Dive Brief:
- Climate software platform company Watershed has partnered with Ever.green, a firm that helps companies use renewable energy certificates and tax credits, to offer five-year fixed-price virtual power purchase agreements, or VPPAs, to smaller firms.
- The first fixed-price VPPA that the firms are offering will help build a 10 MW solar plant in Laredo, Texas, and has received offtake commitments from Samsara, Stripe, and TaskUs.
- While most traditional VPPAs lock in buyers for longer periods at a “strike price” that requires them to pay the difference if the market price of power dips below it, Watershed’s fixed-price terms don’t require buyers to take on that risk.
Dive Insight:
Matt Konieczny, Watershed’s clean power products and partnerships lead, said the firms have created a financing structure that allows them, and not their clients, to assume a project’s risk, enabling smaller companies to participate in a VPPA when it previously might not have been feasible.
“This first-of-kind structure avoids placing that risk on the buyer and allows them to still be the ones who ensure financing happens,” Konieczny said. “So they are making this new-build project happen, but without the onerous requirements of traditional VPPAs.”
The planned 10 MW solar farm in Laredo, Texas has secured five-year commitments from some of Watershed’s customers, including Samsara, Stripe and TaskUs.
“These customers now can buy renewable energy credits from the project and the project is going to use their commitment to purchasing those credits in order to secure financing,” Konieczny said. “These are companies that, in the past, would have been kept out of products like this due to their size.”
The unique financial structure of the project involves a mix of sponsor equity, bank debt, REC purchases and tax credits from the Inflation Reduction Act. Watershed and Ever.green plan to use this mix of financing to help protect the project and the buyers from the financial risk that would ordinarily be assumed by the renewable energy buyers in a traditional strike price VPPA, said Konieczny.
“We’re finding the optimal way to put those together, and potentially topping up with tax credits from the IRA, in order to ensure that the risk is managed from the buyers’ perspective and the project can still get built,” Konieczny said. “And we’re using a capital structure that allows the developer to get the returns that they need to make the project happen, but that doesn't require buyers to take these crazy risks that have been required of the giants who participate in VPPAs typically.”
He said that the fixed price on the renewable energy credits the projects will generate is going to provide a “guaranteed” revenue stream from Watershed’s customers that the company is using to secure financing for the project itself.
The financial side is being managed by Ever.green, which is handling the debt, sponsor equity, fixed-price REC purchases and tax credits that are funding the project.
“The risk in a VPPA was probably the last one we addressed, as we found companies rarely had interest in taking on risk in wholesale energy markets,” Michael Leggett, Ever.green’s co-founder and chief product officer, said in an email. “This led us to start testing with finance partners the idea of fixing the price for the buyer (removing their risk) and making the project investors (who tend to know a lot more about energy markets) comfortable keeping the risk and exposure.”
The buyer companies’ five-year commitment to buy RECs at a fixed price is factored into the financial structure, Leggett said, as it “boosts” the internal rate of return and helps with the firms’ repayments on their bank debt.
Konieczny said he believes the clean energy transition and the swath of net zero goals that have emerged at the federal and state levels in the U.S. will require an “all hands on deck” approach that will be served by increased access to the use of renewables.
“The Inflation Reduction Act is an excellent incentive that can be used to bring new companies into the new green economy,” he said. “At Watershed, we're a bunch of environmentalists, but we're also business people. The way that we help our customers succeed at achieving net zero is by collective action, enhancing their buying power, and finding ways to bring down the costs of projects.”
Konieczny said that as the price of renewables has dropped steeply over the last decade and the threat of climate change has become more widely accepted, there has been a shift in how the market views clean energy in the past few years.
“The big holders of capital understand that in three, four or five years — regardless of what their view is of climate change — it will become very difficult to exit assets at the same value that they want to without having a plan for managing climate risk,” he said.
Clarification: This story has been updated to better describe Watershed and what it does as well as the unique aspect of the Watershed-Ever.green arrangement.
