On February 22nd, 2017, John Powers and James Lewis of Renewable Choice, presented on a webinar alongside CDP on the topic of risks and renewables, with a particular focus on policies that might affect corporate energy buyers in the U.S. as well as how exploring global clean tech markets may help alleviate risks in the U.S.
During the live webinar, attendees submitted some spectacular questions that we have reviewed and would like to elaborate on. Below, find answers to your questions separated by category. Also, at the end, please find the recording to the webinar for more information if you missed out on the live presentation.
Corporate Energy Buying Trends
What kind of trends are you seeing with corporate buyers in the decision-making process between owning projects and providing PPAs for projects?
- There are some corporates, such as Apple, IKEA, and Google, that choose to purchase and own offsite renewable projects. Onsite projects will typically be owned as well, but far and away the preference is a power purchase agreement (PPA). Financial returns for PPAs are generally higher than outright ownership of a renewable energy project, and owning projects introduces more operational and resource risks that fall on the owner rather than the PPA offtaker of the power.
Which of the following factors make the PPA deal most attractive: resource feedstock, markets, technologies, or the regulatory/legislative?
- All factors mentioned are needed to have a really good project, but corporate buyers are fundamentally concerned with regulatory/legal, simply because in some markets it is illegal for them to buy renewables directly. The bottom line is you must have regulatory permission to execute PPA deals – it’s more of a prerequisite than a driver.
- The confluence of technologies, market price for power, and resources contribute to how good of a deal you get in terms of economics. These factors all determine whether you will be able to sign a deal below market prices. Subsidies and incentives also change the attractiveness of certain technologies across markets.
How have low natural gas prices affected renewable risks in recent years and do you expect prices to remain low?
- Particularly in the US markets, the fracking boom and low natural gas prices have also depressed electricity prices. Natural gas and renewables are the only sources of electricity undergoing new construction, which explains why these sources so heavily influence broader electricity pricing. Organizations that locked in fixed renewable energy prices via PPA, even at under market in 2014, probably are above market now due to depressed prices.
- That said, we continue to see that even in a low-priced natural gas market, renewable energy remains competitive globally. Current low natural gas prices make renewable energy seem less attractive in the short-term, but even in these times, corporates can lock in lower prices for renewables in many markets. Forward market views show electricity prices increasing over time, but we are not expecting a spike anytime soon. Nevertheless, renewable energy is competing.
United States Policy Changes
Given the bipartisanship of the Production and Investment tax credits, once existing tax credits sunset, under what conditions would we anticipate new or continuing tax credits? Or do we think that they will sunset for good?
- No one in the industry is banking on U.S. tax credits being extended again. Similarly, developers we talk to are planning for the credits to be phased out. The gradual phase-out of the PTC & ITC provided some certainty which people are happy about. Further extensions would likely require different control of House and Senate, but bipartisan support for tax credits has stemmed from the fact that some of the windiest states (ie: Iowa, Texas, and Oklahoma) are the ones benefitting most from wind power development.
Is there something corporates can do to increase the likelihood for additional tax credits in future?
- Definitely. As an example of this, data center companies we work with will strategically cite data centers in states that have positive policies for renewables. There is also some lobbying by corporates going on in Washington, such as signing agreements encouraging the government to embrace a low-carbon economy, including using renewables. Nearly 900 companies and investors have signed the Business Backs Low-Carbon USA statement urging global leaders to address climate change.
What is renewable choice’s opinion on how potential changes in corporate tax rates will impact offsite Virtual (Financial) PPA opportunities?
- Tax reform and trade policy changes are likely to have the greatest impact on energy markets as a whole. A shrinking tax equity pool, loss of depreciation value, and challenging economics for imported equipment generally make developing renewable projects more difficult. A reduction of the corporate tax rate would decrease the pool of capital for tax equity investing in renewable projects, though in the near term there should be enough available to meet demand for new projects.
- The depreciation component reduces the total benefit to the project resulting in adjustments in price. But, once the renewable project is running, it would be subject to pay a lower tax rate as well. So, economically, there may be some bump for offsite renewables prices, but don’t’ expect anything seismic. Additionally, falling technology costs can make up some of these losses.
Could you please give your opinion about Canada and its growth potential?
- Canada may provide an opportunity to enter a market at the beginning of corporate procurement. The risk found in low power pool prices also reflects an opportunity to sign cheap contracts before market prices rise, depending on timing of project signing, as projections indicate prices to increase. A capacity market is set to be introduced in 2021, and the environmental attributes being offered are projected to be incredibly valuable.
- In the Alberta grid region, various non-utility players have begun entering into long-term virtual PPA contracts for projects that will make significant money over the term. The primary risk in this market has been the historically low prices for electricity in the past couple years, though prices are projected to rise due to coal retirements and evolution of natural gas price.
There are proposals for EU legislation to remove the ability to generate GOOs for any projects that have received subsidies. Can you tell more about that, and how that will impact possible corporate PPAs?
- Guarantees of Origin (GOOs) are less fundamental to project economics than other factors. Reportability, additionality, and economics are greater drivers for corporates, who want to have something to share about their deal publically that is robust, which the GOO system provides. As long as corporates can find a way to report in alignment with GHG Scope 2 guidelines, that is a significant driver (or hurdle if they can’t).
- To report as zero scope 2 emissions in the EU you must own and retire GOOs. Signing a PPA without GOOs would lessen the impact for the reporting driver, but there are other drivers that will still see adoption. Lower availability GOOs would indeed make PPAs less attractive in that respect.
Couldn’t join us during the live virtual event? We invite you to download the recording for more insights on navigating risks in the global clean tech market.
The post Global Clean Tech Q&A: Our Experts Answer Your Questions appeared first on Renewable Choice Energy.