Month: July 2020

PPA Advisor Fees: Which Fee Structure is Right for your Company?

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Having set ambitious climate goals, your company is now deciding how to go about achieving those targets. Many corporations are entering into power purchase agreements (PPA) to procure large volumes of renewable energy. These transactions are a convenient way to quickly achieve renewable energy goals, but can expose buyers to significant risk factors along the way. Companies that do not have in-house expertise in wholesale power markets and PPAs find it critically important to partner with an experienced advisor and to incentivize success with the appropriate compensation structure.

The scope of an advisor’s work can include stakeholder education and alignment, procurement management and financial analysis, and contract negotiations and performance monitoring. Perhaps more importantly, an advisor’s role requires mitigating the financial risks of wholesale electricity market exposure, as well as any development-related risks associated with counterparties, project financing, and other execution risks.

While there are multiple advisors who can perform these PPA services, cost and compensation structures can be opaque and vary widely making it difficult to select an advisor with aligned incentives. Understanding how the compensation structures work is fundamental to ensuring a fair and successful PPA transaction. Below we describe common fee structures in the market.

Success Fee

In the success fee pricing structure, the advisor’s fee is amortized over the life of the contract and rolled into the PPA payments as a “lift.” This means you pay for the advisory work over the project’s operational lifetime instead of allocating budget to the procurement process upfront. While the advisor is only paid if a contract is successfully executed, success fee structures may have a recapture fee if no transaction is executed once the engagement passes a certain milestone. Although success fees are typically the most expensive option on a total cost basis, the avoidance of an upfront cost is attractive to many buyers.

Success fees are ideal for companies that do not want to spend budget upfront on the PPA procurement process or deal with cost allocation across multiple departments.

There are two main ways that success fees are offered, which can be standalone or combined:

success-fees

While advisor fees have not traditionally shared in buyers’ wholesale power market risk exposure, 3Degrees has worked with clients to create performance-based success fee structures to share that risk.

Time and Materials

A time and materials (T&M) pricing structure allows for the most flexibility as you pay for the work performed on the renewable energy transaction as it occurs. At the end of the engagement, there is no pressure for your organization to sign a contract. Furthermore, the fee will not vary based on the selected project’s final size, technology, or other specific attributes. This is typically the lowest cost option for our clients, but it requires budget to be allocated to the procurement process upfront, which may be a tough sell internally – especially in the current economic environment.

T&M consulting fees typically result in the lowest total advisor cost for buyers, but require upfront budget allocation which can be a hurdle for some organizations.

Fixed Fee

A fixed fee structure identifies a set dollar amount that is paid to the advisor either entirely upon contract execution or on a milestone basis. This structure is often offered at a premium to T&M pricing because the work is performed at risk by the advisor. Similar to T&M pricing, there is no pressure for your organization to sign a contract and the fee will not vary based on the selected project’s final size, technology, or other specific attributes.

A fixed fee could be a good option for companies that want a PPA transaction executed for a guaranteed price without cost overruns which can occur under the T&M structure.

FEE TYPE TOTAL ADVISOR COMPENSATION PAYMENT
TIMELINE
UPFRONT COST PRICE VARIES BY TYPE & LOCATION PRICE VARIES BY MWh VOLUME
SUCCESS FEE ($/MWh) High Over PPA term* No No Yes
SUCCESS FEE (% of revenue) High Over PPA term* No Yes Yes
TIME & MATERIALS Low Monthly up to PPA execution Yes No No
FIXED FEE Medium Milestones up to PPA execution Yes No No
*Success fee structures may have a recapture fee if no transaction is executed once the engagement passes a certain stage.

In our experience, there is not one single pricing structure that will work best for every company. Success fees are popular compensation structures that allow organizations to attain their climate goals while managing budget constraints in the COVID-19 economy. While we have seen increasing interest in success fees recently, 3Degrees continues to offer each of the pricing structures described above to best meet the needs and preferences of our clients.

Success fees are popular compensation structures that allow organizations to attain their climate goals while managing budget constraints in the COVID-19 economy.

Biolite Uganda – Energy Efficiency

African children holding a Biolite cookstove

Cook stoves reduce emissions in Ugandan households

The BioLite Improved Stove Programme distributes approximately 2,500 domestic fuel-efficient cook stoves to Ugandan households. A BioLite HomeStove is an ultra-clean burning fan-assisted wood stove that cuts toxic pollutant emissions by 90% for a cleaner planet and a healthier household, and reduces fuel use by 50%. In addition, utilizing BioLite’s patented Direct Conduction Thermoelectric System (DCTS), the HomeStove also generates its own electricity, providing users with enough reliable, on-demand electricity in a day’s cooking to fully charge a mobile phone and provide an evening’s worth of bright, LED light.  

 

HomeStoves are delivered to households.

HomeStoves are delivered to households. Photo courtesy of www.bioliteenergy.com.

CO-BENEFITS:

Environmental:

According to the United Nations, Uganda lost 26 percent of its forest cover between 1990 – 2005, and is still seeing a deforestation rate of over 2 percent each year. A typical Ugandan family uses wood or charcoal as their primary fuels for cooking. Because these new stoves rely on biomass and not wood, surrounding forests are being significantly less affected, protecting ecosystems and local wildlife habitats. The introduction and widespread adoptions of these HomeStoves will further reduce deforestation for fuel consumption, therefore decreasing erosion and nutrient loss. The protection of standing forests will ensure the maintenance of watersheds that regulate water table levels and prevent flash flooding.

Health:

Traditional wood and charcoal burning stoves emit an extensive amount of harmful toxins. By introducing biomass stoves, there are less indoor air pollutants, such as carbon dioxide and carbon monoxide. Safety in the home is improved, with fewer injuries, burns and respiratory diseases. While cooking, the HomeStove also generates its own electricity, providing users with the ability to charge a phone, or provide light.

Economic:

The presence of the HomeStove increases the standard of living for each household, as families can spend less time cooking and searching for firewood, and more time pursuing opportunities for economic development. The importation, sale, distribution, maintenance and monitoring of the HomeStoves also create employment opportunities throughout Uganda. The increased thermal efficiency of the cookstoves provide an economic benefit to rural Uganda, allowing households to spend more money on essentials, such as food, healthcare, and education.

 

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Krong Pa Solar Farm

Gia Lai Province Vietnam

Krong Pa Solar Farm brings renewable energy and local benefits in Vietnam

Located in the Gia Lai province of Vietnam, the Krong Pa Solar Farm is one of the first large-scale grid-connected solar farms developed under the nation’s new solar feed-in-tariff policy. The project was commissioned in December 2018, and developed by Gia Lai Electricity Company (GEC), a local renewable energy company with numerous projects in Vietnam. This project is connected to the 110KV national transmission network and contains 209,100 330Wp panels.

Nestled in Vietnam’s Central Highlands, Krong Pa Solar Farm was developed in alignment with local and international standards. No permanent households were relocated for the project. In addition to generating over 100 GWh of solar energy per year and reducing carbon emissions by approximately 80,000 tCO2e annually, the solar farm has numerous co-benefits:

+ Local residents were employed for the construction, maintenance, and continued operation of the project.

+ The project owner is providing support to the local community, including:

+ Local housing opportunities

+ Renovating a local kindergarten

+ Constructing and improving local access roads

+ Installing a water supply pipe for Kien Xuong village

Krong Pa Solar Farm in the Gia Lai province of Vietnam

Krong Pa Solar Farm in the Gia Lai province of Vietnam

3Degrees + Renewable Energy
Certificates

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