The Future of Small-Scale Aggregation Deals: New Frameworks and Developments from the Renewable Energy Markets Conference

Corporate demand for renewable energy driven by carbon neutrality and renewable energy targets has mobilized unprecedented levels of deployment in the United States. 2018 in particular was a landmark year for corporate renewable energy procurement with over 6 gigawatts (GW) of new capacity announced. This totals more than the previous two years combined. This mass deployment, dubbed “the year of the corporate PPA” by Greentech Media, is partially induced by the stepping down of the federal Investment Tax Credit (ITC) at the end of this year. The driving force behind this growth is the virtual power purchase agreement (VPPA), which allows corporate offtakers to secure the renewable energy attributes of renewable generation regardless of where the energy is generated.  

The Renewable Energy Markets (REM) conference is an annual event that brings together renewable energy professionals from the policy, nonprofit and private sectors. Since 1996, REM has been a leading forum for the clean energy marketplace. It is organized by the Center for Resource Solutions (CRS) and has significant support from the Environmental Protection Agency. This year, the ongoing threats of wildfires in California, where the conference was located, emphasized the need for new innovative business models to enhance the acceleration to a clean energy future.

A panel discussion about new forms of VPPA aggregation formed a focal point for this year’s event in San Diego. Now, some companies are taking shares of VPPA projects rather than bilaterally contracting to build one strictly for their own renewable energy demand. The talk explored the ins-and-outs of such deals, and provided some pointers for constructing one.

VPPA Pain Points and Growing Opportunities in Small-Scale Aggregation

The traditional VPPA entails a bilateral agreement between a project developer and the corporate buyer. The offtaker pays a fixed price for the Renewable Energy Credits (RECs) associated with the generation but continues to pay their retail electricity rate to their local utility. The market price from the sale of renewable electricity at the point of generation is passed through to the corporate buyer. They are responsible for paying the difference between the market price and the fixed price they have contracted with the project developer. Offtakers accept the risk that they will pay more for energy than they receive in renewables sales, but there can also be times in which the market price exceeds the retail price, and the offtaker benefits financially from the difference.

Although VPPAs have catalyzed capital for renewables in deregulated markets which support avenues for corporate-driven power production, there are some drawbacks to the model. Developers require large minimum project sizes before scoping a deal. According to the Renewable Energy Buyers Alliance (REBA), the average transaction size is 50 megawatts (MW) for onshore wind and 30 MW for solar photovoltaics. This narrows the offtaker pool to companies that have large balance sheets and high energy demand. There are also high legal costs associated with the scoping and development of a VPPA. These can be exacerbated by potential distances between the offtaker and the project, representing different and sometimes esoteric legal regimes.

The renewables sector has seen growing economies of scale supported by technological innovation, falling costs and industry maturation. At the REM conference, CRS provided a presentation on the state of the U.S. renewables market. 2018 was the biggest year of certified sales to date, with over 62 million megawatt-hours certified. Renewable energy from PPAs and VPPAs represented the largest category. These changes have delivered an increasingly large spread of deal sizes. As the renewables industry continues to grow, competition between developers has put downward price pressure on both the technology and soft costs (such as legal costs) associated with renewable energy development. This has opened doors for smaller or more risk-averse offtakers to participate in VPPAs.

Some leading companies are participating in aggregation deals to pursue their renewable energy goals. This is spurring larger overall project sizes, with increasing space for smaller commitments from participating buyers. Apple, Akamai, Etsy and Swiss Re teamed up last year to develop a 125 MW wind facility and a 165 MW solar array. Each company bought different shares of each project. Apple was the largest buyer, contracting 111 MW of the wind facility and 134 MW of the solar array. Etsy took the smallest stake, signing a 4.5 MW contract. This makes it the smallest corporate VPPA on record in the U.S. Another notable deal closed earlier this year in which Bloomberg, The Gap Inc., Workday, Salesforce and Cox Enterprises teamed up to collectively purchase 42.5 MW of a 100 MW facility in Dominion Energy’s service territory in North Carolina. Each business partner contracted a similar share of energy between 5 and 10 MW, according to REBA.

Creating a Small-Scale Aggregation Deal – Key Benefits

An aggregation deal with multiple partners and smaller-than-average stakes in the project is a relatively new opportunity which may require new tools and strategic collaboration. Joshua Kaplan from the REBA mediated the REM panel discussion on small scale VPPA aggregation. Joining him was Erik Hansen from Workday, Michael Barry from Bloomberg, Rob Collier from LevelTen Energy and Rebeccca Sternberg from BayWa. Kaplan framed the conversation around some key takeaways from REBA’s now-published case study about this deal type. It found that key benefits of small-scale aggregation deals include:

• Sharing transaction and legal costs across multiple buyers
• Marketing potential from participating in innovative, high-profile deals
• Opportunities for learning and sharing best practices between buyers
• Participation of buyers with small load profiles that were previously prohibitive to VPPAs
• Larger aggregate deal size potential supported by multiple buyers, driving economies of scale shared among all offtakers.

Selecting the Team Members

What do stakeholders require to make an aggregated VPPA work? Choosing the right team members to undertake a small-scale aggregation deal is a critical first step in beginning a successful project, according to REBA and the representatives from Workday and Bloomberg. Although there are no strict size limitations for the number of partners, historical precedent suggests that smaller groups of three to six members are optimal. Some attrition during the scoping process should be expected and accounted for when determining a buyer group’s size.

Alignment in project engagement for aggregation and a broader corporate sustainability agenda are also vital from the outset of the project. “Engagement is key. I trusted my fellow project members and knew that they were working hard to get this project across the line,” said Michael Barry, head of sustainability business operations at Bloomberg, of the North Carolina aggregation deal.

Besides the buyer group, the other two critical partners are the project developer and the legal counsel. When selecting a project developer, some companies value considerations beyond a bid price — such as flexibility — to ensure that the project will go smoothly. Having a shared legal counsel that is willing to work for the entire buyer group is also an important consideration.

Negotiating with Stakeholders and Developing the Project

Finding and negotiating a project can take multiple pathways. Although formal RFPs and existing business networks can be leveraged to find qualifying legal and developer partners, some buyer groups may find this process tricky due to the novel nature of VPPA aggregation. Some third parties can be leveraged to streamline and expedite this process. For example, Bloomberg, Gap, Workday, Salesforce and Cox Enterprises worked with LevelTen Energy as a transaction partner. LevelTen’s key roles and responsibilities included issuing an RFP and matching the buyer group with a shared legal counsel and qualifying developer.

Some other best practices in setting terms and streamlining the development of a project, according to REBA, include:

• Identifying project location, size, and cost sharing as early as possible
• Making strike price identical for all buyers regardless of offtake commitment
• Committing to identical (or near-identical) contracts, with variation in offtake size (for example, the Bloomberg, Gap, Workday, Salesforce and Cox Enterprises project was 98% identical between buyers)
• Cultivating relationships within a company to support the project
• Ensuring cohesion and transparency both internally and between buyer group companies.  

Industry Transition and Future Models for Success

If it continues to be replicated, the small-scale aggregation VPPA model can diversify large-scale renewable procurement access. The participation of corporate buyers — beyond the Fortune 500 companies which have traditionally dominated the VPPA space — can speed the transition to a clean energy economy. As companies continue to make more aggressive renewable targets, new models such as small-scale aggregation offer a chance to promote collaboration and accelerate learning spillovers.

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