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Less Risk, More Certain Reward: De-risking Large-Scale Renewable Energy Transactions

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By Jaafar Rizvi, Director of Client Service

Interested in decreasing your organization’s carbon footprint by contracting for renewable power, but uncertain of the risks it might entail? Your caution is understandable: if you transact for large-scale renewables hastily, you risk leaving significant economic value on the table. When done thoughtfully, however—by leveraging competitive forces, deep due diligence, and varied de-risking tools—your organization can join the ranks of sustainability leaders by responsibly decarbonizing.

The good news is that there are at least three unique ways to de-risk large-scale renewable energy transactions, none of which existed as recently as a few years ago. By pairing these risk approaches with competitive and careful project section, you can increase the chance that your purchase ends up being a successful one. Broadly speaking, these ways to mitigate risk include:

1.) Transferring the risk to the developer

2.) Transferring the risk to a third party

3.) Warehousing the risk by integrating it with your organization’s existing retail purchases

Below is a brief description of each option, along with potential costs and benefits.

Transferring the risk to the developer: Traditional power purchase agreements (PPAs) lock a buyer into a fixed price for power, which nets out against floating wholesale market revenues. The major risk here is that if wholesale power prices go down, the PPA can create costs instead of savings. One way to manage this is to negotiate with project developers to take some of the market risk in exchange for a share of the upside. This is an attractive approach for many, as the first-order goal is typically not to profit off of a PPA, but rather to meet sustainability goals in a cost-neutral or better manner. This can be done in any grid region, with any technology.

Transferring the risk to a third party: Financial institutions play an increasing role in power markets, and the number of risk products they offer has proliferated as a result. They provide products that can mitigate risks from contracts such as PPAs. For example, your organization can buy a swap or other derivative that behaves in a fashion that is the opposite of your PPA, offsetting the economic impact of your renewable energy transaction. One important caveat is that these products are usually only available when the PPA settles at a market hub. If your organization would like the hedge to match the term of the PPA, PPAs are typically 12-20 years.  Many hedges are not available for that long a tenor.  In addition, these products perform better with solar than wind projects due to the greater predictability of solar production, although they are available for both. This is a particularly good solution for solar projects in PJM and ERCOT, due to the tenor of hedges offered in those regions, but it can be effective in other markets as well.

Warehousing the risk: This can be accomplished in two ways. The first option is to replace your retail power contract with a long-term retail-delivered contract tied to a specific new-build renewable energy asset, also known as ‘Structured Retail.’ Clients such as Wells Fargo have helped pioneer the use of this innovative structure in markets such as CAISO, ERCOT, and PJM. This will reduce your organization’s exposure to energy prices by fixing (or largely fixing) power prices for seven to twelve years. Alternatively, your organization can create this dynamic synthetically by lining up its brown power purchases to act as a natural hedge to your large-scale renewable energy transaction. Doing this requires two conditions: your organization’s load must be located in a state which offers retail choice (allowing you to customize your brown power procurement strategy), and a renewable energy project that settles at a market point highly correlated to the one from which your brown power purchases emanate. In many regulated markets there are also the option of next-generation green tariffs, where bill credits based on the avoided cost of generation act as a natural hedge against your variable power price for current consumption.

For any of these strategies to be effective, we’d advise your organization to leverage competitive forces and perform the diligence necessary to select the right project for your desired strategy. Additionally, prices for these products will vary significantly based on the market, the specific product in question, as well as the amount of risk mitigation desired, which in turn requires a clear understanding of how risk is allocated in the contract. Thoughtfully designing a strategy which considers all these elements will help your organization embark on a low-risk way to shift from brown to green power.

At CFR, we work hand-in-hand with our clients as they consider these risk mitigation tools, providing support and guidance from initial strategy conceptualization and procurement support through contract negotiations and external communications. As the market evolves and these new products proliferate, a trusted advisor can help you maximize value and avoid potential pitfalls. If you are interested in learning more about how risk mitigation products might help your organization meet its sustainability goals, please reach out: 

Jaafar Rizvi is a Director of Client Service and has led all aspects of solution development for over a dozen CFR client engagements. He also spearheaded the creation of CFR’s renewable asset optimization service line. Jaafar brings over 10 years of renewable energy and sustainability experience to CFR.

(240) 449-3013
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