HK Summit: Investors should expand risk analysis capability for PPAs

Partners Group’s Andrew Kwok cautions that growth in PPAs presents new risks to investors at the same time as supporting project investment cases.

Investors in renewable energy platforms should expand their risk analysis capabilities as the transition to corporate and industrial (C&I) power-purchase agreements accelerates, the Infrastructure Investor Hong Kong Summit has heard.

Andrew Kwok, managing director and head of private infrastructure, Asia, at Partners Group said the rise of PPAs, while supporting the investment for many projects, also introduced new risks thanks to the need to analyse both credit and energy trading risks.

“These bespoke contracts, they’re negotiated one after the other, after the other,” he said. “That introduces a lot of diversity in tenors – out of [our approximately] 50 corporate PPAs only one is for 20 years and the average is in the low teens.

“The type of obligation you sign up to also varies. Most of our PPAs are on a dispatch basis, so we take risk that if the wind goes down we have to step into the market. So, on top of credit risk, you also have trading risk.

“[As a result], renewables platforms, as they’re transitioning to C&I PPAs, need to start working on new risk departments – energy trading and credit analysis.”

Kwok said the market was still very much “corporate-led”.

“The buyer is the one that’s calling the shots – so when you go in and bid for these corporate PPAs, you do have to take different duration risks and different obligation risks.

“I’m fine about that – [but] I think it’s much harder if you’re a single-project investor as you’re really stuck with a lot more risk without levers to mitigate, which is why I think investors like myself are better off investing in platforms,” he said, referring to the ability to diversify risks within a portfolio.

According to Kwok, Partners Group currently has around 700 MW of operational renewable energy capacity in its portfolio and is in the process of building out a further 800 MW of capacity. Around 40 percent of those projects are covered by corporate PPAs.

“We’ve been building our portfolio for the last five years but corporate PPAs have really become a thing in our portfolio in a material way in the last 18 months,” he said.

Kwok was speaking on a panel alongside Sebastian Meyer, until recently vice-president at EDF Renewables, and Dany Qian, vice-president at JinkoSolar.

Meyer said most PPAs were largely being signed because of cost savings, with subsidies supporting distributed solar and wind projects in the past.

“Those subsidies have largely gone away from the distributed transactions, but we’re still at a point where, because of the capex costs coming down, there’s a sweet spot where savings can be offered,” he said, with PPAs motivated by environmental concerns an “exception to the rule” in most markets.