Four ways to advance corporate renewable strategies during the COVID-19 pandemic

History
should teach us not to underestimate the creativity of the US corporate office
or its financial markets, nor should we underestimate the resilience of the
renewable energy industry. For example, US tax equity investments in wind power
projects plunged more than 80% during the 2008 recession, and the next year, in
2010, Google and NextEra Energy Resources announced the country’s first
corporate PPA.

Many
companies are currently facing challenges similar to those during the 2008
recession: liquidity strains, tightening credit, slower demand, and a general
sense of uncertainty. Unlike the 2008 recession, however, a sizable majority of
major US corporations now have publicly stated sustainability targets,
including 78% of the S&P500.

With
public commitments in a world of uncertainty, many corporate buyers are looking
to better understand how COVID-19 has impacted the renewable energy market and
how they should adapt their strategies. Though there is no “one size fits all”
solution, one thing is clear: COVID-19 has not slowed demand for quality
projects and offers are moving quickly. Early buyers will have the advantage as
the ripple effects of the COVID-19 pandemic strain supply in the back-half of
2020 and into 2021.

Below
we examine four ways the renewable energy industry has evolved during the
global pandemic and offer advice on how corporate buyers can adjust their
approach.

1)
Don’t hesitate on quality projects

The
underlying forces driving renewable energy adoption have not changed as carbon
emissions remain high. According to the National Oceanic and Atmospheric
Administration, weekly average CO₂ emissions climbed 2.92 parts
per million as of June 5, a 0.7% increase over last year and 6% increase since
2010. In addition to the science, there is increased pressure from the broader
investment community, with Moody’s, BlackRock and others continuing to price
climate risk into company valuations.

However,
with risks of project delays fueling uncertainty in the tax equity market,
investors are looking to close on good deals while they can, which means
prioritizing strong, in-progress projects. Beyond potential financing risks and
higher costs, equipment supply shortages are expected to increase the costs of
early stage projects. As the production of primary material declines and
Chinese manufacturers operate with reduced factory utilization, market analysts
expect prices for solar PV modules to climb as much as 10-20% throughout 2020.

Projects
with existing module and other solar hardware contracts in place will be
largely shielded from these price increases, increasing the likelihood that
near-term projects will offer better returns than those further down the pike.
With less demand, lower financing costs, and lower materials costs, early
moving corporate buyers should expect to see better pricing and hold more
negotiating power than late-moving buyers that adopt a “wait and see” approach.

2)
Don’t miss out on green tariff opportunities

Even
before COVID-19 upended public health and the global economy, utilities around
the country were quickly expanding green tariff programs to attract and retain
energy-intensive customers. There are now 19 states that offer green tariffs,
more than double the number of states with green tariffs in 2017.

While
they rarely offer the cost-savings opportunities associated with utility-scale
VPPAs, many corporate buyers are attracted to the stable pricing, lower risks,
shorter-term options, and easier contracts that green tariffs typically afford
over virtual power purchase agreements. Through the first five months of 2020,
we’ve already seen major green tariff announcements by GM, GCC, Textron
Aviation, Toyota, Dow Chemical, City of Charlotte, and Google.

Now,
in the wake of the COVID-19 pandemic, we expect demand for green tariffs to
sharply tick upwards among risk-averse companies looking to procure
“additional” renewable energy without large capital expenditures or significant
market exposure. However, like quality PPA project options, there is a limited
supply of green tariff products available. Many of the existing green tariffs
around the country are already fully subscribed, and remaining utility programs
are expected to fill quickly.

We
recommend corporate buyers evaluate tariff options in the short-term and engage
utilities on direct purchases or new programs that will meet their current and
future needs.

3)
Evaluate green retail products in competitive markets

Many
of the largest retail energy suppliers in the U.S. now offer “green retail”
products that provide varying degrees of additionality, tenor length, and price
competitiveness. As corporate buyers look to mitigate financial risks and
invest less human capital into renewable purchases, we expect a growing
appetite for green retail products.

Like
green tariffs, many retail suppliers offer firm block or full requirement
renewable energy options that can mitigate the shape and volume risks that
COVID-19 has exacerbated among VPPAs. Most suppliers will originate and finance
renewable projects under a green retail contract, which can further mitigate
some of the credit risk faced by companies experiencing COVID-related credit
downgrades. Also like green tariffs, green retail products typically require
significantly less human capital and legal costs than utility-scale PPA and
VPPAs. Lastly, green retail products are typically associated with local
projects. As corporate buyers integrate renewable purchases into a broader
sustainability program, regional GHG emission impacts and local economic
benefits become more material.

At
a time when corporate buyers are keenly focused on core business functions, we
expect many to be attracted to the legal and administrative relief that these
products offer. We recommend corporate buyers consider whether green retail
products align with their environmental, budgetary, and risk management
objectives.

4)
Closely measure nodal pricing trends

U.S.
corporate buyers have shown an increasing appetite for solar PPA projects.
Through May, solar represented 85% of corporate PPA activity in 2020, a steep
increase from 22% in 2017. Falling solar costs and an expiring PTC certainly
contribute to the uptick in demand for solar projects, but so does a maturing
buyer’s market. Solar production tends to peak during hot summer days when
corporate energy cost and consumption peak, alleviating some shape risks. Solar
PPAs also tend to be less susceptible to basis risk than wind PPAs because
solar projects can be located closer to urban demand centers than utility-scale
wind projects. With less shape and basis risk, solar PPAs generally make better
hedging instruments than wind PPAs for most corporate buyers.

Nodal
pricing for solar projects, however, is tantamount to a project’s
profitability. Similar-looking projects in terms of size, pricing hub, and even
strike price can vary considerably in terms of value. As buyers compete for
projects ahead of the ITC step-downs, they will compete for projects with
vastly different revenue potentials. We recommend solar buyers pay close
attention to nodal pricing trends and incorporate recent turmoil in the
wholesale energy markets as a litmus test for projects and corporate budgetary
requirements.

What
this all means for corporate renewable purchasers

Though
the fundamentals of the renewable energy market are strong, near-term project
development has slowed as a result of the COVID-19 pandemic. At the same time,
publicly announced corporate purchases have largely kept pace with previous
years. Due to the ongoing health and economic crisis, it is likely that several
corporate buyers are postponing public announcements until after the COVID-19
health pandemic is under control and the economy begins to recover. It may be
the case that corporate purchases have actually outpaced last year.

With
shrinking supply, increasing demand, and short-term increases in financing and
material costs, early actors will find better options than companies that wait
until the pandemic subsides to take action.