This blog is the third in a four-part series on mitigating power purchase agreement (PPA) risk. Each blog in the series focuses on a different risk: market risk, regulatory risk, execution and operational risk (this blog), and reputational risk.
Author: John Powers is an industry-leading authority on commercial renewables purchasing
When approaching any long-term contract, smart businesses ask pointed questions about the execution and operational risk that may impact delivery. The corporate or industrial (C&I) PPA buyer should be no different.
C&I purchasing of PPAs is on the rise and is taking the renewable energy market by storm. In 2015 alone, corporate buyers purchased more than 3,000 megawatts of new wind and solar in the form of PPAs. In the fourth quarter, PPA purchasing by corporations outstripped that of utilities.
What is driving this trend? As a contract spanning 10-20 years of clean energy production from a newly-developed project, a PPA offers an attractive opportunity to mitigate the risks associated with rising brown power energy costs and regulatory changes while assuring a positive environmental legacy.
One common concern among PPA buyers is what they stand to lose if the deal they’ve purchased fails to be built, or doesn’t perform to expectations once construction is completed. The bottom line is that in a well-structured PPA there can be little executional or operational risk to the buyer and here’s why:
- Project developers want corporate partnerships. A credit-worthy offtaker like a corporation helps developers secure the needed financing to get new projects off the ground. As a result, the likelihood that a project will proceed when it has a C&I offtaker could actually be higher than without that offtaker. It is rare for projects with PPAs to fail to be built.
- Due diligence identifies–and reduces– operational risk exposure. Any advisor worth their salt will ensure that the corporate buyer performs a rigorous due diligence process on the contract terms and the developer to identify and address risks up front. Some of the more impactful tactics of this process can include:
- Requiring a developer to post meaningful credit to guarantee the PPA, including damages should the project not be executed. When a developer is prepared to put real money behind their assurances that the project will move forward, the buyer can interpret that as a powerful demonstration of the developer’s confidence in getting the project financed and built.
- Structuring contracts to explicitly address and mitigate execution risk at signing.
- Carefully interviewing the developer about project status, including interconnection, land control, permitting, and related processes.
- Evaluating projects from multiple developers, and having a back-up project selected in the unlikely event that a project becomes unavailable during the contracting process, or fails to launch.
- Wind and solar have a solid performance track record. Wind and solar developments rely on mature and reliable technology that, by and large, performs well over the long-term. Project developers will provide vetted production studies, which can be evaluated by a qualified buyer’s agent. Buyers can further protect themselves by seeking contract provisions that limit their exposure in the event actual production falls below projected levels. Ultimately, the C&I buyer is contracting for energy production. That means that if the project does not produce, the buyer is not obligated to pay anything. There is no downside risk for underproduction, so it is just a matter of protecting against lost upside.
Project vetting and contract negotiations–ideally supported by a skilled buyer’s agent with deep industry experience–are the linchpins to providing buyers with the greatest protection against risks and the greatest opportunity for success in achieving their financial and sustainability goals.
For a deeper dive into risk identification and mitigation in a successful PPA procurement process, download our white paper Proactively Managing Risks to Accomplish Your Long-Term Renewable Energy Goals today.
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