Corporate Renewable Energy Procurement Legal Considerations & Market Trends 8/17/2016 Presented by Ann A. Hawkins / Nike O. Opadiran / Ethan M. Schultz Beijing / Boston / Brussels / Chicago / Frankfurt / Hong Kong / Houston / London Los Angeles / Moscow / Munich / New York / Palo Alto / Paris / São Paulo / Seoul Shanghai / Singapore / Tokyo / Toronto / Washington, D.C. / Wilmington 1 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Agenda Introduction and Industry Trends PPA Structures Contract Terms Additional Considerations 2 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
1 Introduction and Industry Trends 3 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Corporate Buyers Going Green Power sector has seen significant growth in corporate off-takers procuring renewable energy via power purchase agreements Traditional models for corporate procurement: Contracts to purchase unbundled Renewable Energy Credits (RECs) Buy green power via regulated utility tariff C&I PPAs in connection with on-site, distributed generation project Recent trend has brought shift to physical PPAs and synthetic / virtual PPAs, entered into directly by corporate buyers with renewable generators. Not as configuration intensive as C&I project development (i.e., no need to align generating resource, site, load, etc.) Represents stronger link between corporate action and development of renewables projects Depending on structure, can provide hedging benefit or commodity price upside potential 4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Drivers of Corporate PPA Trend Extension of key generator subsidy in late 2015 federal Production and Investment Tax Credits Declining price environment for new renewable generation U.S. and global political landscape Clean Power Plan Paris Accords Expanded and renewed green initiatives / sustainability commitments among corporates With commitment to additionality Brand management / marketing considerations 5 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Buyer Characteristics Typical PPA corporate buyers Fortune 500 company with top-tier credit profile Green initiative as part of corporate mission Heavy energy user (e.g., via data centers), with desire to hedge significant operating cost Consumption profile shows load spread over a number of geographic regions In addition, among the most active corporates in this sector Procurement teams develop familiarity with wholesale purchase / sale of power Commercial team understands interplay between PPA and project financing / tax-equity transaction for project developer 6 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Corporate Off-take Stats 7 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Corporate Off-take Stats 3.2 GW of utility-scale renewable transactions by corporate buyers completed in 2015 Capacity of wind PPAs signed by corporate customers exceeded those with utility purchasers Through June, 2016 pace is slower than 2015 ( 15 spike may have been a function of PTC/ITC cliff) Solar deals are on the rise since start of 2015, represent nearly 25% of corporate off-take Corporate procurement strategies are part of larger sustainability commitments for 43% of Fortune 500 companies, yet only a fraction (~18) have signed PPAs 8 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Select U.S. Transactions Off-Taker Developer Project / Contract Description Facebook Alterra Power / Starwood Energy 204 MW Wind (13-year hedge) Amazon Pattern Energy 150 MW Wind, Indiana (13-year PPA) Dow Chemical Company 200 MW Wind (15-year PPA) Kaiser Permanente NextEra Energy Resources 110 MW Solar / 43 MW Wind (20-year PPA) Steelcase APEX Clean Energy 25 MW Wind, Oklahoma (12-year PPA) Corning Duke Energy Renewables 50 MW Solar PPA, North Carolina (25- year PPA) IKEA APEX Clean Energy 165 MW Wind, Texas Microsoft RES Americas 110 MW Wind, Texas (20-year PPA) 9 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
2 Structures 10 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Structuring Options 1) Commercial & Industrial (C&I) PPA 2) Standard / Physical PPA 3) Synthetic / Virtual PPA 11 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
1) Commercial and Industrial (C&I) PPAs Fixed-price, retail contract with non-utility, non-residential off-taker (e.g., corporates, schools, governments, hospitals and non-profits) Physical delivery of power and RECs to serve load demand at specific location (e.g., corporate office, retail outlet, data center, manufacturing plant or warehouse) Retail purchase for direct consumption (as opposed to wholesale transaction for resale) Project may be located off-site or on-site ( behind the meter ) On-site projects reduce transmission costs / congestion risks Differing tax and energy regulatory considerations for off-site and on-site projects 12 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
2) Standard / Physical PPAs Renewable Project Owner Fixed $ / MWh Energy (MWh) [& RECs] Corporate Offtaker Energy (MWh) Market $ / MWh Energy (MWh) Retail $ / MWh Local Electric Utility / Retail Supply Partner Wholesale Market / Retail Supply Partner Long-term, fixed-price wholesale contract with corporate off-taker Physical delivery of power and, if elected, RECs Corporate off-taker takes title to the renewable energy Subject to FERC regulations for wholesale transactions Terms and conditions largely mirror renewable PPA with utility off-taker 13 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Virtual / Synthetic PPAs Renewable Project Owner Fixed $ / MWh Floating $ / MWh Corporate Offtaker Market $ / MWh Energy (MWh) Energy (MWh) Retail $ / MWh Wholesale Energy Market Local Electric Utility Synthetic PPAs avoid the need to deliver physical power Contract for Differences 14 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Virtual / Synthetic PPAs (cont d) Long-term contract with corporate off-taker who does not take physical delivery of power Project sells power into market and seller receives prevailing market price for its own account If market price exceeds contract price, then seller pays off-taker (delivered quantity x (market price - contract price)) If contract price exceeds market price, then off-taker pays seller (delivered quantity x (contract price - market price)) Results in fixed-price contract for seller; acts as price hedge for off-taker s load demand Made possible through deregulated energy markets and liquid spot prices 15 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Virtual / Synthetic PPAs (cont d) Versatile structure because project and load can be located in different places Physical delivery often impractical or cost-inefficient (e.g., for smaller, distributed loads) Transmission constraints: Where sun shines best, where wind blows most and where load demand is highest are often disparate locations Renewable projects are concentrated in certain geographic regions Metropolitans are not well configured to connect to off-site projects or to allow for on-site projects Residual price exposure (e.g., congestion and basis risks) for off-taker, so not complete hedge Potential exposure due to spread between floating prices used for settlement and retail prices for off-taker for load demand Potential exposure due to spread between contracted quantity and actual retail load 16 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3 Contract Terms 17 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Key Contract for Differences Provisions 1) Delivery Term 2) Supply and Delivery Obligations 3) Purchase and Sale Obligations 4) Credit Support 5) Financing Considerations 6) Transfer Restrictions 18 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
1) Delivery Term Long-term contract i.e., 10-20 years Delivery term starts on project commercial operation date (COD) Developers need to lock in long-term, predictable revenues to secure debt or tax equity financing Off-takers know that ability to attract financing is key to additionality (which is prerequisite to sustainability commitments) Off-takers want to fix energy costs over period that align with time horizon for capital plans 19 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
2) Supply and Delivery Obligations Product includes energy and RECs / environmental attributes Unit-specific: Product must be supplied from specified facility, but replacement RECs usually permitted Energy Delivered into market Off-taker does not take physical delivery of power RECs / environmental attributes Transferred using tracking system or attestation Off-taker takes title and has all reporting rights Environmental attributes do not include tax benefits or capacity attributes Minimum performance requirements 20 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Purchase and Sale Obligations Conditions precedent to purchase and sale obligations Milestones to achieve material development events, including commercial operation date Delay damages and termination rights Off-taker has minimum purchase obligation e.g., 100% of facility output and associated RECs Creates predictable revenue to support project financing (irrespective of actual load demand) Off-taker may have economic curtailment right Applicable if market price falls below zero or other minimum price Make-whole payments may be required (never get sunlight / wind back, so facility loses money on each MWh curtailed) Other curtailment rights generally not relevant 21 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Purchase and Sale Obligations (cont d) Exceptions to purchase and sale obligations Force Majeure (e.g., not reasonably foreseeable, beyond reasonable control, cannot be overcome or avoided) Scheduled maintenance May only be permitted during certain months or hours Subject to maximum number of hours per year Forced outages or system emergencies Curtailment orders, grid or transmission constraints Default 22 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
3) Purchase and Sale Obligations (cont d) Price RECs sold at fixed-price (levelized payment or annual escalation) Monthly settlement for energy hedge Market price: Weighted average of real-time market price at agreed settlement point Contract price: Fixed (levelized payment or annual escalation) Floating price payment: Product of difference between market price and contract price and delivered quantity Minimum market price: Used for economic curtailment Generally speaking, capacity payments do not apply to renewable projects No price adjustment for failure to receive tax credits or other government incentives for seller s account 23 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
4) Credit Support Off-taker s creditworthiness key to project s financeability Increased payment risk relative to utilities Credit support required from off-taker under corporate PPAs, but not usually required for investment-grade or regulated utilities Seller often special purpose vehicle with no assets other than project, so must provide credit support Amount of performance security varies over term If off-taker has a second lien on the project, an intercreditor agreement and forbearance agreement will be required 24 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
5) Financing Considerations Sufficiency of projected cash flows Cover operating expenses Service debt and meet financial covenants under debt financings (e.g., debt service coverage ratio, fixed charge coverage ratio) Achieve target internal rate of return (IRR) for tax equity investors PPA term should exceed debt tenor/tax equity flip point by at least 2-3 years to provide buffer for project delays (e.g., force majeure) Stability of revenue source Creditworthy off-taker Minimum purchase obligation irrespective of off-taker s requirements / load demand Minimal curtailment rights without make-whole payments 25 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
6) Transfer Restrictions Assignments General rule: Neither party can assign without other party s consent; but subject to number of typical exception Exceptions: Assignments to creditworthy affiliates or creditworthy and experienced third-party assignees» Assignee must expressly assume assignor s obligations» Need to define creditworthiness (minimum credit rating and net worth; no worse than assignor s as of effective date or date of assignment) Seller typically permitted to collaterally assign its rights under PPA to lenders without Buyer consent 26 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
6) Transfer Restrictions (cont d) Change in control May be subject to restrictions on assignment or considered default PPA should permit planned sell downs of seller s interest in project (including to tax equity investors), so as to avoid having to seek consent Off-takers care most about experience and creditworthiness Corporates may desire flexibility for mergers and sales Corporates unlikely to seek rights of first offer (ROFOs), rights of first refusal (ROFRs) or buyout options 27 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
4 Additional Considerations 28 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Regulatory Matters Federal and state approvals may be required for contract or rates Specifics vary across PPA structures and regulatory regime applicable to seller and off-taker FERC regulates interstate transmission of electricity and wholesale sales of electricity in interstate commerce FERC has authority over wholesale market transactions involving interconnection to transmission grid / bulk power system States regulate retail sales of electricity Corporate Physical PPA: Subject to FERC regulations governing wholesale market transactions (outside of ERCOT) May also be subject to state regulations governing retail sales Synthetic PPA: Requires coordination with applicable RTO rules May be subject to Dodd-Frank; may give rise to concerns re: hedge accounting treatment 29 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Procurement Process & Options Develop green strategy Identify sustainability goals Assess energy usage Issue RFQ / RFP Volume target Bidder requirements Evaluation criteria price and project execution / deliverability Pro forma PPA / Indicative terms Select preferred bidder / negotiate PPA 30 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Speakers Ann A. Hawkins Partner, Houston Ethan M. Schultz Partner, Washington, D.C. Ann A. Hawkins concentrates in the areas of development, financing, acquisition and disposition of energy assets, including electric power projects, oil and gas projects and commodities. She represents developers, financial institutions, investors, power purchasers, fuel purchasers and commodity traders. Ethan Schultz represents clients in connection with acquisitions and divestitures, joint ventures, financings, and other corporate and commercial transactions in the energy and infrastructure sectors. Nike O. Opadiran Counsel, Washington, D.C. Nike O. Opadiran concentrates her practice on the development, financing, and acquisition and divestiture of energy and infrastructure-related projects. She is experienced in drafting and negotiating purchase and sale agreements, financing and collateral agreements, power purchase agreements and ownership agreements. 31 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
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