The scope of commitments by corporations involving their own sustainability efforts around the globe has markedly accelerated this year. About 300 companies have signed on to the RE100 initiative, which brings together businesses committed to 100% renewable electricity. And recently, more than 400 businesses urged the Biden-Harris administration and the United States to set goals of cutting greenhouse gas emissions to at least 50% below 2005 levels by 2030.
A large number of companies are also setting science-based targets to reduce their emissions, relying on the Paris Agreement as a guide. In this insight, Morgan Lewis lawyers detail a few high-level tactics those companies are employing to achieve their energy commitments.
- Virtual Power Purchase Agreements (VPPA) are a growing area because they offer a solution to a particular need. More and more companies have corporate sustainability goals and are seeking to invest in renewable energy. These investments can take the form of acquisitions or joint ventures, installing solar panels on roofs of office parks or distribution centers or acquiring renewable energy credits (or RECs) through VPPAs. Through a VPPA, a company can purchase the intangible attributes known as RECs that correspond with the amount of energy generated by a particular renewable energy facility. Under these arrangements, the generated energy is delivered to the grid, the corresponding RECs are delivered to the buyer, and the revenue is delivered to the developer. The payments due under VPPAs are typically calculated via a financial settlement based on the difference between an agreed upon fixed price and the market floating price at a particular point on the grid. In some cases, we see corporate buyers also interested in purchasing the physical energy in addition to the RECs, and this presents various complex regulatory considerations.
- On the international front, corporate markets in Asia and Europe are still lagging quite significantly behind the United States in demand for corporate PPAs or VPPAs. However, in the last two years, there has been a significant uptick in interest in this area – particularly in the Scandinavian region and the United Kingdom. You are now seeing retailers, financial institutions, oil and gas companies, and many other corporations as a full range of consumers under VPPAs. This is really for two reasons: the demand from consumers to have the “green” credentials provided directly by a VPPA with a renewable power generator; increased supply due to a reduction of subsidies available for new renewable power development, which is causing more renewable energy projects to seek long term PPAs. But it comes with a couple of challenges – both stemming from the derivatives-like nature of VPPAs – that could put a damper on the market: the accounting treatment of VPPAs under IFRS rules, and regulatory tussles between the different agencies that regulate the energy industry and the derivatives/financial instruments industry. Until those regulatory issues are ironed out, it will limit the international market for VPPAs.
- While not surprising in light of the growth in renewable energy projects, we are seeing a shift toward a seller’s market with respect to terms developers are seeking and obtaining in corporate PPAs. Given the intensifying interest from corporations in renewable energy and a promise from the Biden-Harris administration to expand support for renewable energy, including possible expansion of tax credits, sellers are often able to find favorable terms early in the development cycle of a project. We are going to be watching these developments closely.
- When companies make investments in renewable energy, they want a return on that investment in the form of energy cost savings or the ability to make claims to customers about green practices. But companies need to be careful in their claims, because the broad principles embodied in federal and state laws do not always provide clear guideposts as to what enforcers will consider to be “unfair or deceptive” under those laws. Another source of confusion is the fact that the actual generation or source of the energy is disaggregated from the claims one can make about the energy one is using. For example, the producer of electricity from a solar facility could sell the electricity to one customer and the right to make claims about the source of that electricity—embodied in renewable energy certificate (RECs)—to a different customer. Only the buyer of the RECs, not the buyer of the electricity, can make the claim that it is using solar power.
- Now more than ever, environmental, social, and corporate governance (ESG) considerations and disclosures are driving many investment decisions. We are at a critical juncture about how companies are going to be required to disclose information about their ESG investments. And these requirements differ depending on the jurisdiction. The European Union takes a very top-down regulatory approach with defined terms and concepts to create metrics that allow for comparison across companies in various industries. To date, the United States has not adopted specific disclosure requirements and instead relies on the existing materiality standard to dictate what must be released, focusing on the disclosure of all information that would be material to a prudent investor. However, under the recently appointed Securities and Exchange Commission (SEC) Chairman Gary Gensler, it appears likely that the SEC will revisit this issue. Beyond the regulatory requirements, investors, customers, and employees are demanding the development and implementation of ESG policies for a vast array of public and nonpublic companies and funds. Another developing area to watch closely is how funds and companies with cross-border interest will address the complex and differing requirements.
- In the loan markets, there has been an explosion of sustainability-linked financings. The market has really focused on the E in ESG over the last couple of years as investors push green financing, with major companies committing billions to low-carbon investments. More recently, we are seeing more focus on the S in ESG, as there are new financings supporting social sustainability through social bonds or loans. Whereas the green loan market's aim is to facilitate and support environmentally sustainable economic activity, the aim of the social loan market is to facilitate economic activity which supports and addresses social issues. The UK’s Loan Market Association, the US’s Loan Syndications and Trading Association, and the Asia-Pacific’s Asia Pacific Loan Market Association have jointly issued a guide on social loan principles, which offers a framework of voluntary guidelines for lenders and borrowers to follow if they want to categorize a loan as a “social” loan.