Continued commitments to renewable generation in 2021 mean that corporate purchasers remain major drivers in the development of new wind and solar power generation projects in the United States. Megawatt numbers vary depending on the source; however, there is no dispute about the significant role played by corporates. While corporate offtakers were initially focused on wind generation, corporate offtakers now regularly contract for solar generation as well.
Any overview of the U.S. market would be lacking if it did not first address the regulatory and market structure of the U.S. market. First, the U.S. energy market is split between retail (i.e., direct sales to the end-user) and wholesale (i.e., sales for resale) markets. Retail markets are strictly governed by state law and are subject to state regulatory commissions. There are fifty states in the U.S. and thus, in a sense, fifty separate retail markets.
Wholesale sales outside of the state of Texas are regulated by the Federal Energy Regulatory Commission (FERC). While a small portion of the wholesale sales in Texas are regulated by FERC, the substantially larger portion of wholesale sales are subject to the rules, regulations and market practices of the Electric Reliability Council of Texas and the Public Utility Commission of Texas.
This web of markets and regulations means that when looking across the United States for examples of corporate offtake agreements (often generally referred to as power purchase agreements (PPA)) at the retail level, one can find “Direct Sale” PPAs, “Sleeved” Corporate PPAs, and “Behind the Meter” PPAs. “Direct Sale PPAs” are found in states that allow a customer to choose its retail electricity supplier. These states include Texas, California, Illinois, Massachusetts, Michigan, Ohio, Pennsylvania, New Jersey and New York. Direct Sale PPAs in states that allow them, are subject to various state regulatory policies
“Sleeved” PPAs are found in those states in which a direct sale to retail customers is either prohibited by state law or allowed only in limited, expressly approved circumstances. Cooperative and municipal utilities will at times agree to sleeve a sale to a large customer. Investor-owned utilities may also agree to sleeve power from a renewable generator – although this is the exception, rather than the rule, and at all times requires some level of approval by the state regulatory commission.
“Behind the Meter” PPAs are also found at the retail level. The “Behind the Meter” nomenclature refers to generation that directly serves a retail customer, by directly offsetting the electricity load otherwise served by a utility.
If a corporate offtaker cannot receive service at the retail level through one of the structures identified above, the corporate offtaker will look to the “Synthetic” Corporate PPA (or in the parlance of the U.S., a “Virtual PPA” or “VPPA”). While retail sales, and independent renewable credit sales still occur, it is safe to say that the VPPA is now the predominant model for sales from renewable generation.
VPPAs differ from utility PPAs in certain key areas. First, the VPPA will expressly disclaim any physical sale or delivery of energy without the express consent of the seller. Instead, the VPPA is a financial instrument that includes a “Fixed Price” and a “Floating” market price -- generally based on the locational marginal price (LMP) at a market “hub”. If the Floating Price exceeds the Fixed Price, the renewable generator pays the corporate offtaker the difference between the Floating Price and Fixed Price. If the Fixed Price exceeds the Floating Price, the corporate offtaker pays the renewable generator the difference between the Fixed Price and the Floating Price. The VPPA contemplates, and may expressly require, the sale of physical energy by the renewable generator in the real-time or day-ahead LMP at the renewable generator’s point of interconnection.
This pricing structure raises a few issues, including:
- Credit Support. Corporate offtakers may or may not have adequate credit to cover the market exposure faced by the renewable generator.
- Market Liquidity. Neither the corporate offtaker nor the renewable generator will want the Floating Price to be easily manipulated or subject to large, unpredictable, price swings.
- Price Floors. Price floors will often be a subject of negotiation.
The pricing structure above shares features with a pure financial hedge from a bank or other hedge provider; however, the VPPA differs from a financial hedge in that a VPPA generally does not require a fixed quantity of energy, subject to the availability or performance guaranties. Further, , the VPPA will always involve a commitment of the renewable credits and other attributes produced by the renewable generator.
Another unique feature of the VPPA is the importance of reputation, confidentiality and publicity to the corporate offtaker. Corporate offtakers may want the specifics of the VPPA held strictly confidential and will want strict controls over publicity around the VPPA and the facility. Many corporate offtakers will insist upon naming rights to the facility and control over signage.
Two other elements of VPPAs that distinguish these agreements from other PPAs require mention. Given the pricing structure, the reporting requirements of the Dodd-Frank statute must be considered. Further, while corporate offtakers may commit to large amounts of capacity, they are often seeking a commitment that will be less than the ideal size of a renewable generator. Thus, the corporate offtakers often commit to a prorated fraction of the total energy generation and REC production of a renewable generator.
While a VPPA differs from traditional power purchase agreements and hedges in many ways, the VPPA will include elements common to PPAs:: (a) requirements for establishing commercial operation and liquidated damages if commercial operation is delayed; (b) provisions requiring operation and maintenance consistent with prudent industry practices; (c) guaranties of mechanical availability and, at times, performance; (d) termination and damages provisions for default; and (e) provisions addressing force majeure events. Each of these issues raises commercial and legal issues that should be carefully considered.
For more on these agreements and other driving forces behind U.S. renewable energy development, listen to the recent Nota Bene podcast episode “What’s Driving the Shift Toward Renewable Energy?” (on Apple Podcasts, Google Podcasts, Spotify, Amazon Music, Stitcher) with Sheppard Mullin partners Paul Kaufman, Ben Huffman and Michael Cohen.