Procurement of corporate renewable power purchase agreements (PPAs) in the U.S. hit an all-time high of 15.7 gigawatts (GW) in 2019, and it has remained robust in the first half of 2020. Still, many corporate project champions and internal stakeholders ask: “Why sign PPAs in 2020? Why not wait, given market uncertainty?”
In this blog, Schneider Electric Cleantech Client Manager, Ian Law, offers 4 strategic insights on why companies are still executing PPAs in 2020.
Ian Law is a Cleantech Client Manager at Schneider Electric Energy & Sustainability Services. He leads client processes and interfaces with utility-scale wind and solar project developers around the world.
Why is 2020 an opportune year to consider a U.S. PPA?
In short, we have seen wholesale PPA rates increase in most markets over the past year and this inflationary trend may continue, making it imperative for companies that want to capture economic upside to look at PPAs now. Several market conditions have combined to limit renewable project supply available to corporate buyers, including:
- Supply chain and logistics limitations driven by tax incentive step down and current events
- Demand for corporate renewable energy goals growing across industries
- Longer lead times between PPA signing and project operation
How do declining tax credits affect project availability?
The value of tax credits secured by a project affects the PPA price that developers can offer to corporate buyers. The Production Tax Credit (PTC) for wind projects started to step down from its full value in 2020. Even with recent extensions announced by the IRS, corporate buyers have little (if any) access to new-build wind projects that will benefit from 100% PTC value. Projects must start construction in 2016 and begin operating in 2021 to receive this full PTC benefit, and buyers have already contracted most of these assets.
Projects that qualify for 80% PTC value began construction in 2017 and expect to begin operations by the end of 2022. There is a limited inventory of these projects, and to secure them, corporates likely need to sign PPAs by late 2020 or early 2021. Most other wind projects still available began construction after 2017 and are expected to come online in 2022 (60% PTC value), 2023 (40% PTC value), or 2024 (60% PTC value).
Then, there’s the Investment Tax Credit (ITC), which allows solar projects to realize 100% of the ITC value (30% of installed project cost) if the project began construction by the end of 2019 and begins operations by the end of 2023. This scenario creates a finite inventory of 100% qualified ITC solar projects available in the market for corporate buyers. More projects may appear, or other projects may improve their pricing, but this is uncertain.
Along with these project availability considerations, if projects miss their expected online dates for any reason (e.g. Force Majeure, interconnection delays, or contractor failure), investors may potentially lose access to the expected PTC/ITC value. Even with contractual PPA protections, losing tax credit value could materially hurt a project’s economics and potentially lead to solvency risks that derail the project. These factors introduce potential challenges for organizations to achieve their sustainability goals.
Contracting via a faster process and with nearer term (2021/2022) expected online dates provides buyers with two primary advantages: a) it grants greater access to the limited supply of projects that benefit from the higher tax credit values, and b) it buys additional time to find a replacement project at similarly competitive prices if, for some reason, the initial project fails.
How has COVID-19 impacted wholesale market prices and PPA economics?
To date, most of the pandemic’s impact on wholesale electricity prices has been contained to 2020 and 2021—which is prior to the start of delivery for most currently available new-build projects. Updated traded forward market pricing quotes show that electricity prices have largely rebounded to their pre-COVID levels, and Schneider Electric continues to monitor this potential impact for clients. (Note that should COVID-19 have a lasting impact on electric power demand and natural gas prices beyond 2021, this may impact PPA economics).
Why is it important to consider lead times and anticipated commercial operation dates?
Given the long lead-times required to finance and construct utility-scale projects, most PPAs currently in negotiation involve projects expected to reach commercial operational date (COD) towards the end of 2022. Electing to wait several additional months to launch an RFP and/or sign a PPA may result in companies contracting a project that starts delivery in mid-to late-2023. In this case, they will not receive any sustainability benefits from the PPA until 36-42 months from now.
Construction lead-times are also the reason buyers building a multi-project portfolio cannot expect to wait for their first projects to start delivery in order to assess the next buying pattern. Corporate buyers may buy unbundled U.S. renewable energy certificates (RECs) to bridge the gap—but this doesn’t convey additionality and requires out-of-pocket expenditure from the buyer’s operational budget.
Corporate renewable energy buyers that maintain momentum in 2020 will realize several strategic advantages and have a broader selection of projects to explore—especially in the face of valuable tax credits stepping-down and limited project inventory. This concept is particularly important for organizations with multi-project portfolio goals or selective project criteria (such as a specific term length, technology focus, or market). As flexibility and supply decrease, speed to market will be key.