1. Global and Regional Headwinds Will Continue Narrowing the Renewable Project Pipeline, Reducing Available Supply
Across North America and Europe, renewable energy project developers are navigating an array of challenges. The list of these obstacles is long: continuing global supply chain disruptions, spiking commodities costs, land use permitting uncertainties, and overwhelmed interconnection queues. There is no doubt that this is a uniquely different, and difficult, time for renewable energy development. Many projects’ commercial operation dates (COD) have been pushed out, and the inputs to project finance models have become harder to predict. Consequently, attaining a clear “line of sight” into build cost is difficult and risky. Developers have historically been able to hedge and buffer these risks by speculating on decreased material costs, technology advances, and/or installation efficiency. But under these current circumstances, there are a shrinking number of available projects with clear paths to operation, making an already tight market even tighter.
Projects with known interconnection costs or agreements in hand will fly off the shelves as offtakers swoop in to seize projects that have cleared this crucial hurdle. Interconnection queues are congested across nearly all transmission operators, a situation also mirrored by similar transmission constraints in European markets. Many developers are stuck standing in line as they await the necessary interconnection approvals, and are in many cases holding the bag as the upgrade costs to transmission infrastructure continues to rise. Until supply chains begin to normalize, permitting processes become more streamlined, more transmission lines are built, and interconnection approvals are accelerated to accommodate expanding renewable build-out, clean energy buyers should expect a continued shortage of available renewable PPA offers.
2. 2022 Will Be a Seller’s Market for Renewable PPAs
It is exciting to see the demand for renewable power purchase agreements (PPAs) from corporations and utilities continue its massive year-over-year growth. However, the timing is tricky to say the least. Developers cannot currently meet this increasing demand, not due to lack of effort or thoughtful business strategy, but because of inadequate infrastructure and regulatory support needed to accomodate the pace of development required. This current environment favors experienced buyers and load-serving entities, which can offer sellers the decisiveness and credit-worthiness needed to quickly secure deals — though they will still have to do so at a premium. Buyers will need to be flexible in order to achieve success. Developers are passing along the price uncertainty and associated risks this landscape brings, and will be looking to contract with prepared counterparties that offer a fast path to a done deal.
3. Novel Solutions Will Emerge
While these market conditions may feel dire to both buyers and developers, the situation is far from hopeless. Funding of critical infrastructure improvements to the grid, while slow to be constructed, are on the way through government initiatives and utility interconnection queue reform, and net-zero regulations are being proposed and enacted in North America and Europe. In response to these dynamics, new innovations in PPA contracting, insurance, and credit solutions will arise. As the renewable PPA market continues to mature, new entrants from a broad variety of sectors will come to the table with new renewable transaction infrastructure that will address many of these issues, and advance solutions that support buyers and sellers alike. From electricity retailers offering more green power programs or consulting firms developing new PPA contract structures that mitigate risk, to financial institutions acting as credit intermediaries or technology companies delivering new analytics and software, we fully expect 2022 to be a year of innovation when it comes to how buyers of all sizes enter renewable energy deals.
4. More Retail Electricity Providers Will Create or Expand Green Power Programs
Recognizing the surging demand for clean energy as well as the unique market circumstances buyers are navigating, retail electricity providers will either create, or expand, green power programs as corporate buyers turn to utilities for solutions. With their procurement expertise, often extensive renewable project pipelines, and sound credit, electricity retailers are an ideal intermediary party that can readily enter into PPAs and then pass on the renewable energy certificates from those PPAs to multiple offtakers through green retail power agreements. Constellation’s “CORe” program is a terrific example of a green power program that has allowed many buyers to help bring new renewable energy projects online by entering into PPAs through Constellation. Similar offerings will likely emerge from other retailers during 2022.
5. More Buyers Will Take a Holistic Approach to Project Selection
Corporations are increasingly looking to maximize the good their renewable procurements can bring, and are seeking more and more to drive progress in environmental and social justice efforts. For many buyers, the scope of their project selection process will expand to include assessments of all related aspects of project build-out — from the hiring of diverse local workforces and providing community benefits, to siting practices that minimize damages to nearby ecosystems and wildlife. We also expect a growing number of offtakers to procure with an eye for building a PPA portfolio that can power their operations 24/7. These committed, innovative buyers will likely be willing to pay more for the right offers that advance their ESG commitments or round-the-clock clean energy goals.
Recognizing this, LevelTen Energy has collaborated with The Nature Conservancy and National Audubon Society to create guiding principles for our industry, which outline the “3 C’s” of impactful renewable development: Community, Conservation, and Climate. To help turn these principles into industry-wide action, LevelTen has created the Impact+ Score™, which allows renewable developers to showcase the full impact their projects have on local economies and ecosystems, and provides buyers with a comprehensive snapshot of a project’s extended benefits through a single score. Embedded in the LevelTen Platform as a standard metric for applicable projects, the Impact+ Score™ facilitates impactful renewable development and procurement at the speed and scale needed to address the climate crisis head on. LevelTen is also supporting organizations that wish to design a renewable PPA portfolio that best matches when and where they use energy to advance 24/7 goals.
A Resilient and Evolving Industry, Rising to Tackle the Climate Crisis
2021 was, without question, a challenging year for renewable energy developers and buyers alike, and the pendulum swung from a buyer’s to a seller's market. The sector continues to innovate and push forward, rising to meet myriad challenges to create a more just and sustainable future. LevelTen Energy, with our robust network of partners and developers, will continue to meet these challenges head on, and work to usher in new solutions and innovations that will allow renewable growth to continue its essential role in building a better tomorrow.