This guest blog from BRC member Coronal Energy was originally posted to their site here.
Corporate sustainability leaders, municipal government officers, renewable energy executives, and financiers gathered for the 2018 Business Renewables Center (BRC) Member Summit last week. We joined the two-day event and came away with new insights and optimism for the sector at large.
The corporate renewables market is moving beyond its earliest stages into a new wave, where big first movers are joined by a diversifying set of companies. 2018 deal volume is on pace to achieve an historic 5 GW of total contracted capacity, and is closely approaching 2017’s 2.78 GW total capacity.
The Market Continues to Grow and Diversify
Growth accelerates as the market diversifies: While the IT sector continues to be a significant player in corporate deals, 2017 was the first year where the sector made up less than half of deals, joined by consumer staples, materials, industrials, financials, and giant bakeries. Many conference participants expect RMI’s BRC will continue to focus on small to medium-sized buyers and aggregating them together in pursuit of larger, more competitively-priced projects. The supply side is also diversifying: while wind still makes up the bulk of the supply mix, solar increased to 25% of deal flow and one biomass contract (P&G) represents a new direction for corporates interested in sustainability for its thermal loads.
BRC conference participants expressed optimism for increased financial sector influence in 2018, a trend supported by Goldman Sach’s involvement in the market (and the host of the session), along with industrials. As the BRC reports, in only five years, we’ve seen the number of buyers increase tenfold from 4 to 50, and new developers enter each year to compete for buyer demand – a good sign of a healthy market.
Risk and Skepticism Still Inhibits Some Would-be Participants
While these signs are undoubtedly positive, the market has not achieved escape velocity – the point at which deal risk is low enough to attract smaller to medium enterprises into the market. For much of this segment, long-term renewable contracts emerging in the market are still too risky and too complicated to sell internally, particularly to skeptical CFOs accustomed to short-term energy procurement. Buyer aggregation continues to be a focus for many small- and medium-sized buyers, which is expected to accelerate deal flow and attract more renewable energy opportunities. Additional headwinds at the federal level have also slowed down procurement timelines, with solar PV tariffs and corporate tax rates changing.
As with any large, strategic investment—energy or other—downside risk, or the risk that deals could turn upside down over the longer term, prevents many from entering the market. A popular contracting mechanism remains the virtual power purchase agreement (“VPPA”), which enables corporates with geographically distributed loads and/or facilities in regulated markets where direct supply isn’t possible to contract for renewable energy in a way that gains them the RECs, additionality claims, and potential financial upside. But at its core, the VPPA is a financial transaction, a hedge that has characterized much of the deal flow. The VPPA removes a portion of a company’s overall risk profile off its balance, but the downside risk still exists, and for companies that use less energy, the portion of their risk that energy represents is simply not large enough to justify the deal.
Getting to Yes
Monetizing extrinsic benefits is therefore critical to supplementing the hedge value to advancing internal procurement discussions. Several options emerged in the sessions:
- Market share (Offense): Does this deal help me win the contract?
- Defense: How can I leverage the renewable deal to make sure it doesn’t prevent me from winning the contract, losing out to a company that has made the effort?
- Diversification: Where am I exposed, geographically, to fuel price volatility of my current supply?
- Synergy: How can this investment be synergistic to my business – A mining company, for example, may make the argument that investment in the renewable sector improves copper sales, as the electric system uses significant amounts of copper to transmit and distribute electricity.
- Workforce: Employees that work for companies making and achieving sustainability targets may be more likely to choose that employer, and stay longer term, cutting down on turnover costs and improving performance and productivity metrics.
- Regardless of the deal structure, these questions are important to building the business case for an off-site renewable energy project. But they assume management sees risk, which may be reduced in a market that offers an attractive green tariff that offers benefits on day 1 of the deal. In many states, for the first time renewables have achieved and surpassed long-sought grid parity. In these markets, like Colorado, renewable energy cost may be priced through green tariffs priced at market, i.e., at a cost savings rather than at a cost premium, which is the status quo for many legacy green tariffs.
Either way, the market is showing healthy signs of returning to the mean, in spite of the uncertainty created by federal policies.
Matthew Crosby is Policy Director
Zach Starsia is Senior Manager, Origination