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April 21, 2017

Selling Your CFO on Large Scale Off-site Renewables

At a recent multi-member discussion focused on “Selling your CFO on Large Scale Off-site Renewable Energy,” David Osborn, Sustainability Roundtable Inc. COO & Senior Adviser, shared key learnings from Member-Clients regarding the “Virtual Power Purchase Agreement (VPPA)/Contract for Differences (CFD)” transaction structure that has reshaped many Member-Clients’ Sustainability Programs.  Patrick Sullivan, NRG’s Vice President of Development, provided a detailed description of the VPPA/CFD transaction, and Nicola Peill-Moelter, Member-Client Akamai’s Senior Director of Environmental Sustainability, shared Akamai’s experience developing a large scale VPPA/CFD project to enable Akamai to advance towards 50% renewable energy — even as it quickly scales its network worldwide.

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Many Sustainability Roundtable Inc. (SR Inc) Member-Clients were years ahead of the curve when they made renewable energy a leading element of their companies’ corporate sustainability strategies (as has been regularly reported on this blog – for instance, see A Revolution Towards Renewable Energy Portfolio-wide and a 2017 update). Today, 89 global corporations, including nearly a dozen SR Inc Charter Members, have joined the RE100 and committed to powering 100% of their operations with renewable energy. This trend indicates a much broader change in the global energy market that has caused many of the largest and most sophisticated corporate energy consumers to recognize that renewable energy technologies have become a necessary component of a sound energy strategy. Beyond that, they can provide a financial hedging strategy that produces savings, mitigates energy price risk, and provides environmental benefits.

While SR Inc has long been advising Member-Clients on onsite renewable energy procurement, the concept of Virtual Power Purchase Agreements (VPPAs) – and, specifically, the Contract for Differences (CFD) form of VPPAs – has driven the adoption of ambitious renewable energy goals for leading global corporations, especially among energy intensive global IT companies. The advent of off-site VPPA/CFD agreements, which do not require companies to have optimal sites for renewable energy projects, has also transformed a growing number of SR Inc Member-Clients’ sustainability programs, as they create a financially attractive path to achieving ambitious environmental goals these companies would not otherwise pursue.

Companies opt to do VPPAs over traditional PPAs when they want to procure renewable energy but cannot cost-effectively develop renewable energy onsite, or when they do not pay a utility for their electricity (i.e., they pay a landlord or colocation facility).  Many SR Inc Member-Clients’ real estate portfolios are predominately in leased space.  These companies in particular are interested in scaled off-site solutions, and more specifically, in how to help their CFO understand the financial benefits of these transactions in the face of growing energy price volatility.

Consequently, David Osborn, SR Inc COO & Senior Adviser, drew from SR Inc’s experience advising dozens of Member-Clients on onsite and offsite renewable energy solutions, to share Key Learnings regarding how to make the case internally for VPPA/CFDs.

Below is a public summary of the Key Learnings David Osborn reviewed:

1. Develop a renewable energy strategy for your entire portfolio, including leased space – Off-site deals for energy consumed in leased space are available and you can win a meaningfully better deal in 2017 than in 2016.
2. Act to integrate renewable energy into your corporate sustainability strategy; waiting will risk a buyer-favorable market – Very low interest rates, 30% federal tax credits and fierce supplier competition are creating value opportunities that are time sensitive.
3. On owned sites where you pay the electricity bill, onsite PPAs or Community Solar could drive year one savings in several US markets – Examine your U.S. portfolio for sites where: (a) changing regulations are favorable; (b) you are paying $.07/kWh+; (c) your sites enable solar; or (d) community renewable energy is available; or (e) the relevant utility offers a “green tariff” to corporate buyers.
4. For sites that are leased or otherwise incompatible with renewable energy, consider offsite options – If you are able to procure renewable energy from the same utility district as your demand, it can provide both high-quality bundled RECs and a robust hedge against electricity price risk. If the renewable energy system is not grid-proximate, it can still provide a financial hedge and high quality RECs.
5. As the market has matured, responsible corporate procurement requires a managed, auditable procurement process – With dozens of deeply experienced, well-financed, and well referenced corporate suppliers and scores of combined transactional, technological and site-based options, responsible corporate procurement of renewable energy solutions requires a comprehensive, auditable process.
6. Corporate off-takers should engage a strategic adviser to help manage their renewable energy procurement – Experienced corporate off-takers develop a blended team of internal experts with deep experience in renewable and conventional energy combined with outside advisers compensated by the corporate off-taker and/or any winning suppliers for a transparent, market-based fee disclosed in the RFP.
7. Integrate storage technology into your renewable energy strategy – Storage technology advancements, rapidly decreasing costs, and changing grid tariff structures virtually necessitate including storage capability as part of onsite and offsite renewable energy strategies.
8. Examine opportunities for aggregated procurement of offsite renewable energy – Member-Clients are increasingly interested in aggregated procurement of renewable energy to improve economic terms, reduce transaction costs and further de-risk procurement.
9. Engage the CFO – Develop a team, plan and market-tested data to engage the CFO 6 to 9 months before procurement to demonstrate why a renewable energy strategy and implementing transactions provide a superior, risk-adjusted opportunity.

The Virtual Power Purchase Agreement (VPPA) & the Contract For Difference (CFD) Transaction Structure:  A Sustainable Game Changer

Patrick Sullivan, Vice President of Renewables Development at NRG, a SR Inc Premier Thought Leader, provided a detailed explanation of the VPPA/CFD transaction structure that has transformed so many corporate sustainability programs. He noted that corporate customers are increasingly seeking offsite PPAs, given the cost of solar and wind energy has dropped significantly in the past ten years, often to a level competitive with the cheapest form of energy available from the grid. VPPAs produce many of the benefits of a more traditional PPA with no capital expenditure required by the customer.  Importantly, VPPAs enable “additionality” by creating a long-term financial contract to support the development and construction of new renewable generation facilities. Like a traditional PPA, VPPAs produce RECs that the buyer can retire to claim emissions reductions and help achieve corporate sustainability goals. Although a VPPA is financial in nature and bears no direct relationship to the actual electricity consumption of the offtaker, it does serve as a long-term hedge against energy price volatility, acting to offset retail energy price fluctuations and reducing a buyer’s exposure to volatile fuel prices over the long-term.

These types of contracts differ from a physical or traditional PPA, in that in a traditional PPA, the corporate offtaker physically takes title to the electricity from the system and pays the system provider an agreed upon PPA price over the term of the multi-year contract. Rather than being strictly a financial hedge, a traditional PPA is an energy hedge applied to the offtaker’s load or monetized in the market.

Leveraging the VPPA/CFD Transaction Structure to Super Charge Your Sustainability Strategy

Member Executive Nicola Peill-Moelter, Senior Director of Environmental Sustainability at Akamai Technologies, described how the Akamai team built the business case for CFDs internally, and specifically how they presented the opportunity to the company’s CFO. Akamai, a global Content Delivery Network service, has grown rapidly, with a 20x increase in peak traffic since 2009, while carbon increased only two-fold over the same period. Renewable energy is a key to this decoupling of business growth from energy consumption and carbon emissions.

The challenge for Akamai, like many companies, is that its office and network operations are highly-distributed globally with low power demand in each. Further, most of these facilities are leased, so Akamai pays the landlord (versus the utility) for electricity. This common set of circumstances means that a CFD is the only suitable option for procuring renewable energy in the form of bundled RECs. Furthermore, because CFDs (unlike PPAs) expose the buyer to electricity pricing volatility, the business case must be stronger, and not strictly tied to potential lower electricity costs which may be a weak argument for distributed, outsourced operations.

Akamai recently announced a 2020 goal to reduce greenhouse gas emissions by 40% from 2015 levels, which hinges on a second goal to power 50% of global network operations from renewable energy. Below is Nicola’s own summary of the CFD structure Akamai opted to pursue to achieve this goal:

“Thanks to finance innovation, a long-term CFD with a renewable energy-project developer is a viable procurement mechanism that aligns with our principles. We agree to act as the long-term energy “off-taker” at a fixed price, called the strike price. With this commitment in hand, the developer can secure funding for a project that will generate electricity commensurate with our annual energy usage in that power market. Once the project is up and running, the electricity is sold into the wholesale market, with the difference between the strike and market prices flowing to us as a debit or credit, along with the credits for the renewable energy generated (bundled RECs) which are subsequently retired.”

In order to get buy-in from the C-Suite for these goals, Nicola and team had to build the business case for renewable energy, which boiled down to 4 key questions:

1. Why are we doing this?
2. How will we achieve these goals?
3. How much will it cost?
4. Are the risks acceptable and manageable?

To ensure the initiative’s success, Nicola identified key players and ensured she had a strong renewable energy strategy team in place. She recommended that such a team consist of a:

1. Sustainability champion: a strong influencer who instigates and leads the project/strategy with the goal of reducing carbon emissions but who can also build a strong business case
2. Executive champion: an executive who fully supports the project/strategy – ideally the executive whose division is responsible for a major portion of the company’s energy consumption and carbon emissions
3. Renewable energy consultant: a subject matter expert who helps develop the strategy and is compensated for the best outcome for your company

Other players who played a key role and ultimately needed to be involved in making a deal possible included Executive Management, the CEO and CFO, a treasurer, and a support team including representatives from legal and accounting and outside legal and accounting consultants with expertise in renewable energy.

The business case for a CFD should go beyond potential electricity cost savings. A core part of the business case may include the strong trend of growing consumer concern about climate change, corporations setting renewable energy goals, and strengthening supplier sustainability requirements. Of course, when pitching to the C-Suite, Nicola stressed the importance of speaking in terms they understand – e.g. “competitive value”, “competitive differentiation”, “product features”, and “market trends” – to tell a story compelling to the audience. She also made the case for the “why” in a way that resonated with top decision makers: customer demand. With 89 companies and counting committed to 100% renewable energy via the RE100, and investors applying similar pressure, companies like Akamai need to display their commitment to provide clean-powered services (products) in order to remain competitive.

Helping Your CFO Understand Why So Many Top Corporations Have Found the VPPA/CFD Transaction Structure Attractive

A compelling business case garners buy-in from the CEO and most of the executive team. But ultimately, they look to the CFO to give her/his blessing before signing off. It’s easy for the CFO to say “No.” The needed support from the CFO comes from a  trusted relationship between the CFO and the sustainability champion; demonstration of a well-thought out procurement strategy; well-vetted financials; and an assessment of and mitigation plan for the risks.

 

SR Inc has been pleased to advise many Member-Clients leading the historically important embrace of renewable energy technologies world-wide. SR Inc recommends that companies avoid committing to energy-related transactions until they have systematically examined opportunities for renewable energy procurement portfolio-wide. SR Inc looks forward to continuing work with Member-Client companies to define management best practices in integrating advanced energy systems and transactions into portfolio-wide sustainability strategies to help meet individual and aggregated needs for procurement of more sustainable energy.

The slide presentation accompanying the Symposium summarized in this blog are available in SR Inc’s Member-only Digital Library here.  Interested non-member companies are encouraged to reach out to SR Inc to request an invitation to join SR Inc’s shared-cost industry leadership service here.

Select Relevant SBER Executive Guidance & Tools:

• Member Advisories:
  • California Renewable Energy Legislation
  • Advanced Off-site Renewable Energy Procurement (Virtual Power Purchase Agreements)
  • Options for Renewable Energy Procurement in Northern California
• Member Briefings
  • Solar Power Purchase Agreements (SPPAs)
  • International Markets for Renewable Energy Certificates (RECs)
  • Managing the Changing Water-Energy Nexus
  • Impact of Renewable Energy Purchases on Reporting
  • International Renewable Energy Markets: 2016 Update
  • Market Structure for Conventional and Renewable Energy
• Presentations:
  • Best Practices in Corporate Procurement of Renewable Energy Portfolio-wide
  • Summit for Sustainable Operations V: Regenerative Portfolios by 2030
  • 2016 Q3 Symposium: Measuring & Reporting Impacts of Renewable Energy
  • 2016 Q2 Symposium: Leadership in Renewable Energy Portfolio-wide
  • 2016 Q1 Symposium: The Renewable Energy Revolution