When it comes to renewable energy, smaller buyers have more options than ever before. Solutions are increasingly becoming available for businesses of all sizes to develop a robust sustainability strategy and ensure their programs are meeting their goals.
One of the most popular ways corporations are implementing renewable energy is through offsite corporate power purchase agreements (PPAs). The unique structure of these agreements has historically benefitted large organizations due to their high electricity consumption and creditworthiness, as well as their tolerance for long-term contracts. However, solutions are emerging that are enabling small buyers to get in the game in innovative ways.
Collaboration has benefits
There are several different PPA collaborations a smaller business can explore, in tandem with other renewable energy initiatives — aggregation/buyer consortiums, anchor/joint tenancy and reseller contracting. Each of these collaborative models are appropriate for different circumstances, so let’s explore what makes sense for particular business models.
Aggregation: In the aggregation model (also known as a buyer consortium or club), corporate buyers collaborate to achieve similar goals by aggregating their energy offtake, achieving an economy of scale, or contracting together to optimize energy prices. When businesses aggregate their resources, it can be easier to replicate the development of purchasing models.
Aggregation is a common approach when businesses are looking to collaborate on PPAs, but business leaders should be cognizant of its challenges. A number of considerations must be discussed prior to collaborating, such as partner selection, governance, exit arrangements and avenues for conflict resolution.
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The Dutch Wind Consortium — consisting of AkzoNobel, DSM, Google and Royal Philips — is a successful example of the aggregation model. Together, the businesses executed two utility-scale offsite wind PPAs and brought together four major players in the corporate renewables industry.
Anchor/joint tenancy: In this structure, the corporate offtaker contracts for a small portion of a project that already has a larger-percentage offtaker. This way, the company is the sole purchaser of the small project percentage and is responsible for executing its own PPA.
The anchor/joint tenancy model is viable for buyers that can demonstrate creditworthiness and risk tolerance in the same way a larger-scale PPA would require. Yet, the smaller size of the project piece (partnered with the developer’s desire to find offtake for the smaller percentage), can still work in a corporate buyer’s favor. For example, if the majority of a project is financed by the anchor tenant, a smaller buyer may easily contract the PPA with lower credit or a shorter contract length.
The buyer should be careful that a developer may not exhibit much flexibility in deal terms, or even offer a compelling price. The developer will mostly be interested in an offtake agreement that could guarantee the project achieve a certain amount of financing.
Reseller contracting: More and more small buyers are engaging in pre-contracted, resold tranches of a larger PPA, referred to as reseller contracting. This method allows them to step into the ring with a large-scale buyer that posts credit to purchase the total offtake from a project. Once established, the offtake is divided into smaller packages to resell to other counterparties, such as corporates and retail electricity providers.
Small buyers are attracted to reseller contracts because the work required to execute a resale is less than a full PPA. However, airing on the side of caution is recommended, as the secondary corporate counterparty cannot always claim to additionality, or material impact, which is a critical component for companies seeking to support new build projects. Other challenges may include restraints in the terms of the contract, as the secondary offtaker has less influence over the PPA terms and performance risks. While this could potentially work to the buyer’s advantage, as the resold parcel may offer a reduced term length or less risk, it could also mean that the project profile and performance don’t match the buyer’s goals.
It is an exciting time to be a corporate energy buyer of any size, as the renewable energy market continues to skyrocket and become increasingly innovative. Smaller buyers interested in collaborative models will need to exercise due diligence to identify the best partners, agreement terms, and deal structures that align with their needs and goals. Regardless of the model a smaller buyer chooses to pursue, collaboration yields valuable benefits and working with trusted partners makes all the difference.