquidity strains, tightening credit, slower demand, and a general sense of uncertainty. Unlike the 2008 recession, however, a sizable majority of major US corporations now have publicly stated sustainability targets, including 78% of the S&P500.
With public commitments in a world of uncertainty, many corporate buyers are looking to better understand how COVID-19 has impacted the renewable energy market and how they should adapt their strategies. Though there is no “one size fits all” solution, one thing is clear: COVID-19 has not slowed demand for quality projects and offers are moving quickly. Early buyers will have the advantage as the ripple effects of the COVID-19 pandemic strain supply in the back-half of 2020 and into 2021.
Below we examine four ways the renewable energy industry has evolved during the global pandemic and offer advice on how corporate buyers can adjust their approach.
1) Don’t hesitate on quality projects
The underlying forces driving renewable energy adoption have not changed as carbon emissions remain high. According to the National Oceanic and Atmospheric Administration, weekly average CO2 emissions climbed 2.92 parts per million as of June 5, a 0.7% increase over last year and 6% increase since 2010. In addition to the science, there is increased pressure from the broader investment community, with Moody’s, BlackRock and others continuing to price climate risk into company valuations.
However, with risks of project delays fueling uncertainty in the tax equity market, investors are looking to close on good deals while they can, which means prioritizing strong, in-progress projects. Beyond potential financing risks and higher costs, equipment supply shortages are expected to increase the costs of early stage projects. As the production of primary material declines and Chinese manufacturers operate with reduced factory utilization, market analysts expect prices for solar PV modules to climb as much as 10-20% throughout 2020.
Projects with existing module and other solar hardware contracts in place will be largely shielded from these price increases, increasing the likelihood that near-term projects will offer better returns than those further down the pike. With less demand, lower financing costs, and lower materials costs, early moving corporate buyers should expect to see better pricing and hold more negotiating power than late-moving buyers that adopt a “wait and see” approach.
2) Don’t miss out on green tariff opportunities
Even before COVID-19 upended public health and the global economy, utilities around the country were quickly expanding green tariff programs to attract and retain energy-intensive customers. There are now 19 states that offer green tariffs, more than double the number of states with green tariffs in 2017.
While they rarely offer the cost-savings opportunities associated with utility-scale VPPAs, many corporate buyers are attracted to the stable pricing, lower risks, shorter-term options, and easier contracts that green tariffs typically afford over virtual power purchase agreements. Through the first five months of 2020, we’ve already seen major green tariff announcements by GM, GCC, Textron Aviation, Toyota, Dow Chemical, City of Charlotte, and Google.
Now, in the wake of the COVID-19 pandemic, we expect demand for green tariffs to sharply tick upwards among risk-averse companies looking to procure “additional” renewable energy without large capital expenditures or significant market exposure. However, like quality PPA project options, there is a limited supply of green tariff products available. Many of the existing green tariffs around the country are already fully subscribed, and remaining utility programs are expected to fill quickly.
We recommend corporate buyers evaluate tariff options in the short-term and engage utilities on direct purchases or new programs that will meet their current and future needs.
3) Evaluate green retail products in competitive markets
Many of the largest retail energy suppliers in the U.S. now offer “green retail” products that provide varying degrees of additionality, tenor length, and price competitiveness. These products are often considered the most “client friendly” renewable sourcing product due to their shorter, flexible terms and simplified contracting and accounting requirements. As corporate buyers look to mitigate financial risks and invest less human capital into renewable purchases, we expect a growing appetite for green retail products.
Like green tariffs, many retail suppliers offer firm block or full requirement renewable energy options that can mitigate the shape and volume risks that COVID-19 has exacerbated among VPPAs. Most suppliers will originate and finance renewable projects under a green retail contract, which can further mitigate some of the credit risk faced by companies experiencing COVID-related credit downgrades. Also like green tariffs, green retail products typically require significantly less human capital and legal costs than utility-scale PPA and VPPAs. Lastly, green retail products are typically associated with local projects. As corporate buyers integrate renewable purchases into a broader sustainability program, regional GHG emission impacts and local economic benefits become more material.
At a time when corporate buyers are keenly focused on core business functions, we expect many to be attracted to the legal and administrative relief that these products offer. We recommend corporate buyers consider whether green retail products align with their environmental, budgetary, and risk management objectives.
4) Closely measure nodal pricing trends
U.S. corporate buyers have shown an increasing appetite for solar PPA projects. Through May, solar represented 85% of corporate PPA activity in 2020, a steep increase from 22% in 2017. Falling solar costs and an expiring ITC certainly contribute to the uptick in demand for solar projects, but so does a maturing buyer’s market. Solar production tends to peak during hot summer days when corporate energy cost and consumption peak, alleviating some shape risks. Solar PPAs also tend to be less susceptible to basis risk than wind PPAs because solar projects can be located closer to urban demand centers than utility-scale wind projects. With less shape and basis risk, solar PPAs generally make better hedging instruments than wind PPAs for most corporate buyers.
Nodal pricing for solar projects, however, is tantamount to a project’s profitability. Similar-looking projects in terms of size, pricing hub, and even strike price can vary considerably in terms of value. As buyers compete for projects ahead of the ITC step-downs, they will compete for projects with vastly different revenue potentials. We recommend solar buyers pay close attention to nodal pricing trends and incorporate recent turmoil in the wholesale energy markets as a litmus test for projects and corporate budgetary requirements.
What this all means for corporate renewable purchasers
Though the fundamentals of the renewable energy market are strong, near-term project development has slowed as a result of the COVID-19 pandemic. At the same time, publicly announced corporate purchases have largely kept pace with previous years. Due to the ongoing health and economic crisis, it is likely that several corporate buyers are postponing public announcements until after the COVID-19 health pandemic is under control and the economy begins to recover. It may be the case that corporate purchases have actually outpaced last year.
With lagging supply and increasing demand, companies that take near-term action will benefit from still-favorable pricing conditions and a boom of projects aiming to break ground ahead of renewable energy tax credit step-downs.