VPPAs:

The Good, The Bad & The Ugly

GreenBiz WorkshopFebruary 15, 2017

1

Agenda for Workshop

+ Welcome & Introductions

+ VPPA Level-Set

+ Biggest Drivers & Risks of VPPAs

+ Breakout Work Sessions

+ Report Back to Group with Main “Aha” Moment

+ Key Considerations and Wrap-Up

Today’s Goal:

For you to leave with a holistic view of VPPAs and better understanding of whether a VPPA might be right for your company (and what questions you should be asking!)

VPPAs: The Good, The Bad & The Ugly

2

What is a Virtual Power Purchase Agreement?

Key Terms:

+ Power Purchase Agreement (PPA): A contract between two parties where a developer sells electricity to a buyer

+ Virtual PPA: A financial contract where the buyer:

+Pays a fixed price to the developer for electricity and RECs from a specific renewable energy asset

+Retains RECs and does not receive or take legal title to the project generation

+Project generation is instead sold into the wholesale market

+Receives proceeds from that sale

NB: Buyer continues to receive and pay for energy for its

operations/facilities from local utility/electricity provider

A VPPA is a form of price hedge where a buyer enters into a fixed-price, financial contract for electricity and RECs from a specific renewable energy asset

3

VPPA: How It Works

PROJECT

Developer sells project generation

into the market

Developer receives the variable market

price for selling project generation

BUSINESS AS USUAL

WITH ELECTRICITY

PROVIDER

Payment based on difference between the contract price & market value of the project

generation

Developer provides Buyer with RECs

from project generation

BUYER

POWER GRID

UTILITY

Buyer continues to buy & receive

electricity from local utility

Utility continues to dispatch electricity

to Buyer

EXECUTEVPPA

HOW DOES A

VPPA WORK?

4

VPPA: Payment StructureVPPAs: The Good, The Bad & The Ugly

$

TIME

Market price

VPPA Fixed Price

BUYER PAYS THEDIFFERENCE TO SELLER

BUYER GETS PAIDTHE DIFFERENCE BY SELLER

5

VPPA: A Contract for DifferencesTODAY ($/MWH) FUTURE ($/MWH)

Retail electricity rate ($80.00) ($85.00)

REC price ($0.50) ($1.00)

Total Cost to Buyer: ($80.50) ($86.00)

TODAY ($/MWH) FUTURE ($/MWH)

Retail electricity rate ($80.00) ($85.00)

VPPA fixed price paid to developer (includes REC) ($26.25) ($26.25)

Proceeds from sale of electricity into wholesale electricity market $25.00 $28.00

VPPA Contract Settlement Value: ($1.25) $1.75

Total Cost to Buyer (includes utility power, RECs, hedge): ($80) + ($1.25) = ($81.25) ($85) +$1.75=($83.25)

Difference between Scenarios ($0.75) $2.75

SCENARIO 1NO VPPA

SCENARIO 2WITH VPPA

VPPAs: The Good, The Bad & The Ugly

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VPPA Drivers: The GoodVPPAs: The Good, The Bad & The Ugly

Big Impact

• Additionality

• Positive environmental impact

• Single transaction can meet large goals across many markets

• Positive signal to market and investors for reputation & brand

• Increased employee engagement, retention & recruitment

• Potential for geographic tie between buyer’s load & project

Good Economic Decision

• Price hedging tool for long-term energy & RECs

• Take advantage of current but expiring federal tax incentives

• Historically low renewable energy project costs

Fits Well with Current Operations

• No change to current utility relationship

7

VPPA Drivers: The ChallengesVPPAs: The Good, The Bad & The Ugly

THE “BAD”Risks That Can Be Managed

• Complexity of transaction requires deep wholesale power expertise

• Buyer procurement process: Internal resource availability; stakeholder education & alignment; approval process

• Lack of correlation to local retail rates

• Too small electricity footprint can impact cost competitiveness (approx. threshold of 15 MW)

• Transaction cost

• Accounting concerns

• Contract length can exceed risk management parameters

• Project curtailment, basis risk and negative price risk

• Credit requirements can be significant

THE “UGLY”Risks Outside Your Control

• Future wholesale energy market prices worse than expected

- Natural gas prices stay low or go lower

- More renewable energy projects built in same area

• Project does not reach completion:

- Developer unable to obtain financing

- Poor development or construction by developer

• Policy uncertainty:

- ITC/PTC Rollback

- Increased incentives for coal production

• Force majeure event

8

VPPA Market Context: Contract vs. Power Prices

PPA Price vs. Forward Price Curves

VPPAs: The Good, The Bad & The Ugly

Case NPVEffective REC

Value/Cost

High $32.4M $9.71

Base $4.9M $1.49

Low ($16.5M) ($4.93)

9

VPPA Performance: What Could Have Happened?VPPAs: The Good, The Bad & The Ugly

10

Breakout Work Sessions: 4 Key DriversVPPAs: The Good, The Bad & The Ugly

Unexpected Market Conditions

Lower wholesale power prices than expected

Harry Singh

Project Location

Correlation to load, RE penetration rates, local policy impact

Kourtney Nelson

Transaction Complexity

Stakeholder alignment, required internal education & approvals

Melissa Peterson

Additionality

How and whether it matters

Erin Craig

11

VPPAs: The Good, The Bad & The Ugly

Unexpected Market Conditions

1. Natural Gas Prices (e.g. pipeline infrastructure, polar vortex, fracking restrictions)

2. Policy changes (e.g. environmental regs, tax incentives, RPS targets)

3. Level of RE penetration (relevant for location but can sometimes can have more widespread impact)

4. Hydro Conditions (relevant in some markets like the West)

5. Power Market Design (scarcity pricing, capacity markets, other tariff changes)

Project Location1. Proximity/Correlation to load (poor hedge); relevance of local impact

2. Current Resource Mix & GHG Impacts (Scope 2)

3. Level of RE Penetration (overall in market and close to project, impacting negative covariance, congestion, curtailment ) and Impact on Pricing (low or negative pricing exposure)

4. Local Policy impact (e.g. redefinition of reginal boundaries for CAISO and DSW joining SPP)

Transaction Complexity

1. Educating non-energy stakeholders & decision makers

2. Gaining stakeholder alignment when different priorities

3. Paper process/approval (who signs?)

Additionality

1. What does it mean?

2. Does it matter?

3. How do you achieve it?

4. What does it cost?

Breakout Work Sessions: 4 Key Drivers

12

Key Considerations Require Tradeoffs

Co

ntr

act

str

uct

ure •Fixed vs.

escalating PPA price

•Tenor: How long?

•Price caps or collars?

•Fixed vs. escalating PPA price

•Tenor: How long?

•Price caps or collars?

Reg

ion

al

ma

rket

sel

ecti

on •Proximity to

load

•REC value

•Cost to develop

•GHG intensity

•Resources

•Market stability

•Proximity to load

•REC value

•Cost to develop

•GHG intensity

•Resources

•Market stabilityS

ettl

emen

t b

asi

s &

pro

ject

ris

k •Project busbarvs. market hub

•Generation: Weather

•Purchase products to hedge these risks?

•Project busbarvs. market hub

•Generation: Weather

•Purchase products to hedge these risks?

Ad

dit

ion

ali

ty •Existing vs. new projects

•First buyer or later?

•Small slice or large?

•Keep RECs?

•Existing vs. new projects

•First buyer or later?

•Small slice or large?

•Keep RECs?

VPPAs: The Good, The Bad & The Ugly

13

Thank You

Kim Fiske 3Degreeskfiske@3degreesinc.com

Kourtney Nelson3Degreesknelson@3degreesinc.com

Melissa Peterson Apex Clean Energymelissa.peterson@apexcleanenergy.com

Erin CraigOrigin Climateerin.craig@originclimate.com

Harry SinghGoldman SachsHarry.Singh@gs.com