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Develop a Market Approach

As you engage with internal stakeholders and build your deal team, you can begin honing in on a specific market approach. It is possible that your approach could evolve as you continue through the process (e.g., after receiving responses to an RFP, you may find it necessary to re-evaluate some priorities).

This approach is one level deeper than the strategy formation discussed in step 2. In other words, what we mean by "approach" is to decompose the high-level objective into preferences for your procurement’s characteristics.

To that end, the deal team must clarify a number of questions, the most important of which are:

Global vs. regional vs. local vs on-site: Do you want to source renewable energy globally, or do you want the project to be in the same grid region as your main sources of consumption?
Regulated vs. deregulated markets: If the approach is either regional or local, do you want to start with regulated or deregulated provinces?
New vs. existing load: Are you more concerned about existing load or new consumption centers?
Additionality and environmental attributes: How important is “additionality,” and would you consider selling the project RECs (and replacing them with other RECs)?
Retail sleeve: Are you interested in tying your PPA to the energy charge on your retail bill (where available), or do you prefer a simpler deal structure (“vanilla” virtual PPAs)?
Aggregation: Do you want to be the off-taker of a fraction of a renewable project along with other buyers, or do you prefer to sign the majority of the project yourself?

Global vs. regional vs. local vs. on-site

Some companies (e.g., IKEA, Mars) recently announced that they will achieve their 100 percent renewable targets in the U.S. with one PPA. Other companies prefer to have their renewable projects physically connected to the same grid as their sources of consumption (regional approach), and even at times with proximity constraints (local approach).

The advantages of the global approach are:

Simplicity: Only one transaction is needed every 20 years.
Optimization: The off-taker can select the best project available in the country. By definition, the larger the solution space, the lower the cost as global supersedes regional, which supersedes local.

The drawbacks of the global approach are:

Lack of risk diversification: This could be addressed by sourcing from a small number of projects as opposed to just one.
Basis risk: The likelihood of weaker correlation between the revenues of the projects and the electricity bill of the off-taker is greater - even so, electricity prices are generally correlated with natural resource prices across the country.
Public perception: Even though most PPAs signed do not link directly the production of the project with the electricity consumption of the company, most people do not understand that. By locating the project in a state or grid that is not physically connected with the main loads of the off-taker, the point becomes more obvious to a larger number of people, and that may create a perception problem.

On-site deals may be profitable, but the limited sizes of rooftops (or other on-site installation types) mean that they can cover only portion of the facility's consumption.

New vs. existing load

The deal team must choose whether to source renewable energy for an existing business activity or for a new one (e.g., a new plant or data center). The opportunity to do the latter depends on the growth strategy of the corporation. The deal team will most likely be on the receiving end of it.

However, once a new site is in the works, if energy is a very important part of the economics of the site, we would expect the deal team to contribute to site selection.

The advantages of selecting new loads are:

To be in a stronger negotiating position with state-level authorities. It may make some deals feasible in regulated states. It may attract financial state-level support in some states.
To reinforce external communication. The announcement of a new site is likely to be perceived even more positively if the corporation can simultaneously announce that the site will be powered by renewable energy.

The drawback of selecting new loads may be:

To select a site that does not have the best renewable economics. New sites may not be located in regions with the most attractive renewable deals. To decide whether to provide renewable energy first to a new or an existing site should therefore be based on economics, taking into account the state-level incentives that could be negotiated in exchange for creating economic activity in the state.

Regulated vs. deregulated markets

In regulated provinces, corporations generally are not allowed to sign direct contracts with renewable project developers. As a consequence, most of the large off-site renewable transactions signed to date by corporate off-takers have been signed in deregulated states.

There are, however, some notable exceptions (e.g., the Iowa wind deal signed by Facebook). To the best of our knowledge, all of the large deals signed in regulated states in the U.S. were negotiated as part of a larger arrangement to create new business activity in the state.

Corporate off-takers trying to serve existing sites with renewable energy in regulated provinces must understand the perspective of local utilities:

In most cases, there is no growth in electricity consumption in the area served by the utility.
Therefore, adding generation capacity (renewable or conventional) has for effect to reduce the utilization of the existing generation fleet and creating a virtual stranded asset.
Therefore, for a deal to make sense from the local utility's perspective, the corporate off-taker must pay not only for the cost of renewable energy but also for the cost of grid connection, necessary grid reinforcement, and lower utilization of the existing infrastructure in order for the ratepayers not to be financially impacted by the deal.
As a consequence, it is not surprising that we have not seen many of those deals.

Additionality vs. environmental attributes

Corporation have markedly different perspectives on additionality and environmental attributes:

For some corporate off-takers, a renewable deal will be deemed acceptable only if (i) the project is developed but not built, (ii) the deal makes the project financeable, and (iii) the RECs become the property of the off-taker and are retired by the off-taker.

Some other corporations are on the other extreme of the spectrum and would consider procuring renewable energy from an existing project without buying the RECs from the project.

Others are somewhat in the middle, focusing on newly built projects but having flexibility on what to do with the RECs (e.g., selling them or swapping them with cheaper RECs from other states).

This difference in attitude reflects a difference in priorities - whether the corporation wants to be perceived as an environmental leader, simply wants to ensure that its actions are leading to newly-installed renewable capacity, or simply is looking for cost-saving opportunities.

Retail Sleeve: physical vs. virtual

Virtual PPAs are the most commonly used structure by corporate off-takers.

Compared to physical PPAs, virtual PPAs have the following advantages:

Simplicity: The off-taker receives from the project the proceeds of the production of the project and does not need to be involved in physical delivery and marketing of the electricity.

Compared to virtual PPAs, physical PPAs have the following advantages:

Further cost-saving opportunities: In particular for companies that already have an internal electricity trading desk, they can leverage their own resources to market the energy produced by the project and save management fees.

More information on this topic is available in the deal structure primer.

Aggregation: whole vs. part

There are pros and cons to contract a project for most or all of its production or only a part of it.

The advantages of contracting most of the production are:

A better bargaining position with the project developer.
A clearer argument in favor of additionality.

The drawback of contracting most of the production is:

The risk of triggering consolidation (e.g. through lease accounting). An accounting primer is being developed in 2020 that will provide more details.

There are two ways to take a slice of a project:

Size: To contract only for a fraction of the yearly production (e.g., 50 MW out of a 100 MW farm).
Time: To contract only for a fraction of the expected lifetime of the project (e.g., 15 years out of 30 years).

Time considerations should be based on the expected lifetime of the load that the project is supposed to match. This is a strategic decision akin to asset liability management in the finance sector. This decision should typically be made by controlling or the corporate CFO and not by the deal team.

Deliver Specific Transaction Preferences

As you engage internal stakeholders, build a team, and formulate a market approach, you should solidify your preferences for the characteristics of the transaction. These preferences, together with the risk considerations discussed in stage 5, will inform the RFP you issue in stage 6.

Preferences to consider

Different companies will prioritize specific project characteristics differently. The questions you might consider include:

Location - do you prefer a particular wholesale market or state?
Technology - do you prefer wind, solar, hydro, or biomass? Would you consider storage as well?
Size - how much electricity and RECs do you need the project to generate annually? Beyond this, do you have specific preferences around the capacity of the project?
Contract tenor - most PPAs are in the range of 12 to 20 years in duration. Buyers may find that shorter durations correspond to higher prices, all else being equal. Do you have a preference or limit?
REC treatment - based on your market approach, would you consider selling the project RECs?
Additionality - what does this mean to you, and how does that affect the types of projects you would consider?
Timing - when must the project begin operating: when is too early and when is too late?
Publicity and branding - do you prefer that your company’s brand be associated with the project?
Accounting - what accounting treatment do you prefer, and what must you avoid?

Buyers Roadmap