What Next For the PPA Market? Q&A with AIP

We at Pexapark know all too well that the PPA market is anything but straightforward. It can be a complex affair. Many different factors influence the ways in which energy contracts are structured and priced in oder to satisfy all stakeholder concerns.

We love working with clients that push the frontier in renewable investments in PPA markets, doing transactions that add new layers and insights into how the wider market could evolve over time. We recently had a short Q&A with Domenico Tripodi, Investment Director of AIP Management (“AIP”) to discuss his experiences and opinions on this challenging, yet exciting and dynamic, market.

Herewith is a brief synopsis of our insightful discussion with Domenico:

What are the main things you and AIP have learned after several renewable PPA transactions?

It’s all about changes, which are three-fold. First, more time is being spent on PPA transactions. Second, our transactions have become more complex. Third, there is an entirely new dynamic in the game: energy risk analytics. These changes have occurred because, whilst the focus of attention was on construction and operational risk during the era of the feed-in-tariff system, today the focus is on the energy risk and price element.

All other risks still exist and remain as relevant as ever. But they are better understood and, as such, less daunting. The renewable investment world has gotten more complex. Therefore, each project presents now a different ‘revenue story,’ so to speak, linked to a given PPA.

What are the key challenges in renewable investment these days?

And how could the market and players adjust to these challenges?

A key challenge is how the market reaction will be in the short- to medium term to the increased share of intermittent power. We at AIP are indeed concerned about that, since certain risks regarding the issue of intermittency are eventually not always accurately priced in. Furthermore, certain power grids are not readied enough to handle the rise in renewable energy production.

As such, we do anticipate some stress and pain in the years to come in this regard but we remain positive about the longer-term outlook. After all, players and systems will adjust to these issues. The renewables market has been booming for some time now. Yet we maybe sometimes forget that we still operate in a very cyclical industry. Market prices will adjust and transaction pricing will be more accurately reflecting implied energy risks

We also see considerable change underway in how projects are funded. This is especially true for larger projects, in which we expect the role of ‘senior debt’ to decrease significantly. The projects of the future will increasingly feature layered capital structures. Consequently, there will be a huge need for equity and hybrid capital, both for re-financing of projects and funding of new builds.

The upcoming UK Offshore Wind projects will be a good test case in this regard.

How has the way in which you do business changed with the rise of PPAs?

The most visible change is that we have employed more analysts, as new transactions typically take more time to accomplish due to their increased complexity. We at AIP have clearly invested in more analytics on the energy risk side, but we also need to work with more specialist advisers such as Pexapark, as you bring in very specific know-how. Our overall aim is to focus on building up specialist competence in energy risk analytics and financial structuring.

What are the key competences needed to succeed in renewable investments?

As I mentioned previously, we firmly believe that the two key competences for success in renewable investing is in two specific areas: energy risk analytics and financial structuring. A real structural advantage will also arise if organizations are capable of applying energy risk analytics throughout the value chain.

There are a host of energy risks, costs and uncertainties that can be priced, managed and ‘played’ in a distinctive way. A simple example of this is that the focus is no longer on achieving maximum availability of your asset. Rather, it’s on optimizing risk-adjusted revenues which consider negative prices or more flexible maintenance concepts in the case of, say, low wind, low price events.

But I view this as just the tip of the iceberg in what a nimble and competent player can potentially achieve in this market.

If you had one wish for the future development of the industry, what would it be?

From an overall market perspective, my wish would definitely be for more standardization and higher volumes. Can this be achieved? Only time will tell.

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