The Spanish "wave" gets to Italy
You find below the english translation of the interview given to Staffetta Quotidiana on January 16th by Miguel Marroquin and Dario Gallanti.
You can find the original interview here.
Interview with Miguel Marroquin and Dario Gallanti of ONE, advisor who in 2018 followed 1 GW of the 2 GW of contracts concluded in the Iberian Peninsula and now debuts in Italy with Audax-BAS. New transactions are expected in the summer. Public guarantee is a “false discussion”, the market parity is already a reality. On the purchase side the most active are still traders and utilities, large consumers back but catching up. Among investors in the forefront funds, IPPs and banks. Average durations in growth, discussed 15 years in Italy. Prices: first you have to understand what you negotiate, payment per kWh produced is not the only model.
During 2018 the Iberian Peninsula witnessed a spike in market parity installations and developments in long-term hedge products for renewables, with more than 2 GW of PPAs being signed in the last 12 months alone, this proving that RES investments remain a lucrative opportunity.
In this brave new world where the energy price represents the sole revenue stream for the investment, we have very often seen the name of the Spanish-based firm Our New Energy (ONE) alongside some of the most transcendent transactions as PPA advisor of choice. We have taken the opportunity of the participation of ONE to the agreement for the 10 year PPA on the 20 MW plant in Basilicata, to better understand the role of the PPA advisor in the transaction as well as the evolution of the market parity trend across Southern Europe, which seems to start relentlessly involving also the Italian peninsula. Hereby our interview with Miguel Marroquin, Managing Director of ONE and Dario Gallanti, Partner on what we should expect for 2019.
Q. Your name appears in several deals closed in the last months, including the 219 MW asset from Allianz Capital Partners in Portugal (v. Staffetta 19/12/2018). What is your role?
A. PPA advisory responds to two very clear needs which emerged at the dawn of the market parity era: the first one is that, by nature, the off-taker and the investors do not talk the same language, as the first one focuses on and reasons in markets terms (price and risk) while the second typically speaks the financial language and follows return utility functions (returns, price scenarios, financial risks, etc). For this reason, the interaction usually starts with at least one of the parties barely knowing what to exactly look for in a potential private PPA agreement. The second need comes from the difficulties that both actors are facing in the negotiation, drafting and execution of the deal, as the devil is in the details and given the long tenors, nature of intermittent renewable resource and end goal for the investor to maximize returns, basically very often they discover very after the outset that one party wants to buy and the other wants to sell, but they do not want to buy and sell the same thing.
What we do is therefore facilitating the transaction from the definition and structuring of the product throughout the actual negotiation until the deal closure. People are often impressed to see how many times one party can give out something in the transaction that has very limited value for him but very high value for the other side. Yet, you must know where to look.
Thanks to this very hand-on approach, we very recently celebrated our first GW of transaction we assisted from inception until closure.
Q. Structuring a merchant PPA of long tenor has (or has been until not long time ago) considered a very complex thing with few possibilities of success. Do you agree? And what is the most important aspect that allowed you to close?
A. About the difficulty of closing a 10, 15 or even a 20 year agreement, we partly agree with the statement: it indeed has some implications which bring the conversations and negotiations into a complex domain, but where there is a will, there is a way. It is very important to have at hand a set of tools and ideas that one has seen working elsewhere (other deals, previous experiences, etc) to maximize the chances of success of a true win-win deal, which is how we envision our participation to this process, in opposition to a more zero-sum tendering process which we do not favorize under the current form of development of the LT PPA market.
As we solely work on the generator side, mainly it is the true understanding on the ‘other side’ motivations and utility function, so we can easily and promptly navigate to a workable solution.
Q. Which counterparties have you seen being the first movers in Europe on the investment side during the last year?
A. The beauty of energy transition lays in the fact that control and hence value is moving away from centralized entities to be redistributed along the chain, where actors from all across are part-takers. With reference to the Iberian market we have seen everyone from the usual suspects, from the most aggressive investment funds and IPPs (Independent Power Producers) using leveraged structures seeking to maximize return in the shorter term, to the very large financial institutions with very risk averse and conservative returns investment criteria.
These players have very diverse needs, leaving space on the off-taking side to offer different products based on their risk appetite. That is why we usually start our engagement process diving deep in understanding the end goal of our clients as there is not one PPA solution that results to be the best for everyone.
Q. On this side, have the buyers mainly been traders so far or we have seen also large corporates?
A. First of all it is important to distinguish the pure trader from the utilities, the main difference being having a portfolio of final consumers which can support the off-setting of part of the risk.
Talking of market parity initiatives in Portugal and Iberia, we have seen that the pure traders were some of those more acquainted with managing the interaction between renewables and the market. . On the other hand, in the case of a trader, generally, not only we often found limited capability of “warehousing” the long term risk but some extra effort shall usually be performed to ensure the bankability of the PPA.
Independent utilities have proved to be very flexible in the negotiation, offering longer tenors together with physical off-take of the power. Differently, they usually have a limited appetite and sometimes limited bankability. Both these limits are solved by vertical integrated utility that are usually more easily bankable and have a strong appetite for long term cheap power.
The volume of corporate PPAs closed in Southern Europe recently is much lower than the one closed with traders and utilities, even though the appetite of large consumer is growing as the understanding that good opportunities may lay in long-term energy purchase is also raising.
We are currently working on several corporate initiatives, all we can say is that we have seen corporate PPAs to start closing the gap.
Q. We often hear that some of the largest vertically integrated utility will need to decide whether they want to sit on the buy side or on the sell side. Do you then see the risk of having only a limited number of off-takers quickly saturating their risk appetite for signing long term PPAs?
A. With prices of authorized projects constantly increasing together with the appetite of investors, this is a question that some utilities active in Iberia are certainly asking themselves at the moment.
Regardless of their decision, we expect to be the liquidity of the long-term forward market to offset the risk in the long run, not the trading books of one or few market players.
This assumption is – as we said – corroborated by the appetite we see from some of the largest European energy consumers to negotiated part of their long-term consumption in advance, this stimulating the creation of a long term price index also in the forward market.
Q. Who is usually sitting together with the advisor at a PPA negotiation table?
A. Most of the times we work side-by-side with top legal advisors taking care of the legal issues of the contract. The main topic being that the good lawyer shall define from the beginning all possible threats and opportunities along the tenor of the PPA and define a possible fix.
Even though in Italy we still find a limited number of lawyers specialized on market parity PPAs, good news is that both investors and advisors like us bring plenty of valuable experience from abroad; in many cases there is no need to reinvent the wheel.
Q. After last years’ volatility in the energy markets, investment banks might consider coming back and re-open their energy desks. Could they play a role?
A. We definitely agree with this observation and the come-back of investment banks could bring very interesting solutions and concepts. Of course, they follow strict regulations and they take some time, but based on our conversations we believe they could be playing a very fundamental role going forward, offering innovative solutions backed by their market as well as financial-markets experience, coupled with their strong balance -sheets and appetite for business. Obviously, they would have to remain in the financial structuring of things, but there is a lot that could be done.
Q. The elephant in the room: what prices do you see in the different markets you operate in?
A. Price is less and less the elephant in the room as the market has already proved both in Italy and in Spain to be able to provide competitive prices to ensure the financials of many of the projects. More than the price rumors that naturally circulate in the different markets, it is important to fully understand the type of product that is being negotiated for a given price level. Many investors have quickly understood that a pay-as-produced structure, even though more bankable, is not necessarily the most efficient structure to have in your PPA. We are seeing more and more “exotic” products to be discussed, this reflecting clearer requests and larger risk appetite coming from investors.
Q. Talking duration, it is interesting to see how during the last 12 months the average tenor has also rapidly increased in all Southern Europe, having ourselves successfully negotiated some 20 years PPA in Spain and being in deep discussions for 15 years tenors in Italy. In Italy there have been long discussions on whether the State shall provide some type of public guarantee. How do you see this?
A. We see this is actually a false discussion, because as revenue support for investing in new capacities in the most viable projects and competitive technologies, private long-term PPAs are already a reality. Also, our partners see a strong opportunity in having an investment product which bears no energy subsidy support risk whatsoever.
For this reason, we are obviously aware of the discussions and we are sure there will be plenty of investors willing to invest under the premises that the state will provide some type of subsidy/guarantee, however we believe the obstacle to a large penetration of market-parity renewables lies not in the support scheme from Member States but rather with other facets of the project development and lifecycle such as authorization process, grid connection, market design, etc.
Q. So, none of the agreement you closed so far entails any sort of facilitation eg regulatory, legislative, fiscal or similar?
A. None. We see most interest coming from the scalable fully merchant projects. Do you see a difference between Italian and foreign players?
The real difference is between stakeholders that have been directly exposed to the Iberian wave (whether they are Italian or not) and those who have not.
We say stakeholders because not only investors but also many of the off-takers, large consumers and financial institutions that had a positive experience in the Iberian market parity case are now moving – among others – to Italy, replicating their successful business models.
When it comes to private long term PPAs in Europe we are still talking of a relatively young market, moreover if compared to the US one (apart for the difference for market design there), but once the model has been proved feasible it is also easy to replicate.
Q. Next agreements on Italy?
A. All we can say is that in Italy, we expect very interesting transactions and new products / solutions to come across summer when the first significant volumes of solar authorization will become available. At a European level, watch out for large consumers as we expect some top-notch players to match market parity initiatives with very strong corporate PPAs. Both being necessary steps to ensure a smooth and sustainable energy transition in Europe.