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Oct 21, 2016

Lessons from a Landmark Aggregated Energy Deal

 


The sunny Boston skyline.

This week, a world-class university, the largest Level 1 trauma center in New England, and a parking facility in the center of Boston’s Financial District came together to announce a landmark aggregated renewable energy deal to purchase 60 megawatts of solar from a North Carolina solar farm owned by Dominion, a Virginia-based energy company. The deal highlights the importance of aggregation as a means to provide access to large-scale renewable energy projects for unique groups of buyers—not Fortune 500 corporations, but smaller businesses and nonprofits like universities and hospitals.

The Massachusetts Institute of Technology (MIT), Boston Medical Center, and Post Office Square Redevelopment Corporation signed the group transaction to enable the major solar project, which will power a significant portion of each party’s operations. The proximity of the Boston-area buyers offered an additional incentive to pursue the transaction with guidance from A Better City, a Boston business leadership nonprofit convener, and the support of CustomerFirst Renewables, a member of RMI’s Business Renewables Center (BRC). The deal is the largest aggregated commercial and industrial (C&I) renewable energy deal in the Eastern U.S., and the largest publicly announced solar purchase by a higher education institution in the Eastern U.S.


The Importance of Aggregation

As renewable energy costs have fallen dramatically over the past few years—approximately 60 percent for solar and 40 percent for wind power since 2008—interest in making the transition to clean energy has grown significantly across the country, and desire for large scale, off-site renewable energy has expanded beyond traditional energy companies and utility buyers.

Corporate purchasers have led much of the nonutility renewable energy revolution, with 52 percent of wind power deals in 2015 coming from major brands. But increasingly, colleges and universities have also expressed interest in powering their campuses with affordable renewables. That’s why the BRC and the Massachusetts nonprofit Second Nature just announced a partnership to provide higher education institutions with the resources and knowledge to execute renewable energy transactions. Along with hospitals and smaller C&I buyers, the potential of the aggregation market is significant.

“The Business Renewables Center has been tracking corporate deals for several years with great interest,” said Hervé Touati, managing director at the BRC. “Now we are especially pleased to see more aggregated deals with a strong mix of participants finding success in the commercial markets, as they will likely represent the next wave of growth in the market, allowing more and more companies to participate,” he said.  

These aggregation deals, although still relatively new, bring together buyers from diverse backgrounds with a common goal: to procure clean, affordable power at fair market value from a reliable resource. As MIT, Boston Medical Center, Post Office Square, and their partners at A Better City and CustomerFirst Renewables have shown, this approach can produce a winning strategy for a variety of buyers. “Pursuing solutions together opens doors for diverse organizations to access environmental and financial benefits on a size and scale previously unattainable,” said Gary Farha, CEO of CustomerFirst Renewables. “This exciting aggregated transaction is another pioneering solution that will deliver compelling value to the purchasers and furthers our mission to propel the adoption of large-scale renewable energy procurement across a wide range of institutions and businesses.”   

Now, as universities, cities, and hospitals are building the next wave of renewable purchasing, their ability to fold their demand into a single, bankable deal—despite varying environmental goals, electricity loads, and financial needs—will open a major new market segment to developers across the country. 


Here’s How They Did It 

The Boston deal began in 2015, when A Better City approached its members about the possibility of such a purchase, spurred by the growing trend of corporate renewable energy power purchase agreements (PPAs). The Post Office Square Redevelopment Corporation, owner of a premier parking facility in downtown Boston and an environmentally conscious business, partnered with experienced clean energy advisor CustomerFirst Renewables (CFR).

As the lead advisor, CFR brought deep understanding of the market to the partners, along with objectivity and critical thinking about how to capture the most value from renewables. As a neutral party, CFR brought understanding of the market and objectivity, which allowed it to align the interests of three different purchasers and negotiate on their behalf with Dominion to structure the PPA.

Along the way, multiple interested parties dropped out, and new partners joined the consortium. In fact, the last energy offtaker signed on during the request-for-proposal process, during which more than 40 responses were whittled down to just three. But, with A Better City’s community outreach, CustomerFirst’s experience in the power markets, and at least one committed offtaker from the outset in Post Office Square, a successful transaction was completed within nine months.

As with most aggregated deals, the makeup of the consortium matters. MIT is the anchor offtaker, taking delivery of 44 of the 60 MW of power from the project. While having an anchor participant is helpful in C&I aggregation deals, it’s not the only metric for success. Moreover, this transaction demonstrated that higher education buyers such as MIT are credible and attractive counterparties for financiers.

Julie Newman, director of MIT’s Office of Sustainability, described its role in the deal, saying, “This is a model where we’re thinking of solutions that are beyond the scale of the capabilities of the individual partners, but that demonstrate positive global benefits. By banding together, the partnership enables the parties to join in on a large-scale project that they couldn’t have done individually. Many thousands of organizations around the country that are too small to initiate their own power purchase agreements could potentially follow this cooperative model.”


The Power of the Convener 

Aggregation can work in several different ways, but in almost every case there must be a central organizer, or convener. The BRC has found four general types of conveners that can aggregate a utility-scale renewable energy purchase:

  • Utility—a natural aggregator, but regulatory hurdles can be significant in the non-wholesale market
     
  • Developer—a seller-driven process that follows the traditional sales process to recruit offtakers via business development
     
  • Market Maker—a large bank or electricity trader that buys an entire wind or solar farm and resells it in smaller chunks, taking advantage of its balance sheet; ability to de-risk; and ability to customize deal size, tenor, and terms for offtakers 
     
  • Buyer Syndicate—a group of companies or organizations pursuing a mutually beneficial deal. Critical to a syndicate is a convening party, the intermediary, an independent broker and/or consultant that takes responsibility for organizing offtakers

MIT, Boston Medical Center, and Post Office Square are an example of a buyer syndicate. Despite what looks like a wide variance in their characteristics—credit risk, offtake capacity, organizational classification, etc.—the flexibility and common goals of the consortium ultimately made this deal possible, and profitable, for all.

Terence de Pentheny O’Kelly, ‎engagement manager at CustomerFirst Renewables, emphasized the process behind the deal, saying, “This aggregated transaction was a success thanks to a broad educational effort at the outset, which built up an understanding of the options; repeated efforts to maintain alignment across the buyers; and an appreciation for the larger good above individual organizational preferences.”
 

What We Learned from This Process

This deal offered a learning opportunity, involving as it did an aggregation process within an up-and-coming market segment—hospitals and universities—with unique and diverse needs. For example, as a safety-net hospital, risk mitigation and price stability are paramount for Boston Medical Center. Weighing forward pricing risk was a much larger strategic goal for them than for other participants, though it still needed to be balanced with the environmental goals and the capacity demands of the overall group.

A second insight from this process is that the characteristics of each party can combine in unexpected ways. Post Office Square’s parking facility represented a much smaller electricity load than that of the other two parties, but it was a heavyweight in moving the deal forward. Because it was committed from day one, Post Office Square was integral in ensuring that the deal didn’t fall apart even as potential partners came and went.

Finally, the deal is an object lesson in the potential for growth at the nexus of higher education and renewable energy. This transaction is a good example of what campuses can aspire to after implementing efficiency retrofits or on-site renewable energy solutions, which can be insufficient to meet demand for larger schools. Utilities and traditional power providers rarely offer products to effectively meet environmental needs. But off-site PPAs, including through aggregation, offer the higher education market a semi-bespoke solution to meet its clean energy goals.

With the success of the Boston deal, we anticipate that more schools, hospitals, and small to mid-size businesses will be able to collaborate within their communities to complete mutually beneficial transactions in the renewables market.

For more on BRC’s University program, please visit our page here.

Image courtesy of iStock.

 
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