Solar goes corporate: the rise of the bilateral PPA

Electricity prices are a big deal for many businesses. In the United States, commercial and industrial (C&I) customers represent around two-thirds of total electricity demand, and while electricity prices are lower for both customer classes than for residential ratepayers, they are still a big portion of business costs.

The average U.S. office building spends over $30,000 annually on energy, including gas, and the need for power is even more intense for companies like big-box superstores and data centers. The latter are particularly intense power hogs, and together represented 2% of the nation’s total energy consumption in 2014.

Solar and wind are now the lowest-cost forms of electricity generation in many places, and more and more corporations want in on not only these falling costs, but the promise of stable prices. It can be difficult for businesses to plan for electricity rates which vary from month to month and year to year, particularly the kinds of swings that occur in regions like New England that are dependent upon a constrained supply of natural gas.

But falling and stable costs are not the only reasons that corporations want to go renewable, and motivations to seek out solar and wind including meeting corporate social responsibility and environmental goals. For companies like Apple, using renewable energy is a way to connect with an environmentally conscious customer base. For other corporations like WalMart, the positive PR of renewable energy can help to deflect criticism over labor and market practices.

Many ways to skin a cat

Whatever the reason, businesses that want to go solar have a variety of options. The most direct is to install solar on-site at their facilities, with the output typically compensated through net metering. But while this may be a good option for many companies, it is not the best choice for all of them.

Not every business has a roof, parking lot or vacant land without shading that will be adequate to host a solar array to meet its needs. Larger consumers like data centers may also have the challenge of procuring enough electricity through net metering to meet their needs, either due to capacity caps on net metering programs and/or requirements that net metering systems be located on-site. And even where these factors are not challenges, there is policy risk with net metering due to frequent efforts by utilities to change rate structures.

Fortunately, net metering is not the only approach. For utility-scale, C&I and even residential solar projects, the power purchase agreement (PPA) has been an important business model. As such an increasing number of businesses, particularly larger ones and big energy users, have adopted this model and are choosing to buy electricity from solar projects developed by third parties.

This option has been particularly popular in the United States. According to GTM Research, over 1 GW (DC) of U.S. solar was installed in 2016 that was contracted either under bilateral PPAs or though “green tariff programs”, whereby utilities procure renewable energy on behalf of their customers. This represented around 8% of total non-residential solar market during the year. And this is growing, with contracts for another 1.9 GW-DC of projects under development in the nation.

There are multiple reasons for the growth. “The risk premium is going down in their eyes,” GTM Research Senior Analyst, Solar Colin Smith told pv magazine. Additionally, the absence of any requirement that such utilities are located on-site can mean a big price advantage, as large ground-mounted systems are often much cheaper than rooftop systems. It also means that the company is not responsible for financing, owning and maintaining the project – only buying the power.

And it is not only solar that is benefitting from this trend, but wind as well. Bloomberg New Energy Finance reports that over 2 GW of bilateral corporate wind and solar PPAs were signed in the Americas in 2016, and 4 GW globally. This activity is dominated by tech companies, with Amazon, Google and Microsoft together procuring over 1.4 GW of solar and wind in 2014, as the top three companies for corporate procurement.

Such bilateral PPAs are dependent upon enabling policies, either enacted by legislatures or utilities themselves, and the policy environment varies from state to state. “There are some states where (bilateral PPAs) are certainly harder,” observes Smith.

Smith also notes that the market for corporate PPAs is maturing. Companies including Altenex have begun to offer assistance in setting up contracts, as well as providing more sophisticated products such as shorter-term PPAs.

Global landscape

While the United States remains the world leader in corporate procurement of renewable energy, there is increasing activity in overseas markets. In 2016 corporations signed contracts for over 1 GW of wind and solar in Europe, with the largest procurement in Norway, Sweden and the UK.

In fact, BNEF finds that corporate wind and solar PPAs outside the Americas more than doubled last year to nearly 2 GW, with significant growth in the Asia-Pacific region as well.

U.S. companies are active abroad in the segment. Apple is involved in several solar and wind projects in China, with 210 MW of solar already commissioned, according to BNEF. At the beginning of this year, Google announced that its Chilean data center is being supplied 100% with solar.

The trend worldwide points towards more solar corporate PPAs, and one nation where several hundreds of MW of solar in the frame of corporate PPAs have been announced recently is Mexico. In Mexico there is already over 2 GW of wind, with Walmart and General Motors being among the companies provided with wind electricity.

Many industrial companies have considered solar corporate PPAs in Mexico. Solar prices are declining and large consumers will also have to fulfill clean energy requirements starting next year under the nation’s energy reform.

However the international context seems to be having an important influence. “The industrial sector is awaiting a new trade agreement with the United States”, says ANES President Sergio Arnaud, adding that the current increase in interest rates also affects the electricity sector. But he highlights that with the energy reform the renewable sector is mature.

With Mexico’s Energy Reform clean energy requirements have been introduced for both suppliers and large consumers, starting in 2018 with a requirement of 5%. In 2019 the quota rises to 5.8%.

Within this context, last October Spain’s Iberdrola announced that it had obtained permits for two solar projects with 275 MW. The company expects both installations to be operational at the end of 2018.

Last February, Spanish company Acciona announced a bilateral PPA for a 112 MW extension of the Puerto Libertad solar project in Sonora that will deliver electricity to an industrial group. Including previous phases, the solar park will have combined capacity of 339 MW and will start operations in 2019.

“It will be the biggest photovoltaic plant in Mexico, from which we will generate electricity to cover already-committed public and private consumption”, said Acciona Energía Mexico director Miguel Ángel Alonso. Moreover, Acciona states that this is “the first (contract) of a private nature signed under the new Law on the Electric Power in Mexico.”

Community choices

Back in the U.S., community solar is often advertised as a means to allow renters and other citizens without a suitable roof to participate in solar. However, it is also a boon for companies looking to reap the benefits of solar without owning it. Community solar farms are not limited to residential customers, and in many states including Massachusetts, up to half of the capacity in a community solar project can be subscribed by large consumers.

Consumer solar can now claim an iconic American brand among its customers, with Red Wing Shoes in Minnesota subscribing to two NRG community solar projects. Cohn Reznick Capital Markets President and Founder Robert Sternthal notes that such projects are particular attractive for smaller companies that don’t have the credit to do a 10-15 year contract. “I think what you are going to see is the less big players will go ahead and do community solar,” Sternthal told pv magazine.

A third option is Community Choice Aggregation, where aggregators procure renewable energy on behalf of a pool of customers, however this option is currently limited to only a handful of places outside California.

Going it alone

The process of bilateral PPAs often involves the utility as a third party. However, for some companies dis-satisfied with utility cooperation, there is the option of leaving the utility entirely. Last October, casino holding companies MGM Resorts and Wynn Resorts disconnected from NV Energy to begin procuring their own power.

The price of available renewable energy is doubtless a factor, as these casinos had to pay a hefty $100 million sum to leave. “We have to assume that corporations are seeing these prices as well and understand the range that they are able to achieve going into these negotiations,” stated GTM Research’s Colin Smith. “They believe that they could do it in part because it is going to save them money in the long run.”

Smith notes that this trend is not up yet, with NV Energy suing to keep data center provider Switch under its service, and he says most of the other large casinos in Las Vegas are looking to leave NV Energy as well.

California also has a mechanism for companies to leave their utility, through a program called Direct Access. In all of these cases the burden of attempting to keep large consumers is on the utility, given additional pressure for them to offer renewable energy products to their customers.

Some technology companies have taken this a step further, and have moved from buying renewable power to buying and selling as their own independent power producers. Google again led this trend by receiving approval from U.S. federal energy regulators to buy and sell electricity on the wholesale market in 2010, and was followed by Apple last August.

Tax changes

But while the trend for corporations to procure more solar and wind is gaining speed, in the United States such procurement is facing headwinds from the Trump Administration. And while many in the solar industry have voiced concern about the future of the 30% Investment Tax Credit (ITC), the present danger comes not from having it repealed, but from potentially having it rendered irrelevant.

Trump’s promise to lower the corporate income tax to 15% from the roughly 35% it stands at today will lower the amount of available tax equity financing for developers to monetize the 30% investment tax credit, which could jeopardize funding for a range of renewable energy projects.

“You are already seeing tax equity pushing back on preparing for the reforms,” CohnReznick President and Founder Robert Sternthal told pv magazine. “If they put in 40% of the project typically, they might put in only 30% going forward. And the other 5-10% needs to be put in by the developer, you are going to see a lot less projects.”

Sternthal predicts a consolidation of projects to sponsors that have the balance sheet capacity to handle them, and for tax equity providers to be increasingly scrutinizing deals for credit-worthy counterparties. “I don’t think you are going to cripple the industry, but you are going to create a slow-down and a funnel to the better projects,” states Sternthal.

Sternthal also warns that this will effect the C&I sector more than utility-scale solar. “The tighter it becomes, and the more concentrated the tax equity becomes, the harder it will get for C&I, and it is going to require more strategic investors who have tax appetites to be the owners of the assets,” he explains.

However, this could also push a lot of smaller companies into community solar, including those that do not have the credit for longer-term contracts.

Looking forward

Even with the danger of new financing challenges over the next few years, continuing falling costs for solar mean that corporate customers will continue to procure more solar. This includes the technology giants, whose growing demand for power in data centers means growing power consumption.

Bloomberg New Energy Finance (BNEF) predicts that Google will reach its global goal to procure 100% of its electricity from renewable energy in 2017, having already reached 100% renewable energy consumption for its U.S. operations. However, as Google’s electricity demand grew 20% annually from 2010 through 2014, BNEF states: “Google’s renewable energy goal is likely to remain a moving target”.

Corporations will continue to find ways to access the cheap and abundant power of the sun and the wind – with or without utilities. And as they do so, we can expect increasing sophistication in business models. Bloomberg New Energy Finance says that it is seeing particularly strong growth among green tariff programs, as more corporate consumers seek to buy power from renewable energy in regulated electricity markets in the United States.

According to GTM Research, the bilateral PPA is only the latest step. “I don’t view this as sort of a single evolutionary jump as much as a continuation of the maturity of the renewable energy sector as a whole,” states GTM Research’s Colin Smith. “I see this as one other new mechanism, but also one of many new innovative mechanisms.”

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