Last year, corporations eclipsed utilities as buyers of wind power. It is a trend that looks likely to continue, but it also is a quickly changing market with its own challenges and evolving solutions.

The trend peaked in the fourth quarter when 75% of wind power purchase agreements were signed with corporate buyers rather than utilities.

“Corporate PPAs have doubled every year since 2012,” Ian Kelly, a manager at the Rocky Mountain Institute (RMI), said.

RMI’s Business Renewables Center (BRC), a membership organization for corporations that purchase renewable energy, tracks corporate PPAs. According to BRC, there were 1.18 GW of renewable corporate PPAs in 2014 and 3.24 GW in 2015. So far this year, there have been 0.59 GW of corporate PPAs.

The possibility that the production tax credit (PTC) for wind power would expire at the end of the year drove the fourth-quarter surge, said Kelly. Then deals fell off in the first quarter, but they have since picked up, with the second quarter  comparable to second-quarter 2015’s deal flow, he said.

The market is also expanding. Companies looking to gain market recognition for their environmental stance, like Apple and Google, were among the first to sign renewable PPAs. But in the past year, older, more established companies and companies involved in heavy manufacturing, such as 3M, Dow Chemical, General Motors and privately held candy manufacturer Mars, began signing renewable PPAs.

There are at least two main drivers of this trend. On one side, a growing number of corporations have embraced sustainability goals. In a June whitepaper, the Edison Electric Institute said that nearly half of Fortune 500 companies and 60% of Fortune 100 companies have climate and clean energy goals.

To meet those needs, RMI estimates that 60,000 MW of new wind and solar projects will have to be built by 2025 to serve the corporate market.Corporations could, of course, just buy renewable energy credits (RECs). That is what most corporations did to meet their sustainability goals, until about 2012 when they began to enter into corporate PPAs.

RECs can be used to meet renewable targets, but a corporation is going to pay a premium because they are essentially double buying. In addition to buying the RECs, the company still needs to purchase the electricity to run its operations, said Pete Dignan, president and CEO of Renewable Choice Energy, which advises corporations on reducing their carbon footprint and meeting sustainability targets.

PPAs also provide “additionality,” the term of art used to describe actions that cause more renewable resources to be built or less conventional thermal generation to be used. By signing a PPA, a corporation can show that it is not just going along for the ride; it is causing a wind or solar plant to be built. PPAs also have the potential to be a better business decision.

Increasingly, corporations are looking to buy renewable energy, not just to meet sustainability targets, but to reduce their energy costs. As Kelly notes, “without a PPA, you are short power and a price taker.”

At a renewable energy conference earlier this summer, Rick Needham, Google’s director of energy and sustainability, said, “We are not doing this because it will make us feel good. These are economic decisions that are also good for the world.”

The other driver is on the development side. State renewable portfolio standards (RPS) are reaching capacity, slowing demand utilities’ demand for new renewable energy projects. That prompts developers to look for new markets.

Utilities are also reluctant to sign long-term PPAs until issues with the Environmental Protection Agency’s stalled Clean Power Plan, which aims to curb greenhouse gas emissions, are resolved, said Keith Martin, a partner in Chadbourne & Parke’s energy practice. “We see this trend continuing for another 18 months to two years.” Meanwhile, he said, corporate PPAs are “a godsend for developers.”

Meeting mutual needs for renewable energy

For developers, corporate offtakers represent a new class of potential buyers for the output of their projects, and they are entering the market just as utilities are slowing their renewable energy purchases.

“There is a mutual need,” said Michael Polsky, president and CEO of Invenergy. Invenergy has a pipeline of renewable energy projects, and corporations have sustainability goals. In addition, developers like Invenergy are looking for price certainty to secure better financing terms. That certainty might not be available when doing a merchant project in Texas’ competitive power market, but it can be provided by a corporate PPA.

The result can be a win-win, said Polsky. “Corporations are not buying power for more than it would cost them otherwise,” he said.

Earlier this year, Invenergy signed a 225-MW PPA with Google. The agreement includes the sale of wind energy from Invenergy’s 278-MW Bethel wind farm under construction in Castro County, Texas. The next month, February, Invenergy signed a 120-MW PPA with 3M that includes the sale of wind energy from the company’s 120-MW Gunsight wind farm under construction in Howard County, Texas. At the end of 2015, Invenergy signed a 125-MW PPA with Owens Corning, and a 100-MW PPA with Equinix.

Corporate PPAs may be a godsend but, as Martin notes, they don’t come without challenges. Corporate PPAs are different than utility PPAs. In many cases, they are not even PPAs; they are “virtual PPAs” or contracts for differences.

In most cases, a corporation is not contracting to buy electricity directly from a wind farm. It’s contracting to pay a set price for a certain amount of energy. The wind farm sends the energy to the wholesale market, and the corporation buys from the market. If the wholesale price is higher than the contracted price, the corporation gets paid the difference. If the wholesale price is lower than the contracted price, the corporation writes a check.

Corporate PPAs also come with their own unique risks and challenges, including basis risk, shorter tenors, and credit issues. Basis risk occurs when the price the corporate offtaker pays is not the same as the price the project developer receives. That can happen because the offtaker’s price is established at a different node, or location, than the sponsor’s price. For instance, corporations are buying power from a wholesale market hub and developers are selling from the busbar where the energy enters the grid. To date, no financial institution has been willing to step up and hedge that risk, said Martin, which shifts the risk on to developers.

Corporate PPAs have so far also tended to be shorter in tenor than utility PPAs, 10 or 15 years or even shorter, compared with utility PPAs that can run for up to 20 years, which is a closer match to the expected life of assets like wind turbines.

Corporate offtakers also are potentially weaker credits than utilities. Even companies with strong credit ratings can suffer sudden downdrafts that affect their creditworthiness. Utilities, with steady revenues from regulatory franchises, are generally more secure credits.

The combination of those factors underscores the one thing all stakeholders note about negotiating a corporate PPA: a lot of education. Many corporations don’t sign supply deals longer than three or four years. It takes a lot of explaining for them to get comfortable with locking in a set price for energy 10 or 15 years into the future.

Corporate PPAs can also be cross jurisdictional. A corporate customer might want to source green power locally or they might be located in one state and be buying power from a project in a different state. Given the regulatory jigsaw in the United States, that greatly complicates a potential deal. “It is not one size fits all. Every corporation has different needs and goals," said Jerry Bloom, a partner in the energy practice of Winston & Strawn. But developers do gain at least one advantage when selling the output of a project to a corporation. The price comparisons are based on the corporation’s retail price of energy. When selling to a utility, the developer is negotiating against the utility’s wholesale price of energy.

Paying to leave

Signing a corporate PPA with a project sponsor comes with hurdles, mainly how to structure a deal so that it can be financed at an all-in cost that is still economic, but there are even higher hurdles for utilities trying to craft similar deals.

Corporate PPAs are “not without consequences for utilities,” Martin notes. Utilities have been trying to squash net metering but, he said, they are missing the larger picture: Big industrials are taking hundreds of megawatts of load from utilities. “Eventually they will turn their huge artillery” on this problem, Martin said.

There is no better example of this fight than the battles taking place in Nevada. Under a 2001 state law, large customers are free to choose their electricity supplier. But Nevada regulators, concerned that the loss of a large customer could saddle remaining utility customers with higher bills, has been imposing stiff exit fees on large customers who want to sever their utility ties. That has not deterred some customers from leaving NV Energy in order to sign deals for cheaper and greener energy.

Casino owner MGM Grand in May said it would pay an $87 million exit fee, and it has signed a deal to buy its energy from Nebraska-based Tenaska Power Services. MGM’s defection turned out to the first of several. Wynn Resorts has agreed to pay $15.7 million to get out of buying its power from NV Energy, and Las Vegas Sands and Peppermill Casinos have followed suit.

Utilities may have a good reason to fear the loss of corporate customers. Not only do they lose the revenues from that customer, they are faced with the prospect of trying to recover costs from a smaller customer base. But trying to meet corporate customers’ green power needs also presents problems for utilities.

Some utilities are not allowed to own generation, so they could not satisfy a corporation’s need for additionality. If they could build a wind farm for a corporate customer, they face another problem. The new wind farm could displace some of the utility’s existing thermal generation and ultimately leave it with a stranded asset.

Stranded cost issues could make it more difficult for utilities to maneuver in the corporate PPA market, but utilities do have one advantage: They already have the customers and are familiar with the regulatory and legal structures of PPAs. “If they had the option, corporations would stay with utilities,” said Bloom.

Green sleeves

“Utilities are starting to recognize that this is a real phenomenon,” Bloom said, and some have begun offering corporate customers green tariffs. A green tariff can offer several advantages. In some cases, a green tariff can be set up as three way deal in which the corporation is receiving energy under a back-to-back PPA between the developer and the utility known as a sleeve. That avoids many of the financial risks associated with a corporate PPA. And, for the utility, it solves the stranded asset problem, because it is a way to keep the corporate customer.

But by some accounts, utilities still have a way to go in working out the details of their green tariffs. For instance, Dignan said, not all green tariffs provide the additionality that many corporations seek.

But in the face of challenges such as NV Energy is facing, utilities have a strong incentive to come up with solutions to meet customers’ needs. One example is a recent deal between Amazon and Dominion Virginia Power (DVP).

In June, Amazon unit Amazon Web Services (AWS) signed a PPA with Community Energy for an 80-MW solar farm in Accomack County, Virginia, as part of its effort to be powered entirely by renewable resources.

In the past, power from the solar farm was sold into the PJM Interconnection at wholesale market prices, while AWS data centers in Virginia paid retail rates for power supplies by Dominion Virginia Power from a mix of renewable and fossil fuel power plants, diluting the amount of green power AWS was receiving.

In order to boost is green energy usage, AWS and DVP entered into an agreement, approved by the Virginia Corporation Commission, under which DVP provides scheduling and settlement services to AWS for its wind and solar projects that sell energy into PJM. A separate agreement allows AWS to pay DVP a market-based retail rate that closely matches the wholesale rates the renewable projects are paid. The agreements allows DVP to help AWS move closer to meeting its renewable energy goal without shifting costs to other customers.

The deal shows that “utilities don’t have to sit on the sidelines,” said RMI’s Kelly and, with 60,000 MW on the table, they are unlikely to do so for long.

This post has been updated to clarify a quote from Pete Dignan.