With technology constantly developing, the levalized cost of electricity (LCOE) of renewable energy projects has been steadily decreasing over the last decades.
In countries that have abundant renewable energy resources such as Scandinavia (wind) and Spain (solar), projects without subsidies are already commercially feasible. Other countries, where renewable energy assets have not yet reached grid parity, are instituting auction systems, progressively reducing guaranteed feed in tariffs. And then there are those European countries, who in an attempt to save their bulging budgets, have retroactively decreased or revoked subsidies provided to producers, leading to significant losses for investors. Renewable energy projects with bankable power purchase agreements (PPAs) thus become a favorable option for investors who have appetite for renewable energy assets, but want to minimize political risk.
PPAs, unless signed with state owned national utilities (for instance common in Africa), are independent from public authorities or government subsidies and are structured as bilateral agreements between the project company and the electricity off-taker, usually energy intensive companies, such as industrial players and technology companies that provide cloud services or with utilities. PPAs are bilaterally negotiated and tailor made according to the project´s economics and the investor´s risk-return profile.
Although debt financing for pure merchant renewable energy projects are increasingly possible, PPAs are vital to achieve favorable financing terms in the current market.
Prime Capital’s expertise in PPA structuring
Structuring a bankable PPA that is suitable for a specific transaction demands an asset manager’s deep understanding of the power system as well as its inherent risks, rigorous credit assessment skills and the its capability to find a balance between the offtaker’s and the project’s preferred risk profile.
Prime Capital’s team has developed extensive knowledge of the European PPA market covering different offtaker groups: industrials, tech companies as well as utilities; and different structures: pay as produced PPAs or baseload PPA, rolling forward contracts, etc. Among PPAs Prime Capital has also pioneered some of the most creative solutions to manage counterparty risk available on the market at the time. For example in project Nordlys, Prime Capital structured a guarantee, provided by the Norwegian Guarantee Institute for Export Credits, to enhance the creditworthiness of its PPA with global alumina company Alcoa. This structure was later used as an industry template. Innovation and risk management are at the heart of Prime Capital’s structuring expertise.
With government subsidies dwindling and more and more companies committing to ESG standards and moving towards sourcing green power directly from renewable energy projects, corporate PPAs will gradually become the market norm. At the same time, new solutions, technologies and platforms will be needed to help smaller offtakers join the scene. Prime Capital looks forward to utilizing its expertise to create value for investors while contributing to a more sustainable world.