In the world of project finance, power purchase agreements are usually considered from the point of view of the project owner or lender. But in the last few years, more attention has started to be paid to the other end of the contract.
When commercial and industrial PPAs first began to take off, they were rightly recognized as a huge opportunity for developers. Not only was it a fast-growing source of contracts, but – for some project sponsors at least – it appears to have been a chance to offload thorny risks – such as hub-to-node basis risk – onto their new, less canny customers.
Paying a low, fixed price for renewables for 15 years sounds like a great idea to a corporation with a whopping energy bill – until they realize they are buying a variable amount of energy in one place and have to settle a derivative contract somewhere else, where the spot price may be quite different.
“Watching those first transactions begin to perform, we were delighted by the contribution they made to our sustainability goals but were frustrated by the financial volatility of the settlement payments and the limited ability we had to predict or manage that volatility,” wrote Kenneth Davies in a white paper in 2018, when he was director of energy portfolio management at Microsoft Corp (PFR, 10/18/18).
Microsoft was one of the first whales of the corporate PPA market and, unsurprisingly, one of the first to push back on terms that proved disadvantageous.
Working with insurer Allianz and analytics firm Resurety – who have form solving similar issues for project owners – Davies came up with solutions including the proxy generation PPA, the volume firming agreement and the settlement guarantee agreement.
Davies is no longer with Microsoft but is still banging the same drum at his new company, Birch Infrastructure, whose mission seems to be to spread the gospel to other data center operators. And they appear to be receptive, as shown by the recent contracts signed by Iron Mountain (see story, page 1). Can Amazon Web Services, Google and the rest be far behind?