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• The widespread adoption of sustainable development goals by large corporations has created a significant demand for renewable energy.
• This, in turn, strengthens the hand of generators in power purchase agreement negotiations.
• Energy producers seek to tie buyers for significantly longer terms and transfer more risk to buyers.

Over the past decade, hundreds of companies have publicly committed to various sustainability goals. Many seek to obtain all or most of their electricity from renewable sources. But commissioning new renewable energy projects takes years. As a result, companies looking to offset their greenhouse gas (GHG) emissions will face increasing competition for green energy supplies, and producers will have more leverage in negotiating energy purchase agreements. electricity (AAE). This shift in trading dynamics is already translating into more favorable conditions for sellers.

The demand for green energy is increasing

RE100, a global corporate initiative on renewable energy, has more than 340 member companies that have committed to source 100% of their electricity from renewables by 2050, and at least 20% of these companies have pledged to meet an earlier deadline of 2030. Additionally, in 2021, more than 180 companies have signed The Climate Pledge, agreeing to decarbonize (that is to say., use energy sources that do not produce GHG) and achieve net zero emissions (that is to say, offset GHGs through activities that eliminate these emissions) by 2040.

In the United States, about 20% of total energy supply comes from renewable sources, but green power capacity is not growing fast enough to meet corporate sustainability goals. Since new projects can take up to four to six years to develop, finance and build, companies with short- to medium-term sustainability commitments will face increasing competition for green energy supplies.

Corporate PPAs promote sustainability and provide stable revenue for project funding

A key part of most companies’ sustainability strategies has been the purchase of renewable energy or Renewable Energy Credits (RECs), certificates representing a certain amount of clean energy supplied by a generator to the grid. Companies have historically purchased CERs to meet their GHG mitigation goals. But the sale of CERs usually did not bring in enough revenue to fund a project. Investors and lenders now typically insist that a generator have a buyer contractually bound to purchase its power output for many years in the form of a PPA.

Under a typical PPA, a company commits to purchase electricity at a specified price determined in the agreement for many years, securing the long-term predictable revenue essential to secure financing and investment. of the project. Enterprise PPAs typically last 12 to 15 years, but can go as long as 20 or 25 years.

In many cases, however, corporate buyers do not actually take delivery of a project’s power output. Electricity, for example, may be generated too far from the user to be delivered economically. In these situations, the parties may enter into a “synthetic PPA”, which does not involve the physical delivery of energy to a buyer.

Synthetic PPAs work effectively as hedging arrangements, providing project owners with guaranteed income and price predictability to buyers and potential energy savings generated by the project. These contracts are often structured as fixed price purchase and sale agreements for RECs with a built-in “contract for differences” for energy. The project owner sells the energy on a wholesale electricity market and is paid at the prevailing market price. At the end of a specified settlement period, usually a month, the owner calculates the “variable price payment” based on the quantity sold (or a hypothetical energy profile) and the weighted average price received.

If the payment of the floating price exceeds what the producer would have received at the fixed price of the CAE, the excess is paid to the buying company. If it is lower, the purchasing company pays the difference to the client.

The settlement process under the synthetic PPA, together with the transfer of CERs to the buyer, acts as a GHG offset for the portion of the buyer’s energy consumption corresponding to the project’s output used in the settlement process.

Changing trading momentum is likely to result in more favorable conditions for the seller

Businesses purchased 23.7 gigawatts of green power in 2020, 18% more than in 2019 and 74% more than in 2018. The total is expected to grow by at least 30% per year so businesses meet their 2030 commitments.

Recently, some growers have taken advantage of the leverage this request has given them and have demanded more favorable terms:

• Synthetic PPAs typically last 12-15 years. Increasingly, producers are negotiating terms of up to 20 or 25 years.
• Producers bear less “basis risk”. Synthetic PPAs are imperfect hedges, which create basis risk for the electricity producer when the floating prices used in the settlement process under the PPA differ from what the producer receives for its energy. This difference can be significant if the floating price is determined at a trading center instead of the pricing node to which the project sells its energy output, or if the settlement process is based on a hypothetical energy profile instead of actual sales.
• Synthetic PPAs have also generally not provided relief to generators if actual energy sales differ from the hypothetical profile due to force majeure events, such as the January 2021 storm that led to a crisis for the Texas grid. Increasingly, producers are asking buying companies to cover all or part of the difference in floating prices and are looking force majeure relief for these production problems.
• So far, business buyers have generally been successful in negotiating discounted prices for excess power to avoid having to pay for electricity generated beyond their needs and what needed to be covered. by the synthetic PPA. Increasingly, such price conditions are meeting resistance from producers.
• Synthetic PPAs have typically included many conditions to mitigate the risk of producer non-performance. For example, (1) a letter of credit to secure a seller’s payment obligations, (2) a production guarantee to compensate a buyer if the amount of electricity produced by a project is less than expected, and (3) construction milestones and pre-marketing conditions allowing a buyer to terminate the contract if construction issues prevent the completion of a project.
• Increasingly, producers are not offering credit support to secure their payment obligations and have instead pushed buyers to rely on project revenue. Likewise, they have been less willing to agree to construction milestones and have provided very limited recourse if production guarantees or a target date for commercial operation are not met (for example., termination without liability after an extended period).

In conclusion, synthetic PPAs are effective ways for companies to advance their sustainability commitments, but they should be prepared to negotiate in a more seller-friendly market.

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