Corporate deal of the year: bp

Energy Risk Awards 2020: bp manages complex risk in giant renewable energy deal with Amazon Web Services

Jason Tate

The renewable energy markets are on the march. As the costs of building wind and solar projects continue to fall, government subsidies are being withdrawn, and developers are stepping forward to build a growing number of clean energy projects on an unsubsidised basis. But developing wind or solar projects – where almost all of the costs are upfront – relies on long-term financing that, in turn, depends on a degree of revenue certainty.

This is creating problems for developers. “There are a couple of inherent challenges,” says Jason Tate, chief operating officer, European gas and power at oil major bp. “Number one is that these projects need to be built at scale to achieve best-in-class return targets. And two is that there is a real market inefficiency in the post-subsidised world between obtaining traditional project finance and the classic corporate power purchase agreement (PPA).”

While an industrial energy buyer might be prepared to contract to buy power from a wind farm for a few years, they are typically unwilling to strike a PPA at a tenor or a size that matches the project’s financing needs, he says.

Step forward bp. The firm is seeing a growing opportunity to bring to bear its structuring, trading and risk management expertise – not to mention its balance sheet – to connect developers and corporate buyers. In doing so, it is helping to get wind and solar projects built, at scale, and enabling corporates to access low-carbon power to help them meet their climate change commitments.

“The key role we’re playing is in helping to get projects away at scale,” says Chris Ransford, senior counsel at bp.

Few corporate PPAs are as large as the one struck late last year between bp and Amazon Web Services (AWS), with 172 megawatts (MW) of capacity, reportedly from 50MW of solar farms in Spain, and 122MW from the giant 474MW Nysater wind project in Vasternorrland, Sweden, which is to be Europe’s second-largest onshore wind project when it begins operating in 2021.

The expectation of the two parties is to grow this relationship to more than 400MW of capacity.

The contract will see bp supplying power from the projects as generated; the tenor of the deal and the price paid by AWS is confidential, but Tate says the economies of scale bp can achieve will ensure a competitive price.  

Entering into long-duration deals, typically with renewable energy assets that are not yet constructed, is fraught with challenges. “These long-term contracts, in a subsidy-free world, are complex beasts,” says Ransford.

Tate rattles through a list of exposures that bp needs to manage in such a transaction: “You’ve got development risk, whether the project has the proper permission. You’ve got performance and operational risk. Is the asset performing as expected? Are we getting the volume that we’ve modelled as expected? You’ve got credit risk, which needs to be thought through, certainly the price, financial risk, what’s happening relative to the markets. Are you holding volume at merchant? How are you managing that merchant risk? That’s just a few off the top of my head.”

Ransford also notes that power regulatory and market systems are evolving over time. “In Spain, for example, it’s still an old [power] pool system – you imagine at some stage that will go and they will move to another system. When you’re drafting long-term contracts, they need to be able to ride those changes.”

Chris Ransford

Generator credit risk is clearly a major headache on such a long-duration contract. “It’s a classic issue when you’re facing a project-financed special purpose vehicle (SPV). You need to be creative,” says Ransford. If the generator were to default, the project finance banks would be first in the queue to be repaid, so bp might look at negotiating a second lien over the SPV, giving bp the right to be repaid after the senior lenders are made good, or to have a letter of credit in the transactions.

For bp, however, such complex, long-term transactions play to its strengths and its balance-sheet capacity. They are also closely aligned with its Reimagining energy strategy, unveiled in February. That strategy – designed to get bp to net-zero emissions by 2050 – is backed by 10 ambitions, one of which is to increase its investments in new energy technologies outside oil and gas, and another being to help countries, cities and corporations decarbonise.

“Our ambition isn’t just to flush out and flatten the carbon in our own operations,” says Tate. “Our goals incorporate our customer offerings and helping them achieve their own sustainability goals around decarbonisation.”