Corporate PPAs Dr. Klaus Bader

Partner

Norton Rose Fulbright LLP

9 March 2017

Hans Poser

Geschäftsführer

Finadvice AG

Developers’ view Buyers’ view

Risk Mitigation

• Can unlock a lower cost of capital through

guaranteed offtake(s)

• Diversification of revenue stream away from

traditional utility offtakers

• Development of an investment pipeline becomes less

risky through nurturing offtake relationships

• Diversifies the risk of payment default (multiple PPAs)

Bankability

• A stable and long term income stream allows for

easier bankability with financial institutions

• Allows contracting with a high credit counterparty

Brand

• Effect on stocks

• Development of Sustainable energy system

Business development

• Increases pool of potential offtakers and creates

additional demand

• Can ease expansion into geographically new markets

• Reduces development cost by allowing standard

terms and conditions (partnerships)

Economics

• Allows corporate buyers to lock in a fixed electricity

price or fixed cap, with no upfront capital requirement

• Provides visibility over future electricity costs

• Hedges against fuel and electricity price volatility

• Reduces risks and related to potential future changes

to carbon pricing

• Removes requirement for operational and

management costs and operational risks sits with the

developer

Sustainability

Improve renewable footprint

Brand and Leadership

Increases recognition for renewable electricity

achievements

Leverage

• Allows for the development of partnerships with a

small number of reliable and experienced

counterparties

• In comparison to owning generation assets, PPAs

allow a business to remove focus from non-core

areas

2

Rationales for entering into a corporate PPA

Corporate PPAs

Examples for corporate PPAs around the globe

Mexico

• Coca Cola FEMSA &

Heineken & OXXO –

Marena Renovoables

(396 MW)

• GM & John Deere &

Alsea – Enel Green

Power (129 MW)

• Industrias Penoles –

EDP – Wind (200 MW)

Chile

Guanaco Compania Minera –

Enel Green Power – PV &

Wind (4 MW)

Brazil

• Nestlé – Engie & EDP & NC Energia – Hydro

(29 MW)

• Nestlé – Engie & EDP – Hydro & Biomass (18

MW)

India

• HSBC, Pragathi Group,

Solar, 6.5 & 2.2 MW

• Philips India, ReNEw

Wind Power, Wind, 2.1

MW

Australia

Rio Tinto – First Solar –

Solar (1.7 MW)

USA

• Amazon Web Services – EDP –

Wind (100 MW)

• Apple – First Solar – Solar (130

MW)

• Dow Chemical – NRG – Wind (150

MW)

• Google – EDF – Wind (225 MW)

• Microsoft – EDF – Wind (225 MW)

• Walmart – Pattern Energy – Wind

(116 MW)

UK

• BT, EDF, Wind, 72 MW

• BT, Pennant Walters,

Wind, 23 MW

• Nationwide, BayWa,

Solar, 45 MW

• McDonalds, BayWa,

Solar, 15 MW

• HSBC, BSR, Solar, 61

MW

Sweden

Google, OX2,

Wind, 72 MW

Netherlands

• Google, Eneco, Wind, 62

MW

• AkzoNobel, Eneco,

Biomass, 50 MW

Singapore

Heineken – APBS,

Renewable Energy Cor.,

Solar, 2.2 MW

Data shows: Buyer – Developer – Energy Source (Power)

3 Corporate PPAs

4

Some of the world’s most influential companies, committed to 100%

renewable energy – many to achieve this goal by 2020

Companies are looking to reduce their environmental footprint and energy costs

Majority of the companies will source their renewable energy via PPAs

Source: http://there100.org/

Today 2018 2020 2030 2040 Long-Term Commitments

5

Historically, most of the PPAs were signed by US companies with projects

located in the US - supported by the local regulatory framework

Deal size is rather small

Portfolio buildup rather over time

Increase in 2015 mostly due to expected

expiration of PTC/ITC subsidies

Publically announced corporate renewable

deals from 2012 to 2016 (until Oct. 2016) Top ten off-takers in 2016 (MW)

US companies lead the list by far, still many

companies are far away of carbon-neutrality

Energy has become the “raw material” for cloud

providers like Amazon, Google and Microsoft

Wind energy is the preferred PPA technology, but

Solar is catching up – may be in lead in the future

Source: Bloomberg New Energy Finance

Source: World Business Council for Sustainable Development

6

European PPAs are lacking behind the US since different market systems

apply but are likely to grow in number – little activity in Germany

Apart from the US, some markets are very

challenging, often due to a lack of resources

In Europe, the market structures as well as the

regulatory and support regimes are very different

European PPAs are lacking behind the US but

are likely to grow in number

Global corporate PPAs by region

and year 2008-16Y TD (GW)

Corporate PPAs in Europe

by country from 2008 to date (MW)

The feed-in tariff systems in Europe make PPAs

generally less interesting to developers

Market practices from the US are coming to

Europe, but no major activity in Germany yet

Subsidies declining and with the shift towards

tenders, corporates might be a bit more involved

in the process and dynamics will develop

Source: Bloomberg New Energy Finance Source: Bloomberg New Energy Finance

What makes a market attractive for corporate PPAs?

• A supportive renewable

subsidy regime

• Reduction/removal of stable

government subsidies

• Unavailability of alternative

long-term power contracts

• Significant presence of

corporate buyers

• Availability of renewable

resource

• Increasingly lower

equipment and labour costs

• Large market size

• Established project finance

markets

Developers’ view

• High and volatile market

prices

• Markets with large

operational footprints

• Reputation-led or

government-led pressure

• Actual or forecast electricity

demand growth

• Proven developer/utility

experience

Buyers’ view

• Attractive market economics

• Attractive business

environment

• Clear national commitment

to diversify electricity mix

• Lack of material regulatory

barriers

• Renewables cost

competitive with grid

• Sufficiently large electricity

demand

• Sufficient grid infrastructure

General considerations

Drivers for

corporate

PPAs and

renewables

7 Corporate PPAs

Which regulatory frameworks support corporate PPAs?

•

Feed-in Tariffs

• Direct payments from the

government to supply RE

• Support technological

development

• Fixed or variable FiTs

• Mean a lack of incentive for

developers to sign corporate

PPAs

Renewable Portfolio Standards

• Quotas placed on utilities to

source a certain amount of

electricity from RE

• Not enough certificates lead to

purchase from regulator or pay

for RE generation assets

• Lead to a higher uptake of

corporate PPAs

• E.g. Mexico and India

Contracts for Difference

• Grid-supplied RE

• Strike prices set by

government, regulators or

auctions

• One-way or two-way

• No strong incentive to sign

corporate PPA

Production Tax Credits and Investment Tax Credits

• Primary incentive available in

the US

• PTC applies to wind, biomass

and geothermal

• ITC applies to solar, fuel cells

and cogeneration projects

• Strong incentive for corporate

PPAs

8 Corporate PPAs

9

Developer operates a wind farm and can expect

a FiT as defined in an auction process

The off-taker wants to cap his expenses at

FiT+x (x= cost of cap) and concludes a PPA.

The power price is set as the lower of Spot and

FiT plus x

Developer delivers the renewable energy

through the grid to the offtaker. From the grid

company he receives the difference between

FiT and spot price

The offtaker pays the agreed price to the

operator

The grid company delivers power to the offtaker

In Germany, a green PPA can be used to hedge power procurement costs

Wind farm operator can gain a surcharge on the FiT

Company

(off-taker) Grid operator

Off-site Wind Farm

(developer)

1 2

3

4 1

2

3

4

A PPA is a contract between the buyer (off-taker) and the power producer (wind farm developer or

operator) to purchase electricity at a pre-agreed price for a pre-agreed period of time.

Power price capped

at FiT+x

FiT=70EUR/MWh

+x

PPA=Spot Price=40EUR/MWh +x

As a result, the wind farm always receives FiT plus x, while the offtaker has capped the spot price against

the payment of the surcharge x

Transaction may be done with power trader who in turn sources from one or more operators

FiT-Spot Price=30EUR/MWh

5

5

10

Current power prices are not sustainable as they cannot support the full

cost of power generation

Source: EEX base load power prices

10

20

30

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60

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100

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Eu

ro/M

Wh

zum Zeitpunkt

Base Preise Forwards

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Was 2016 the turning point and the new trend goes up?

Delivery year

11

The market does not forecast prices and hedging is limited to around 5

years into the future

Source: Phelix power futures, Bloomberg. In 2003, only three years were traded. From 2004 there were six years tradable, whereby only the first three years were sufficiently liquid.

(As of today)

0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

EUR/Mwh Annual Phelix Base Load

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Except for the years 2009 to 2001, future prices do not indicate a trend

Prices as of:

Delivery year:

12

Another idea for German offtakers:

Procurement from Poland with fixed price PPA

Basic project assumptions based on real

project details

Five used wind turbines (completely overhauled)

Total installed capacity of 10 MW

CAPEX of 500 kEUR/MW

PPA period of 10 years, fixed price

100% equity financed

Full-load hours approx. 2500 h

PPA power price 200 PLN/MWh

Balancing costs 8%

Exchange rate EUR/PLN 0.22

Border swap around 10 EUR/MWh

PPA power price after balancing and border

swap around 32 EUR/MWh, slightly above

current EEX prices

Would investors consider a Polish wind farm with German PPA as a German or Polish risk?

Results for offtaker and operator

Offtaker: stable power price without commodity price

risk, during the last years below market price

Operator: IRR of 6.3% after taxes, before leverage

0

5

10

15

20

25

30

35

40

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

EUR/MWh

Power price Germany (EEX Spot/Futures +3% increase) in EUR/MWh

PPA Power Price after balancing and border swap in EUR/MWh

13

Legal assessment of corporate PPAs

Regulatory framework (e.g. FiTs, CfDs, PTC, RPS or

cross-border issues)

Regulatory restrictions on a non-utility purchasing directly

Change-in-law risk, (e.g. EU legislative)

Competition law restrictions on multiple buyers from the

same sector or if buyer group’s purchase otherwise influences

competition Dialogue between developers, buyers,

lenders, external adviser, regulators or local electricity

suppliers

Competition law restrictions on exclusively committing to a single counterparty

Corporate PPAs

Contact

Corporate PPAs 14

Dr. Klaus Bader

Head of Energy Europe

T 089 212148 323

klaus.bader@nortonrosefulbright.com

• Head of the Munich Corporate M&A Team and the European Energy Team

• Specialised in national and cross-border M&A and PE transactions and restructurings, in particular

in the energy and infrastructure as well as the financial institutions sector

• Advises insurers, PE and infrastructure funds as well as utilities

• Partner at Norton Rose Fulbright since 2008

15

Hans Poser‘s profile and contact details

Managing Director and Shareholder of Finadvice Zurich

Hans is one of the founders of Finadvice. He has over 20 years deal experience in continental

Europe and has worked on transactions with a total value of >40 bn EUR. Hans’ specialist

sector experience is utilities where he provides M&A and strategic advice.

Among many other projects, Hans

analysed European power markets for EDF and the Edison Electric Institute

helped Veolia acquire and sell various assets, including their largest investment ever

devised Swisspower’s strategy for renewable investments, helped them in their largest

acquisition and its financing

did the valuation for Axpo’s acquisition of >3000MW of wind projects

Before Finadvice, Hans was Vice President of the European Utilities Team of UBS Zurich and

Project Leader of BCG in Frankfurt. Hans graduated in engineering from TU Berlin and in

Business Administration from Toulouse Business School. He speaks German, English and

French.

Hans is a member of the advisory councils of Yielco Investments and Luftmeister GmbH.

+41 788 3200 90 77

h.poser@finadvice.ch

HansPoser

Hans Poser, Managing Director

Finadvice AG

Soodstrasse 55

8134 Adliswil

Switzerland

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17 Corporate PPAs