Corporate commitments to buy renewable energy through purchase power agreements (PPAs) have recently reached a whole new level. From 2017 to 2018, commitments skyrocketed from 2.78 gigawatts (GW) to 6.53 gigawatts, and 2019 looks to be another solid year. Bryce Smith, CEO of LevelTen Energy, the company that has arranged some of the more complex transactions to date, believes this market is just getting started.
Pairing buyers and sellers in these arrangements is not always easy. Price, duration, location, and various risks all factor into the corporate decision to ink the deal. That’s hard enough when one is contracting with a single corporate entity and limited locations being served. It becomes increasingly more difficult when multiple corporations and various locations are involved. But challenges for some create opportunities for others.
A better alternative to emails and spreadsheets
In 2009, Smith was running OneEnergy Renewables – a utility-scale solar developer – when he ran into a roadblock. He saw that his customer base was morphing from traditional utilities to a growing number of corporate purchasers looking to buy renewables and meet carbon reduction commitments. The process of serving those new customers, he says, turned out to be extremely and unexpectedly challenging.
“Practically speaking,” Smith comments, “the transactions were very, very painful. There were no standards, contracts, or analytical tools. Everything was done over emails and with spreadsheets.” In addition, many buyers were new to the game and didn’t fully understand the implications of entering into PPA contracts. Some thought they were going to save money and were upset when they found themselves underwater instead.
Within a short time, it became clear to Smith that a new approach was going to be critically important if the industry were to survive and thrive. Data, analytics, and software would be needed to help the customer better understand and navigate the process. As Smith notes, “I started LevelTen to get more and better transparency into this. Otherwise the whole concept was going to disappear.” To that end, in 2016 the company began developing a PPA Marketplace and dynamic matching software engine to tie potential buyers to renewable projects. By January 2018, it was closing its first deals.
Convincing both sides to engage
The challenge of creating a marketplace and a platform involved reaching out to both sides and convincing them to participate. Smith and his team thus spent months contacting and convincing developers to engage with the platform, touting its advantage in simplifying the process of identifying interested corporate buyers and clarifying the types of deals they were looking for. Many were eager to sign up, since, as Smith comments, “Project developers are not built to go sell power door-to-door to every company in America.” Rather, their job is to line up all of the constituent required project elements and successfully to bring a project to fruition.
At the same time, LevelTen was also engaging prospective customers, with initial conversations centered on their renewable energy objectives, the locations of their facilities, their financial requirements, and their tolerance for risk. The company then began to craft portfolios of projects to match those preferences.
A pivotal moment for LevelTen came when the company signed its first marquee buyer, a well-known information technology company whom Smith declined to identify. Once that occurred, additional developers quickly came on board, with the current total now standing at over 230 developers which Smith characterizes as “nearly every developer in North America.”
From that initial transaction, the market grew overnight, so that over $1 billion of purchases were transacted through the LevelTen platform last year. The company currently has over 750 active or pending projects totaling 90 GW (including geothermal, biogas, hydropower, solar and wind – with the later two also capable of being combined with storage). It also has over 170 interested buyers, looking for potential matches.
Next on the horizon
The company successfully culminated a 20.5 million dollar fundraise in June of this year, which inevitably leads to the question of “what’s next?”
Smith refers to a number of trends, including the emergence of many more solar projects in the mix, compared with recent years when wind has been the dominant player. He’s also seeing the emergence of energy storage, particularly in California, where the “Duck Curve” holds sway and a shaped solar product makes more sense economically. Storage, he notes, doesn’t add much additional complexity to Level Ten or for the buyer. However, it does for developers, since they must take on the responsibility for both when to store energy and when to release it onto the grid.
He’s also observing a trend towards shorter contract terms, with original durations of as long as 25 years contracts now in the 10-15 year range as project costs have declined. Smith predicts that when the federal renewable tax credits expire, we will see even more flexibility with respect to contract lengths. In addition, once the original PPA contracts roll off for existing projects, many projects will be exposed to selling into more risky merchant markets. As that occurs, he asserts, “you will see much more diversity and tenure,” as developers seek to provide hedges of various lengths.
Finally, Smith’s also seeing a market migration towards a larger number of smaller buyers. To date, many of these buyers have been unable to participate, as they have not had the resources or the sizable electricity load to swing their own deals. To address that opportunity, the LevelTen platform aggregates buyers with the goal of offering smaller C&I customers “access to the same projects and terms afforded to the world’s largest energy buyers.” This resolves multiple challenges: For the buyer, it eliminates the need to negotiate a separate deal, reduces transaction risk, and provides economies of scale through the aggregation. For the seller, it provides access to new markets while diversifying exposure across multiple buyers. Smith comments that, “Making many-to-many connections makes intellectual and theoretical sense, but in practice it’s difficult to pull off. We had to take a couple different runs at that before we could figure that out in the real world.”
Level Ten has already enjoyed some high-profile aggregation successes, including a collaborative effort among Bloomberg, Cox Enterprises, Gap Inc., Salesforce, and Workday to purchase 42.5 megawatts from a 100-megawatt solar project in North Carolina developed by BayWa r.e. A similarly complex deal for coffee giant Starbucks involved a 146 MW virtual PPA portfolio with partial off-take from three projects (from different developers) in three different power pools, allowing the company to diversify the risk it would otherwise be exposed to with a single purchase from one project.
LevelTen’s CEO sees the future installed costs of renewables – once the impact of tax credits is accounted for – “going nowhere but down.” Meanwhile, there is a growing expectation, “if not obligation,” Smith says, that more companies will go 100% renewable as quickly as they can. As a result more geographies will open up and more buyers will engage in renewables markets.
The company’s long-term goal is to continue bringing more transparency to an increasingly complex marketplace swamped with projects and data, but otherwise lacking clarity. Smith summarizes,
Software is the only way to track that problem. This corporate renewables market is only in its infancy and we are going to see more software tools that revolutionize the way companies buy power. If we have 900 active renewable projects… how do we track that? You need software, data and transparency to gain insights people simply cannot have on their own.