A fresh look at recent corporate PPAs

Editor’s note: This article comes from Chadbourne’s Project Finance NewsWire of August 2017, edited by  Keith Martin

What should one make of a dip in the number of new power purchase agreements signed in 2016 to sell electricity directly to large corporate buyers? Corporate PPAs were down almost half from forecasts and down almost a third from the year before. Duncan McIntyre, president of Altenex LLC, which matches independent power producers with corporate buyers, answered the question at the Chadbourne Global Energy and Finance Conference in early June.

Let me take you on a very quick tour of the corporate power purchase agreement market in the United States, starting with some high-level reasons why corporations enter into such contracts.

There are two primary motivations.

The first is sustainability. Corporations have been making public statements and mobilizing their work forces to bring sustainability into their cultures. European companies have been doing it for a long time. US companies started becoming interested in sustainability in the last 20 years. It is a growing trend. We have found that companies that make bold statements about sustainability tend to have renewable energy as a component of that strategy.

The second motivation is the economic tool that a corporate PPA provides. Twenty years ago, power markets were more stable. A big corporation arguably had fewer decisions to make. Regulated utilities provided pretty reliable and fairly cheap power. Today, there is more volatility to the energy supply. Companies are more interested in managing how power is procured and brought into the organization.

I want to focus on that second point, which is managing economic risk.

When you think about risk from the standpoint of cash flow, a treasury organization will focus on a handful of things. Foreign exchange and interest rates are two items that have, for a long time, been part of a treasury organization’s key areas of focus. Energy prices over the last decade, in certain deregulated markets, have been more volatile than these two items that treasurers fear put cash flow at risk. Energy managers and chief financial officers did not talk much about them in the past, but they are talking more today. The box below shows the volatility of foreign exchange interest rates and electricity, expressed in terms of relative standard deviation from a mean, over the last 10 years.

The bar graph shows the volume of corporate PPAs signed in each of the last six years. The peak was in 2015, with a little over 3,000 MW of corporate PPAs signed. There were a little over 2,000 MW of new corporate PPAs in 2016. The early adopters were signing PPAs in 2010 and 2011. Sustainability-minded businesses like Google mobilized. They hired energy managers. They hired consultants, and they began to look at the concept of how they could procure renewable energy for their operations. They decided there was an economic benefit from locking in a fixed price for energy.

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