United States: Q&A With Shalini Ramanathan, VP Origination For Renewables, RES In The Americas

EDGE: How does RES approach the corporate customer segment? Are there particular structures or counter-party types RES favors, and if so why?

MS. RAMANATHAN: We look for motivated buyers – that's as true for corporates as it is for utilities. Buying green energy requires a strong champion on the inside. We look for companies that have a clear commitment to procuring green energy and a path to getting deals done.
I know some developers are offering shorter terms, which I'd define as a less than twelve year term for wind projects. Due to our investment partners' lack of interest in significant merchant exposure, we look for offtakers who are open to longer terms. Of course, the market is evolving and we evolve with it, especially on this issue.

And since we develop large wind, solar and storage projects, we appreciate counterparties who can take at least a substantial part of a project we're marketing. We do clubbed deals with multiple offtakers on a single project, and I expect we and other developers will see more of these in the future. 

RES Distributed works on customer-sited solar/storage deals, which is a very different market than the bulk power deals my team and I work on.

EDGE: For many years, developers have had to address financier concerns over the difficulty of conducting credit analyses on non-utility offtakers. How do you see this issue evolving with the recent market focus on corporate PPAs?

MS. RAMANATHAN: A couple of things have happened. First, banks and tax equity have done their due diligence on corporate PPA deals and have gotten comfortable with non-utility offtakers. This isn't that new anymore. Second, corporates and developers have gotten better at understanding what is required (in terms of credit instruments, counterparty entities, levels of buyer credit support and specifics in the PPA to deal with credit downgrades) to make financiers comfortable. It's the rare corporate offtaker today who would only agree to sign a PPA using a shell company with no assets and no recourse to the corporate parent under any circumstances.

Of course, this is an evolving field. Most sizable green energy PPAs have been signed by large, well-known companies. That's certainly our experience, since we've transacted with Microsoft and Google and are in touch with companies of that caliber.

There are plenty of companies who have yet to sign a green energy PPA. At some point, the growth in PPAs will come from smaller than Fortune 100 companies, new companies in new fields or perhaps even from large companies with complicated credit and earnings stories. Those deals will get a lot more scrutiny from financiers than do deals with large, established companies with investment-grade credit.

Clubbed deals will continue to grow in popularity because corporates want the benefits of larger projects even if their loads are small. Assessing the credit risk of each link in the chain is of course more complex than dealing with just one offtaker.

EDGE: RES has been involved in the energy business for over 30 years. Are you surprised at how long it has taken for corporate deals to become common? Why do you think it has taken so long?

MS. RAMANATHAN: The real question is: why is this
happening at all? Corporate buyers are not energy companies, they are experts in other products and yet they have emerged as a large and growing class of green energy customers. This is a terrific development.

Having said that, I'll address the why...

First, the cost of renewable power infrastructure has come down dramatically even as energy yields have gone up. Most corporate buyers will tell you that they are not looking to pay a premium for what is one of many inputs to their products. Signing PPAs for wind and solar that are in the money compared to brown-power prices, or are expected to be over the term of the PPA, is critical.

Second, we're living in an era when people care about the origin of the things they buy. Increasingly, consumers are choosing to pay a premium for organic produce. Major tech companies have a choice of where to site data centers, and many of them are using that leverage to demand that green energy be part of the package – this is corporate consumer choice in action.

Third, fully deregulated and even partially deregulated markets have made corporate PPAs possible. There are markets in the US where it is reasonably straightforward to enter into a financially settled deal, which really is the easiest deal structure for an offtaker that isn't a load-serving entity.

Finally, and perhaps most fundamentally, large companies face consumer and shareholder pressure to take meaningful steps to reduce their environmental footprint. Buying green energy has a huge impact. It's worth your time to do, if you're evaluating multiple corporate sustainability options ranging from packaging to fleet fuel use. The fact that green power is now in many cases competitive with brown power makes it easier to focus on greening your energy supply.

EDGE: As a developer, what are some of the main challenges you have faced in the corporate space?

MS. RAMANATHAN: We spend a lot of time educating prospective corporate clients about the energy market, deal structures and renewable power technologies. We're enthusiastic geeks who enjoy doing it, but it is an investment of time, and any time investment implies an opportunity cost.
We obviously hope that our client outreach pays off in a deal. This doesn't always happen, or sometimes discussions lead to interest in a deal we can't do, such as an RFP specifying a 3-year PPA, which is better suited to an operating merchant asset.

There are some key ways in which corporate buyers are different from utilities. Basis risk, the difference in price between the generation and settlement points, is an important issue that often comes up in corporate PPAs. This is especially true for deals in regions (MISO comes to mind) that aren't as liquid as we'd like them to be. A utility might have tools to manage basis risk, while many corporates argue that they definitely do not. They'd rather pay a premium for a hub-settled deal over a bus-bar option to have a project wear basis risk. The location of an individual project relative to load, as well as analysis of known and expected points of congestion, becomes very important.

EDGE: Are there particular regions where corporate deals are making the most sense? Why?

MS. RAMANATHAN: We see continued demand for projects in CAISO and ERCOT North or South, and strong demand for well-priced assets in PJM. MISO and SPP are, in our view, slower, but ticking along. We've seen a spike in interest in SERC and non-CAISO WECC, though there are challenges to transacting in those markets.

There's an almost philosophical aspect to this question. Should a corporation procure power in the same regional transmission organization (RTO) its load is in? Or is it acceptable to purchase green energy in market X even if you're in market Y, where green power is more expensive to buy and deals harder to structure? Different companies have different answers to this question.
Some price green energy in their footprint, then decide to, for example, overbuy in ERCOT in order to offset overall U.S. or global load.

Some corporate buyers choose projects in their footprint, even at a higher price, in order to have a simple story that their customers, who are mostly not experts in energy markets, will understand.

EDGE: RES does a lot of work internationally – what trends in the corporate space have you seen abroad recently?

MS. RAMANATHAN: We're seeing growing C&I interest in Europe and Asia. A lot of US-based multi-nationals especially have bought a lot of green energy in the United States and plan to keep doing so in the next few years to take advantage of the PTC/ITC, while looking aggressively at green energy in other markets. There is interest among corporates and developers in applying the market and deal structure lessons we've learned in the United States to other markets. Many markets need regulatory reform before corporate purchasing can take off.

EDGE: As a developer, how do you see the potential of the corporate offtake market going forward?

MS. RAMANATHAN: I think utilities will start becoming more involved in corporate deals. Utilities can take basis risk, and some may even be interested in owning projects, putting them in their rate base to earn regulated returns. I think we'll see more green tariffs, such as the Green Rider in North Carolina that allows Duke to meet the needs of large data centers in that state. We'll also see more deals, such as the recent one between Facebook and Public Service New Mexico, where a siting decision is tied to a utility providing green energy. RES works with both corporate and utility buyers, so we look forward to these discussions.

I also wonder if we'll move toward greater shared understanding on how to treat the Renewable Energy Credits (RECs) that are a major driver of deals. Some corporate off-takers are fine with high-value RECs being sold and replaced with low-value RECs as a way of reducing the PPA price while others aren't. Some corporates only buy unbundled RECs, while others go the much-harder PPA route because they value additionality and want to know their role is essential to a project going forward. As an industry, we use the term "RECs" without qualifying that term to reflect these different approaches. We'll see more discussion around this issue as the sector grows.

Finally, we're already seeing more corporate interest in solar deals. I expect this to accelerate as the price of solar continues to drop.

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