US corporate PPAs: utilities central to the sector's outlook

The United States is home to a flourishing corporate PPA environment since 2011. In recent years, greater government support towards renewable energy expansion and societal pressure for decarbonisation attracted new players to the renewable sector. Utility-led PPAs are playing a more prominent role in the path towards net zero, while serving a wider range of ESG-seeking customers. This trend will likely expand the range of energy services for smaller customers and help bring more flexibility to the market 

During the early 2000s, the growth in clean energy demand helped unlock new avenues for renewable energy investment in the US. As a result, the country ended up being home to the largest corporate PPAs market, setting an example for market-oriented initiatives for renewable procurement across the globe. 

Previously restricted by the limited access to renewable energy capacity available from utilities, the need to procure renewable energy enabled large corporations to explore the advantages of corporate PPAs. Pioneer in corporate PPA business, Google's initiative to acquire market-based rate authority status from the Federal Energy Regulatory Commission in 2011 unlocked a series of regulatory changes in the US energy market, signalling new business opportunities for energy companies and utilities alike.

The presence of deregulated energy markets at a state level, which corresponds to 68.5% of total US commercial and industrial power demand, acted as a significant enabler that spurred the growth of corporate PPAs in the country Their flexible structure made it easier to accommodate an array of market players and facilitate the development of virtual PPA contracts with fewer bureaucratic bottlenecks.

What is the state of the largest private PPA in the globe? What are the current regulatory and market trends shaping the corporate PPA outlook? inspiratia explores.

Deal flow in 2020 remained unaffected by the global pandemic

In a period of 10 years, the number of renewable PPAs grew from 1 in 2009 to 98 in 2020, which has been a record year to date. At the same time, renewable energy generation in the United States grew from 382 million MWh in 2008 to 742 million MWh in 2018, according to US Energy Information Administration (EIA).

Number of corporate PPAs versus utility PPAs in the United States, 2009- H1 2021

Source: inspiratia | datalive

After 2018, corporate PPAs exploded with their peak year being 2019, with a total of 49 agreements tracked by inspiratia. As noted above, for overall renewables PPAs, 2020 has been a record year despite the global Covid-19 pandemic. However, a notable trend is evident from the graph: utility-led PPAs surpassed corporate ones for the first time, with a total of 52 deals in lieu of 46 corporate ones.

The year-on-year increase of utility PPAs from 2019 to 2020 is an impressive 300% - which is one of the most notable trends to be discussed in this analysis.

Activity in H1 2021 appears to have slowed, which appears to be a direct consequence of the global pandemic.

 IT companies appear to be the top corporate offtakers in the country, followed by retail. Google, Facebook, Amazon, Microsoft and Apple are the country's top five offtakers by deal count thus far. As economic activities continue to pick up in 2021, the next big players in joining the corporate PPAs club are set out to be industrial and telecommunication companies according to Columbia University.

New PPA deal closures further emphasise this trend. Recent examples include: PPA between Duke Energy and pharmaceutical company Charles River Laboratories, which will offtake 250 MW from solar power in Pisgah Ridge Site in Texas as well as Verizon's PPA with four energy developers  - Lightsource BP, Invenergy, EDF Renewables and NextEra energy – to source a total of 845MW of solar power across multiple locations in the USA.

Selected PPA deals in 2021

Source: inspiratia

Market outlook

Utilities step up their game

As observed in the data above, utilities have joined corporations in increasing their share of renewable energy generation. Cognisant of the growing demand of renewable energy by their residential and industrial clientele, they have demonstrated greater commitment to meet carbon requirements and serve a wider range of ESG-seeking customers by signing a series of renewable PPAs agreement.

In June [2021], electric subsidiary of Southwestern Electric Power Company (SWEPCO), American Electric Power (AEP) issued a request for proposal for a 3 GW of wind capacity and 200 MW of solar located in one of six states (Arkansas, Louisiana, Texas, Oklahoma, Kansas or Missouri) due on August of this year. This future new capacity will be a significant addition to AEP's 5.5 GW installed renewable energy capacity. 

"Utilities are going to continue to play a big role in energy generation and the delivery of electricity services going forward. Corporate buyers and utilities do not cancel each other out. Both can exist and thrive in purchasing renewable energy" says Vanessa Wilson, partner and US co-chair of energy and natural resources sector at DLA Piper.

A measure that has been adopted from utilities as a way to increase the share of renewable energy in utility portfolio was the voluntary adoption of regulatory mandates known as Renewable Portfolio Standard (RPS). RPS were already adopted in 29 states and the District of Columbia as of 2021. First established in 2001 by the state of Iowa, RPSs require utilities to source certain percentages of renewable energy only into the grid. According to the National Conference of State Legislator (NCSL), approximately half of new renewable energy generation capacity since 2000s can be attributed to the RPS initiative.

However, social and environmental groups are not convinced the increased capacity of renewable energy under RPS is enough to prove utility's commitment in divesting from fossil fuels. In January [2021], environmental organisation Sierra Club's published its scorecard report "The Dirty Truth About Utility Climate Pledges", where it evaluated utilities across the country on their climate plans, including pledges to phase out coal-fired plans, construct new natural gas plans, and deploy clean energy projects. According to the report, only 3 out of 79 utilities – parent companies and subsidiaries – in the United States scored 80% or above, which reflects poorly on the American electricity sector efforts to mitigate climate change. The authors state that some of the reasons for the low score is explained by utilities' financial hardships embedded on their long-term commitment to pay off existing fossil fuel plants that have become uneconomical.

To this end, although RPS pledges have been in place for quite some time now, utilities appear to rump up investment to meet these targets, and even upscale them.

Flexibility is key

As ESG pillars become more relevant in business transactions, short-term utility contracts such as green energy tariffs are increasingly more attractive to smaller companies. Consequently, the need for more flexible contractual agreements that are shorter, price negotiable, and can accommodate for aggregate buyers and sellers becomes more desirable.

"I think that flexibility, different kinds of agreements, more tools and options for corporate renewable buyers is just going to grow. Projects are becoming more flexible in different parts of the USA market and people are looking up to opening new market locations. I only see those options growing, whether the company is big or small," adds Wilson.

Utilities started to step up and help fill the demand gap for renewable energy, demonstrating that they are able to serve the decarbonisation needs of a wide range of customers. The redefinition of their business structure and continuous commitment to investing in new renewable generation will offer more flexible short-term energy procurement options. Renewable energy expansion through PPAs has the potential to be a win-win.

Possible extension of regulatory support

The federal government's implementation of Production Tax Credits (PTC) and Investment Tax Credit (ITC) for clean energy generation was paramount in guaranteeing competitive virtual PPA prices. According to a March 2021 Columbia's University study on The Role of Corporate Renewable Power Purchase Agreements in Supporting US Wind and Solar Deployment, ITC contributed to a 30% reduction on the capital costs of solar energy, while PTC corresponded to a credit of approximately $23 per MWh for wind.

In December 2020, as part of the Consolidated Appropriations Act – a US$2.3 trillion spending bill that incorporates a Covid-19 stimulus relief the USA congress granted a one-year extension to PTC, and a two-years one for ITC, for wind and solar projects. The extension was granted for projects that initially needed to start construction by December 2023 to qualify for those, making the news a very positive short-term win for the industry. The package included an abatement in tax credits of 60% of its original value for wind production and 26% for solar. As outlined by US-based renewables marketplace and platform Level Ten's latest PPA Price Index Q1 2021, the extension of PTC and ITC is one of the factors that suppressed the continuous rise of wind PPA prices, assuring renewable price competitiveness against the wholesale market.

Looking long term, the $2 trillion infrastructure plan presented by Joe Biden's cabinet originally proposed a "ten-year extension of direct-pay investment tax credit (ITC) and production tax credit (PTC) for clean energy generation and storage".

In the midst of bi-partisan negotiation on the infrastructure bill, it is unclear if PTC and ITC will remain under the final approval of the bill. In the case of its eventual phase out, the Centre on Global Energy Policy at Columbia University predicts that without this kind of government support, PPA prices will likely increase and lose some of its competitiveness.

The continuous reduction in the levelised cost of renewable energy, however, leaves room for optimist in the industry, signalling that the market might be ready to stand on its own.

"The tax credits have historically been a component in spurring development in the United States. If they were extended, I think they would continue to have that effect. I don't believe that if they were not extended renewable development would just fall flat. Prices have come down and projects are more commercially viable even without the credits. There's just so much demand, people are very focused on concerns over climate change," comments DLA Piper's Wilson. 

However, some constraints to the renewable PPA market growth include future financial risk and absence of flexible regulatory landscape in some states. The covid-19 pandemic caused a halt in industrial activities, depressing energy demand. This period of low demand was intensified by languish economic growth, downgrading the credit ratings of several companies.

"I think we're going to see change in more locations and we will see an increase of options for renewables buyers; it's something states and utilities are looking at," concludes Wilson. 

Disclaimer: DLA Piper does not speak as a legal advisor to any of the PPA deals noted in this article. The PPA deals are mentioned as market activity and are all public information. DLA Piper's contribution to the article represents solely background market information