Reporting from the Texas Renewable Energy Industry Association (TREIA) Renewable Energy Finance Forum


Getting a power purchase agreement (PPA) with a utility has never been more challenging for solar and wind project developers, according to renewable energy finance experts, but there are non-traditional ways of getting the price certainty they need to win financing.

“In 2006-07, we knew we could approach several possible counter-parties,” recalled Pioneer Green Energy VP Bruce Thompson, "and we would be likely to get a PPA from one or more of them.”

Today, factors like low natural gas prices, already-met state mandate requirements, the financial crisis, and increasingly effective energy-efficiency programs have cut into power demand. “We have actually dropped load in many parts of the country.”

Traditional merchant projects were often unsuccessful in the past because they were built where a rich resource led to “over-concentration of build relative to hourly demand or inadequate transmission availability,” Thompson said. As a result, potential financiers now want to know immediately “Where are you with offtake?” Without a PPA, “We have had to turn to nontraditional offtake structures."

One alternative, used by a small number of wind developers and now emerging as a possibility for utility-scale solar projects, is a synthetic PPA, also called a swap PPA, which is like a merchant project but essentially functions as a hedge against future prices.

“You could do a solar hedge using a peak focus,” said Macquarie Group (NYSE:MIC) Managing Director Thomas Houle, “but we haven’t seen it.”

“It might be easier than wind,” agreed Thompson, “because it is more predictable.”

“We just haven’t been forced to figure it out yet,” Houle replied.

A synthetic PPA, Lincoln Renewable Energy (LRE) COO Dan Foley recently explained to GTM, is the result of a long-term agreement with a power marketer. The project sells its power into the market and receives the hourly clearing price, which is used as the index for a fixed-for-floating swap.

The swap is made through a long-term contract, allowing the developer price certainty for the duration of the contract term, Foley said, “as opposed to a PPA, where the contract is settled at a fixed price for every megawatt-hour the project produces.”

Natural gas prices are so low, CIT Energy Director Andrew Chen noted, that gas-fired power plant developers are also having trouble finding good offtake prices. A 30-megawatt First Solar (NASDAQ:FSLR) project in New Mexico had a PPA offtake at $57 per megawatt-hour. “How much can you leverage that up?”

“We’re spending a lot of our investment capital on projects in California that have feed-in tariffs,” said Houle. “Those tariffs are high enough, even though they are for smaller projects.”

Not many hedge deals have been done, Houle said. “The challenge, which we think can be overcome, is the time. It is not twenty years like a PPA. It is ten or fifteen, which limits the term and the amount of the debt you put against it and leaves you with a merchant tail. The unanswered question, which will have an answer shortly because the PPA has been extended, is whether the pricing of the hedge will leave room for a project to actually close."

Hedge products, Thompson said, “work better in some regions than in others. It is not clear how much debt you can put against the hedge. They have different credit terms. They don’t play well with lenders. We tend to see them as viable only in markets where the wind is so strong that there is a lot of tax equity in the structure and you don’t need as much senior debt to begin with. But there are markets where we have a chance.”

It really depends on the lender, Chen said. Some require a utility to be involved. “We say, 'Here’s a financial hedge in place; let’s take a look at it.'”

Thompson pointed out three crucial ways that hedges differ from PPAs. First, most renewable projects deliver to the interconnect and the utility takes the electricity from there, he said. “The banks and the trading companies do not want to deal with the interconnect. They want you to bring it to a liquid market hub. That can add to cost and cash-flow volatility.”

Second, with a PPA, the utility buys whatever is generated. “The trading companies with the banks want an exact amount, determined upfront, for ten or fifteen years. The developer deals with that by having a contract for significantly less than the expected production, so there will always be a cushion.” That lowers the project’s ROI.  

Third, Thompson said, banks use mark-to-market accounting and extreme risk assessment methods, and “will want a first lien on all the assets of the project against delivery abrogation.”

Another option, Thompson said, “are large end-users considering buying directly from projects. We call them unicorns. They are out there. They are fun to talk to, but the deal never seems to happen.”

“I heard of one called Google (NASDAQ:GOOG),” Houle said. “We are seeing the Googles of the world invest, but they are investing in projects that have PPAs.”