Ahead of A Word About Wind’s Financing Wind: North America conference in Colorado next week, major wind developers have highlighted that sellers must continue to take on key operational and basis risks to offer a more attractive product for commercial and industrial (C&I) buyers.
New structures, such as proxy generation and aggregated power-purchase agreements (PPAs), are among the key innovations that will influence uptake of PPAs.
In proxy generation PPAs, a project’s expected generation is calculated by a third party and based on agreed benchmarks. The PPA is based upon these benchmarks, rather than actual generation, because it simplifies the transaction and shifts operational risk from the buyer to the seller. As a result, a simpler product can be offered to the end buyer.
A simplified product may help to attract corporate buyers, many of whom have strong environmental commitments yet have not yet signed up for PPAs. However, developers must be willing to take on the operational risk of the project.
Orrick, Herrington & Sutcliffe LLP (Orrick) represented Microsoft on one of the first big proxy generation PPAs that they developed. Neil Golden, Partner, Orrick, noted that this structure re-allocates some of the operational risk back to the project, resulting in more certainty for the power purchaser.
“It’s an innovative structure,” said Golden. “The idea of a proxy generation PPA was to simplify some of the risks and some of the variables in a traditional PPA. In simple terms, we assume certain operating parameters, measure output and can reduce certain risks to the purchaser.”
Across the industry, developers are taking on an increased share of risk. Longer-distance, cross-state PPAs are becoming more common due to transmission challenges.
Miguel Angel Prado, CEO, EDP Renewables North America, noted that the resulting market price difference can push risk onto the developer, as offtakers will not want to pay above their local ‘hub’ price for power. “We are seeing a prevalence of ‘hub-settled’ deals, where we deliver the energy at one point of interconnection, but we sell at a different hub to our customer,” he said. “This means taking on all the risk of those price differences.”
Mark Goodwin, President and CEO, Apex Clean Energy, added: “Transmission risk is pushing the basis risk toward owners more than power buyers. I think it’s probably gone a bit too far, where there is now an expectation that owners can finance these tougher and tougher PPA contracts.
In terms of other strategies, A Word About Wind has noted that many developers are starting to look at aggregate PPAs as a way to secure offtakers among smaller C&I companies, with less buying power than large technology firms. Despite this, the onus is on developers to offer off-the-shelf deals for smaller companies without individuals who specialize in buying energy.
“Lots of smaller, non-tech players are interested in clean energy – household names in the food industry, manufacturing, and so forth. The question is whether commercial and industrial businesses have the internal expertise to sign PPAs,” said Golden. “Right now, it’s not an easy area to get into, particularly for smaller players.”Despite the challenge of apportioning risk more evenly across energy buyers and sellers, developers expressed optimism about the wind industry going forward.”
“As the PTC phases out, traditional energy finance will come into play and it’ll hopefully bring cheaper and cheaper debt into projects. Prices for projects may go up a little bit, but I think that the market will be sustained and we’ll have healthier project finance,” said Goodwin.Michael Rucker, Mark Goodwin, Neil Golden and Miguel Angel Prado, will be speaking on the Evolutions in Power Purchase Agreements, Large Onshore Projects and Tackling Transmission and Innovations in Project Finance panels at Financing Wind North America in Denver Colorado, April 24 to 25.Richard Heap, Editor-in-Chief, A Word About Wind, added, “The US market has become a pioneer in wind energy financing structures. As we head into a lower-subsidy future, models such as proxy generation PPAs will become increasingly prominent in attracting commercial partners. We look forward to discussing these themes, and more, at Financing Wind in Denver.”