By: Chandni Sinha Das

Non-investment grade companies and companies with small energy loads often face trouble accessing cost effective procurement mechanisms. However, aggregation of small energy loads is a multi-offtaker deal structure that holds the potential to overcome these challenges and allow more non-traditional offtakers to transact. 

While traditional virtual power purchase agreements (VPPAs) are negotiated with one offtaker, in aggregate deals, a group of offtakers — often with different credit profiles — negotiate together. This structure spreads the default risk across multiple offtakers and allows each one to purchase energy at a smaller scale while still contributing to the development of a sizable clean energy project. The group typically agrees to share the same legal counsel and energy consultants to streamline the negotiation process. Developers will analyze each offtaker and provide the group a common credit rating (some have used a weighted average) that is used to settle on a uniform PPA price and deal terms. However, at the end of negotiations, each individual offtaker signs its own PPA contract and posts its own credit commensurate with its credit rating. 

In the strongest aggregate deals, non-investment grade offtakers may join forces with an investment grade partner who acts as an anchor tenant. If a large enough portion of the offtake is assigned to an investment grade company — experts suggest around 50% — the credit rating of the customer(s) for the remaining offtake may be less important to the financier. Anchor tenants in an aggregation usually face slightly higher PPA and credit support pricing than had they negotiated for the entire volume individually, but a large credit-rated company may be incentivized to do this if they have business relationships with the other offtakers and/or have goals for increasing market access more generally. In addition, for non-investment grade offtakers who are newer to the procurement market, partnering with experienced investment-grade companies may also allow them to gain insights into the deal process and smooth negotiations.

The biggest strength of the offtaker structure is in allowing companies to contract for smaller loads. PPA economics often mean an offtaker must contract for a substantial amount of energy — around the 100,000 MWh range — to be of interest and benefit to the developer. Small to medium-sized businesses often have smaller annual energy loads and are therefore likely looking to contract for significantly less than that. For developers, engaging with these smaller companies means spending extra time and money to negotiate more deals per project. In the current seller’s market, developers have little incentive to do this when there is an abundance of larger offtakers willing to contract for the project output. However, the aggregation structure means a developer is effectively negotiating with one group — dealing with one legal team instead of many. Reducing the logistical complexity faced by the developer lowers the transaction costs of collaborating with multiple offtakers, which puts developers more at ease. This can enable smaller individual contracts for non-investment grade offtakers. In addition, poorly rated companies may see slightly better credit posting requirements when pursuing aggregation with an investment-grade anchor tenant. 

Aggregate deals have thus far been uncommon. According to CEBA’s Deal Tracker, only about 9% of customer contracts have been signed as part of an aggregate deal since 2018. However, this may change as more developers set sustainability goals, more large investment-grade companies broaden their sustainability goals to include their supply chains, and streamlined legal and logistical best practices emerge. Experts highlight the importance of using shared legal counsel and relying on consultants to make aggregation work. Consulting agencies often have deep partnerships with developers and a roster of available offtakers. This allows them to facilitate deals and secure replacements more easily in the case of offtaker attrition. 

If your company has attempted an aggregate deal or is interested in doing so, please reach out to disc-e@cebi.org.