A Playbook for Clean Energy Buyers in Today’s Tricky Market
As covered previously, more than enough renewable energy projects are under development to meet growing buyer demand. But many of these projects are running into delays and cost increases thanks to overloaded wholesale market interconnection queues, a global supply chain recovering from a pandemic, inflationary pressures, and geopolitical trade decisions hammering module supply.
Should large energy buyers stand on the sidelines until things improve? We do not think so. You have climate goals to meet and can still find attractive renewable energy opportunities if you take the right approach.
More than ever, buyers must be better informed, creative, and flexible. This post explores how you can be all three whether you are at the starting line, working through an active procurement, or negotiating a contract.
|Join our webinar on Monday, June 13 to dig into current market conditions what you can do to find and execute attractive renewable energy deals. Register here.|
For Buyers at the Starting Line
1: Keep an eye on renewable energy related policy and rulemaking
Buyers beginning a new renewable energy strategy and/or procurement need to stay up to date on relevant legislative, regulatory, and trade decisions that could significantly impact their options. For example:
- The outcome of the US Department of Commerce’s investigation into imported solar modules from southeast Asia could impact cost and viability of the vast majority of US solar projects. [UPDATE AS OF JUNE 6: The Biden Administration announced that it will pause solar tariffs for two years while the Department of Commerce completes its investigation and efforts to boost domestic production of solar modules are deployed.]
- A renewal and/or extension of tax credits as part of a smaller Build Back Better agenda or tax extenders package could help reduce the impact of new solar tariffs and even make wind projects more attractive amidst solar uncertainty.
- Proposed changes in ERCOT (Texas’s main wholesale energy market) in reaction to the February 2021 winter storm could make contracts there less attractive.
These are just several active examples. Not staying up to date could mean your strategy quickly runs stale.
2: Consider a wider range of options
In a challenging market, knowing your options and being flexible in how you reach your organization’s goals are crucial to finding the best deal.
- Are your facilities in a deregulated state or spread across geographic regions? Explore all available renewable energy solution types available to you. Maybe you would be hard pressed to find a deal directly with a project developer, but an intermediary can still access projects through a retail agreement or green tariff program.
- Have near term goals to meet? Despite weaker sustainability claims, you can consider shorter term options like purchasing renewable energy certificates (RECs) or agreements with already operating renewable energy projects until the market clears up.
- Afraid of not being able to compete with the largest buyers? Join them! Consider tagging along with a larger organization in your supply chain or value chain who has renewables experience as part of a buyer aggregation. (CFR has facilitated many aggregations. Contact us if you want to pursue one or learn more about how they work.)
- Discouraged by the obstacles with solar development? Consider wind projects. Although there are not as many wind projects actively being marketed and they do not fully sidestep current supply chain issues, they avoid some of the main areas of uncertainty facing solar like the US Department of Commerce’s investigation. Wind projects also have a very different production profile (and therefore economic narrative), creating a good counterbalance to current or planned solar projects.
- Have a global footprint? Consider looking at your renewables options in all of your markets to understand where near-term progress can actually be made.
For Buyers in Mid-Procurement
|For detailed guidance on priming your organization to make a large renewable energy procurement, see our guide.|
1: Prime your organization to move quickly
In this market, attractive renewable energy projects will not stay available for long. Buyers must move fast. You can prepare your organization to make a quick decision by practicing good change management. This means engaging key functional groups and decision-makers across your organization early to understand their priorities and requirements. This dramatically increases the odds that you can secure their approval when you need it.
2: Dig into key project development details to avoid potential pitfalls
The days of leaving the nuances of project development risk to the project developer are over. Part of your diligence as a buyer should be assessing whether the project has a realistic path forward. How can detailed project development diligence give your organization a leg up?
- Worried about interconnection dysfunction? Some projects may sidestep the grid interconnection logjam by connecting at the distribution-level and avoiding wholesale markets’ crowded queues. Also note that for projects in PJM, a wholesale energy market stretching from Illinois to New Jersey, queue position determines if they will get swept up in the planned queue reform process and therefore delayed multiple years.
- Looking to avoid potential tariff impacts on future projects of interest? Scrutinizing which panel suppliers project developers have access to and plan to use for your project of interest could potentially avoid impacts of future tariffs.
For Buyers in Contract Negotiations
Power purchase agreements (PPAs) and other renewable energy contracts successfully reaching execution today certainly will have differences from ones negotiated just a year ago. Historically, sellers have asked buyers to assume market price volatility. In turn, sellers have largely assumed project development and operational risks given the information asymmetry that exists between the two parties.
Given the considerable uncertainty out there right now in developing projects, however, this is changing. Sellers are asking buyers to be more flexible in allowing for certain exit rights or risk sharing mechanisms. Buyers should discuss the known macro-level issues with sellers early to understand how the sellers intend to address those issues contractually.
- Are you 100% sure what you’re signing up for? Complex carveouts and formulas that ask the buyer to share the project developer’s uncertainty of certain capital expenditures (e.g., solar panel costs), for example, require specific expertise and scrutiny. Only agree to solutions where your organization can gain comfort over the risks. If you need external support to arm yourself with information to better evaluate, do not hesitate. The do-it-yourself model is becoming more difficult amidst current challenges and solution intricacies.
- Does the contract split downsides and upsides? If sellers are asking buyers to share the risk of cost increases, it is perfectly reasonable for buyers to ask to share the savings if costs decrease. Contracts are often signed years before projects will incur these costs. The world can change quickly, and contracts should account for these costs to go in either direction (to reasonable levels).
- Are all the risks fair to take on? Finally, do not lose sight of which uncertainties and risks are reasonable for a buyer to share. Macro-level events like the US Department of Commerce investigation that are not directly controllable or easy to foresee fit the bill. Certain avoidable project-specific development risks, however, may not and should be held exclusively by the seller.
2: Identify where you can be flexible
If you have already discussed the project with leaders across your organization, you likely have a solid understanding of your organization’s priorities, which also means you know which factors are not priorities.
These factors that matter less to you as a buyer could be crucial to striking a deal that works. For example, perhaps your organization’s climate goals are sufficiently long-term to allow for timeline flexibility in a renewable energy contract. That timeline flexibility could be very valuable to the seller and make the difference between a contract staying alive versus you having to run a new procurement.
Making Progress on Your Climate Goals Amidst the Chaos
Unfortunately, this market is very challenging and likely will remain so in the near-term. Buyers who are mid-procurement or in contract negotiations will likely experience the most difficulty, but we continue to see viable pathways for getting deals done amidst the market challenges.
For those buyers just getting started, their focus should be on first aligning stakeholders internally and creating a renewable energy strategy, which can take time and therefore allows the market to unwind some of its current kinks.
Regardless of where buyers are at in their journeys, it is important to stay informed, creative, and flexible to successfully make progress on their renewable energy and climate commitments.
This blog post is the third in a series of posts covering volatility in the large-scale renewable energy market and how buyers can navigate challenges. Our previous posts: