A lot of factors have led to clean energy’s growth in the US, but don’t overlook the power-purchase agreement.
The de-facto mechanism for installing distributed renewable power plants, first popularised by solar companies more than a decade ago, allows for developers to quickly build small- to medium-sized projects on a customer’s property. Electricity is sold at a cheap rate back to the host and anything left over to a local utility.
Jigar Shah, SunEdison founder and former chief executive, believes the underlying principles of the “solar-as-a-service” model can be applied to assets across the infrastructure sector.
After leaving SunEdison in 2008, before the company’s yieldco-driven growth that led to bankruptcy last year, Shah teamed with a group of clean energy and financial entrepreneurs to launch Generate Capital in 2014. He said the goal is to bring the PPA leasing model to a variety of projects in the US.
“There has been a great unclogging of projects in the solar and wind space over the last 10 years, largely [due] to the advent of power-purchase agreements,” Shah said. “What we’re really doing is a formula and that pattern that they’re used to seeing in solar and wind exists in all these other sectors.”
It is difficult for energy efficiency or battery storage companies to obtain funding from banks or other lenders for a leasing model that requires upfront capital for new technologies, Shah explained to Infrastructure Investor. Generate Capital seeks to move these projects along by backing developers that have projects that can be signed to service contracts.
Shah said Generate Capital is committing around $500 million a year to companies working on different types of lease agreements, but it usually deploys around $10 million at a time to a developer, reserving capital for when it has contracts lined up. The firm most recently committed to develop anaerobic digestion plants in Michigan and New York and has been active in battery storage and solar as well.
Signing core infrastructure assets such as roads or bridges to a PPA-style lease agreement is more complex, Shah explained, but it is possible. He said traditional assets usually depend on merchant revenues such as tolls, and signing something like that to a service contract would require a sponsor “that’s promising to pay the bill” if the market dries up.
The most promising assets compatible for lease agreements are along the lines of what Shah helped deploy for solar years ago. The distributed nature of sustainable infrastructure allows for individual projects to be contracted one at a time, but this will add up as people become familiar with the model used in different settings, Shah said.
“Once the customer has signed a servicing contract and the technology is ready for prime time, you need someone to believe in the business plan,” Shah explained. “There’s been a need for a purposeful company like Generate who really understands these assets to give a lot of these companies their first term sheet.”