What about Corporate PPAs in Africa? An interview with Baker Mckenzie Senior Associate

Quick Summary

Last year, we had the pleasure to catch up with Mike Webb, Senior Associate at Baker McKenzie, discussing about the paper he published regarding corporate PPAs. So what did we cover? Do see main points below:

• Corporate PPAs and licencing issues.
• Why are corporate PPAs important?
• How do we spread corporate PPAs?
• What make a PPA bankable?
• How can Baker McKenzie help?

Listen to the Live Interview? Click HERE.

INTERVIEW

RiA (Q1):  Today we have Mike Webb, Senior Associate at the Baker McKenzie and we’re going to explore a topic that is a very well talked about across the continent nowadays: corporate PPA (power purchase agreement).

Mike, just to start and to give justice to your fantastic career so far and the firm that you represent, would you mind giving us a bit of an understanding of who you are and what is Baker MaKenzie please?

MW (A1):  Absolutely.  I’m a senior associate in our Johannesburg office here at Baker McKenzie.  Baker McKenzie is a global law firm founded over 50 years ago with 77 offices around the world. 

As a full-service law firm, we cover various sectors and industries.  I personally am focused on the energy and infrastructure sectors and obviously have had experience in the renewable energy sector. At Baker McKenzie, we advise clients from developers to project sponsors to financiers. Really cutting across the sort of spectrum in developing various types of projects and we’ve had a fair bit of experience in Africa over the last few years.  The renewable energy practice at Baker’s is very successful around the world; in hot markets like the US, Europe, Australia, Asia and recently Africa.

RiA (Q2):  You recently put together a very fantastic article, talking about corporate PPA and you’ve given some very interesting information. Can you give us some insightS from that article?

MW (A2):  Yes sure.  The piece originated from a report that we coordinated here at Baker’s and the reports looked at the regulatory framework applicable in several African countries. They’re the framework applicable to corporate PPAs.  So, with the intention of really trying to understand what those frameworks look like, what challenges there are currently at play and what opportunities we can find.

One of the key constraints with corporate PPAs is that many stakeholders within the market don’t really understand what exactly they are and who can benefit from them.  This report was really an attempt to help and educate the market, while locking some of those opportunities.  We looked at nine different countries.  Each country has its own framework.  So, we can’t make assumptions that they are standardized across the board, but I would say that there does seem to be a general trend. One of the key issues is around the licensing of these types of projects. 

There is a low threshold in place in these countries where projects, usually above a megawatt, require a generation license.  Those licenses can be difficult to come by.  They’re time consuming and there’s uncertainty as to whether you’ll obtain the license. 

That was one of the key takeaways.  The other issues we encountered with corporate PPAs are macro kind of issues. The uncertainty is obviously a deterrent when looking to develop these projects, and financiers and investors need as much policy certainty as possible.

There were a few positives that came from this report and a couple of markets where reforms are slowly but surely moving ahead, and those types of reforms are the sort of policy reforms that that will help these opportunities.

Those are some of the key takeaways from the reporting and that article.

RiA (Q3):  Why those corporate PPAs are important to Africa?  You mentioned two key markets; it’d be good to name them.

MW (A3):  Yeah absolutely.  So I think one needs to take a step back and look at corporate PPAs in general and perhaps on a global basis where corporate PPAs have been a fast-growing trend across the globe.  I see two drivers.  The first is the economics and electricity price uncertainty; second is bringing electricity costs down. 

The last five ten years, the cost of various renewable technologies has decreased dramatically, and in particular solar PV and wind.  Those cost reductions coupled with the volatility of grid tariffs around the world, have led customers and large energy users to take the control back of the power prices.  So, they look at these corporate PPAs as hedging instruments against the volatility of the power costs. Then they look at these corporate PPAs as a way to reduce power costs. 

RE 100, as an example, is an initiative where large companies and multinationals signed up and committed to using a 100% renewable energy.  Those types of pressure from their large shareholders, pension funds and institutional investors who all have identified the major risk that climate change represents.

So economics and sustainability apply to Africa. In Africa, you’ve also got the reliability of energy supply. We tend to see the load shedding or power cuts having seriously detrimental impacts on businesses.  So bringing a more reliable supply of electricity is a major drive for us in South Africa. 

It comes back to the policy certainty and where the utilities have investment mandate.  Corporate PPAs provide a very nice way to keep the renewables market growing and keep the traction going and that’s important for any new industry, which needs that type of growth.

RiA (Q4):  How can we spread that across the whole 55 countries in Africa?  Do you have an idea?

MW (A4):  That’s a million-dollar question right? As I said, first and foremost, it comes down to policy and situation and we’re solving that as the first bottleneck.  Are the countries committed to a more clean and diversified supply of energy? In most cases, there’s a need for an improvement of the policy framework.  It’s also about explaining the benefits of corporate PPAs to all stakeholders within the industry; the regulators, the utilities, the distributors and ultimately the consumers.

We need to explain all of those benefits and come out with a solution that keeps everyone happy.  Socio-economic inclusion also needs to be brought into the equation.  Job creation is important and those factors need to be thought of. 

RiA (Q5):  To the benefit of developers but also investors who look at corporate PPAs as a way to step into the market, what makes a corporate PPA bankable?

MW (A5):  There needs to be that market certainty and that comes early at the policy stage.  There’s going to be an accommodation of these types of projects from a policy point of view.  If that certainty is in place, then developers and financiers would look at the credit worthiness of the off takers. 

You might find your corporate has a stronger credit variety than a distribution company or utility depending on the type of market you’re operating in; but often, sometimes they obviously might not.  I think one of the key issues with corporate PPAs is the length of the the PPA and the terms of it.  Banks and investors need to be comfortable that a corporate is going to be in business for the next 20 years.  If it’s a 20-year PPA, then there’s a fair bit of analysis and comfort that needs to be brought about.

There’s ways of working around that particular issue.  You can try and reduce the terms of the PPA and we’ve seen that in other markets in Australia, in Europe; where corporate PPA terms are reduced as far down to 10 years for example.  

The upshot of that is that the price is then going to be higher.  So that’s something that needs to be weighed out. If you’re not comfortable with one corporate’s bankability you might want to try and incorporate several corporates into one offtake arrangement known as an aggregated corporate PPA. 

That has the advantage of spreading that off-take risk across several off-takers.  So, you try and find an anchor off-tanker off taker, like you have an anchor tenant and you then sort of work around that.  It has its own challenges. So project certainty, completion certainty, price certainty and then the local market is always going to be an important aspect.

Do you need local partnerships?  Is this the community involvement? I think it’s a big factor particularly in many African countries where land arrangements are often regulated within a community.  So, ensuring that you’ve actually gone through the right channels to obtain your land permits is always important.

RiA (Q6):  One of the biggest issues is the policy certainty, the regulatory framework.  So, once a client, developer, or an investor has decided to move into a market, how does Baker support this client?

MW (A6):  Absolutely, thanks for asking sir.  We see ourselves as a business partner to our clients and particularly clients who are less familiar with various African countries and entering them for the first time.   So we would start tick things off with a full analysis of the project in the form of a due diligence report for example where we assist. We look at the project structure, identify the key risks, and identify the mitigation strategies for those. 

Then we lay down a plan for the investors to move through the development process of the project, reach a financial close and then go ahead and build the project.  We would assist with all the documentation that goes with that process.  So, we do the full spectrum of the legal documents of the project agreements, i.e. PPAs, construction contracts, operation contracts, corporate structuring of the project, the financing arrangements and the loan agreements if debt involved. 

Then there’s the advisory side as well.  So, like I said these are new markets and there’s tax considerations.   There’s exchange controls and regulatory considerations and for all local law requirements and the project as a whole.  We partner with chosen law firms. So we have identified chosen partners in all 55 countries and we work closely with those firms in various different departments across the firm globally and so we had that working relationship with the local advisors and we see ourselves as a provider in a single sort of legal service across the firms

 RiA (Q7):  I liked what you have described which is a structured and organized method to source projects which is exactly what we are advocating here in Renewables in Africa and that’s why we are rolling out our first workshop which gonna be looking at the inside but also how to source effectively project in Africa. Thank you for explaining to people here that it’s more than just asking a simple guy:  how can you find a project for me? 

Last question for you which is important: what is the typical size of corporate PPA that you see in Africa at the moment?

MW (A7):  Yeah that’s a good question and so again it goes back to the initial points or challenges that we have and in some of these countries where licenses are required for projects in excess of 1 megawatt.  Firstly, there’s a fairly big market and opportunity for the very small distributed energy projects; more like rooftop-size projects that fit within that megawatt restriction.  They typically are for your commercial, industrial type of companies with requirements up to 1 megawatt.

In excess of that, it’s a bit constrained with these licensing issues but we would see projects going up to 250 megawatts at this stage and I think one of the first opportunities or industries to grapple with these corporate PPAs is in the mining and the resources sector.  So that’s been at play for a little while in Africa.  Those projects range between 20 and 50 megawatts and then are structured in various types of ways. 

Certainly globally, we’ve seen projects that go all the way up to 200, 300 megawatts.  Some of those would involve multiple off takers clubbed together.  We have projects between 10 to 250 megawatts and really anything in

between.

RiA (finale):  Excellent.  So ladies and gentlemen, we were talking to Mike Webb, Senior Associate at Baker MaKenzie. Mike, it was a pleasure to talk to you today and thank you for sharing information. I’m sure everybody will find that very interesting.

MW (finale):  Great, thanks so much Tony and thanks for having me and I look forward to keeping in contact.

RiA:  Thank you, we certainly will.

Video link: https://youtu.be/F3q0q-UKQhY

About Mike Webb

Mike Webb is a senior associate in Baker McKenzie’s Projects Practice Group. Mike focuses his practice on the energy, mining and infrastructure sectors. He advises multinational investors and financial institutions on various components of a project, including corporate structuring, project development, project agreements, finance and regulation issues.

About Baker McKenzie

Baker McKenzie is one of the leading firms for cross-border transactions, providing strategic advice on deals involving the world’s leading financial institutions and multinational companies. From deal inception to business integration, the Firm provides an end-to-end service that helps clients bridge the gap between aspiration and achievement.

Energy Mining and Infrastructure

Baker McKenzie’s team of Energy, Mining and Infrastructure specialists in Africa works closely with the Firm’s global team, offering a wealth of experience across all relevant areas of law and a thorough understanding of the strategic and operational business challenges of operating in this sector. The team combines its global reach and full-service approach with decades of local industry experience.