“What’s the catch with offsite renewable power purchase agreements (PPAs)? They look too good to be true.”
This is a common question from the companies we’re talking to at Schneider Electric Energy & Sustainability Services. To dispel the misconceptions about PPA benefits and risks and to share with you our answers to some of these common questions, we sat down with Jake Hoheim, Client Development Manager in Renewable Sales.
Aren’t PPAs risky? How do PPA buyers manage the risks I’ve heard about?
There are many ways to mitigate risks under a PPA. I’ll touch on just a few, but we have a white paper on PPA Risk Management as well. Finding the right project in the right market is paramount. There are methods of risk mitigation that can be applied after the deal is signed to further maximize the buyer’s value, but the most successful deals are always the ones that are well-vetted upfront.
Other potential risks can be managed via the terms and conditions included in the PPA contract. For example:
- Market risk becomes an issue if market electricity prices fall below the contracted PPA price. Buyers can address this risk, first and foremost, with smart project selection. The geography and technology you choose will heavily influence agreed upon PPA price. Running financial models on future scenarios can help a buyer analyze and quantify financial risks to enable more informed decisions. There is also an element of negotiation that comes into play with market risk, where deep market expertise, awareness of common contracting structures that help mitigate market risks, and experience navigating PPA contracts can help a buyer and developer reach an agreement.
- Execution risk is whether the project construction will be completed after the PPA is signed. Buyers can reduce their exposure to project execution risk by performing due diligence on both the project and the developer, and by utilizing effective risk reduction strategies in the contracting phase. For instance, requiring a developer to post meaningful credit to guarantee the PPA can indicate the developer’s confidence in executing the project once a PPA is signed.
- Operational risk becomes a concern for buyers if a wind or solar project fails to produce power at the expected levels once built. In this case, the main risk to a buyer is opportunity cost. Without the PPA running as expected, buyers can lose the financial upside from the project, and may not be able to make the environmental claims they had planned—or worse, may need to purchase unbundled certificates to meet their goals or make claims. A well-developed PPA contract will mitigate exposure by including stipulations defining and remedying the buyer’s risk if the project doesn’t perform according to plan.
Timing is also important in securing a good PPA. The most attractively priced projects are usually the ones that get fully subscribed for offtake. If your company is at all interested in PPAs, I advise you to start the education and exploration process, since now is a great time to buy. One way to do this is with our NEO™ Network, a collaborative global platform of over 250 corporate buyers and project developers. Inside NEO Network, you’ll find expertise and best practices—and it’s free for commercial & industrial buyers to join.
By opening a conversation about your options with us, you’re not committing to signing a deal. You’re only committing to learning about and gaining visibility into the market. And we work hard to deliver significant value to you as the buyer—not only in terms of the eventual PPA price, but also by ensuring that you’re fully aware of everything you need to know to confidently make a yes or no decision on PPAs.
I just don’t think our finance team will go for this, and our accounting team is opposed to anything exotic.
A key to getting buy-in from finance, legal, and accounting is engaging them in conversations about the PPA early in the process. By helping them to get more familiar with the structure, contract language, upside, and risk mitigation techniques, we find that most stakeholders come around to the idea of doing something innovative.
Our expertise and presence in global markets means we’re knowledgeable about new and emerging risk mitigation options that internal teams and other advisors might not be aware of. Because we’ve walked so many corporates, across so many industries, over the PPA finish line, we’re confident that we can anticipate most questions you’ll get from internal decision-makers and work together to answer the questions critical to your organization.
For more information on accounting considerations in a PPA, I suggest reading this blog
To read the rest of our Q&A with Jake, and to learn what other questions we hear from companies who are wary about renewables, click here.