December 9, 2019

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Community Choice Aggregators on the Rise as an Alternative Electricity Provider

Community choice aggregators (CCAs) are growing in popularity as an alternative electricity provider for communities that want more local control over their energy mix. And so, financiers, CCAs and other business leaders must assess what this growth means for the electric grid, utility business models and project finance. While there’s a primary focus on California, increasing energy loads being served by CCAs and other non-utility suppliers have been trending across the country.

The recent American Council on Renewable Energy (ACORE) Forum united dealmakers, policymakers and systems experts to confront the business opportunities, policy and regulatory issues, and technology challenges associated with integrating high-penetration renewable electricity on the grid. The goal of ACORE’s 2019 forum was to advance efforts for a modernized grid that values flexibility, reliability and resilience. One important session was Community Choice Aggregation: Impacts on Project Finance and Grid Management, which was moderated by Ed Zaelke of McDermott Will & Emery and included panelists Nick Chaset of East Bay Community Energy, Daniela Shapiro of ENGIE, N.A. and Britta von Oesen of CohnReznick Capital.

A Brief History

The first CCA formed in 2010 in Marin County, CA, and since then, the CCA movement has grown very quickly to 19 agencies (19 of California’s 58 counties). Notably, CCAs serve over 10 million Californians today. Helping local governments accelerate climate action is foundational to CCAs, with many seeing CCAs as a positive catalyst in promoting climate action, cleaner energy and finding ways to make the necessary energy investments to actuate transportation electrification and building electrification.

In a nutshell? They want to offer lower-cost energy that is cleaner and find ways to invest in local communities.

CCAs vs. Utility Bundled Service

As one panelist noted, CCAs look and feel a lot like a standard municipal utility or publicly owned utility, except that they provide the procurement and generation of service to customers rather than manage the wires. There’s also a choice component—where CCAs operate, the customer has the choice between the CCA and the incumbent investor on utility. That is, the CCA model in California is an opt-out model.

Financing CCAs

A key element of CCAs is that they are not financially supported by the counties in which they are located. According to developers, the market has evolved rapidly in the last few years, putting the market for CCAs in a different place than even three years ago. So what do they look for? Financeability and sound business models. Assessing the long-term value of power purchase agreements (PPAs) from CCAs with limited histories is difficult. But, financiers are getting more comfortable with discerning credit behind business models as CCAs improve understanding tied to data requirements, the financing community and the importance of attaining external credit ratings. Presently, only two of California’s CCAs have public credit ratings, but others are attempting to such ratings from the ratings agencies. In the meantime, banks and other financiers are trying to establish “shadow ratings” for some of the larger CCAs in order to get projects financed.

Unrated Agencies Actions

What can agencies do to provide the type of credit support to make deals work? For many, extended contract timelines (e.g. 2022, 2023) allow the development of a little bit more operating history. Rating agencies like Moody’s and Fitch have devised parameters for rating CCAs, which allows agencies to assess metrics and develop credit policies that align and further to produce quarterly unaudited financials that can be sent out to and the financing institutions to demonstrate progress.

The Durability of CCAs

Factors outside of financing affect the durability of CCAs. Customers want a renewable path and are asking for it, but the regulatory environment also needs to remain top of mind. What is happening in a certain state at a certain time—is there an oversupply of a renewable energy? An undersupply? The continued transparency of progress is essential. While there are risks that targets won’t be hit, there needs to be an understanding of all matters involved and a business model proven to be resilient. Developers require minimal risk that the system works because it directly impacts their cash flows.

Many CCAs understand what is required, what people want to see and how people want to get comfortable before financing, which can be tied to the volatility on regulation and enduring unknowns.

Reliability

CCAs have a resource adequacy obligation that is part of a broad reliability framework. But, at the end of the day, it’s the California ISO that maintains reliability (on one of the largest and most modern power grids in the world), operating a transparent wholesale energy market to meet the electricity needs of consumers, while increasing the amount of renewable energy to usher in the clean, green grid of the future.

The biggest reliability challenge in California is tied to retiring the gas fleet, which CCAs, are keen to problem-solve, partnering with generators, investor-owned utilities (IOUs) and competitive suppliers to come up with a backstop resource adequacy procurement agent.

Partnerships and Local Priorities

The CCAs have to be governed by their local elected officials, which means that they want to think about steadying rates that will reflect on local priorities. If a community is concerned about cost, then that will translate into the governance by those elected officials. There’s a high level of trust in local government officials to set water rates, to set the transportation fares and to govern the municipal utilities that operate across the country. Might issues with utility regulation of investor-owned utilities remain? Sure, but CCAs argue that there is an effective balance.

A concern that was raised in this discussion was whether there are enough qualified people to operate a growing number of CCAs. One answer to this was the suggestion that CCAs need to form partnerships for operation. Bigger CCAs are going to have more capacity to manage things in-house, which makes sense, but there is also a strong element of partnership in the industry. Small and medium public municipalities are partnering with large, very capable enterprises to provide the critical services that needed to deliver on commitments to the customers of the CCAs.

What’s Next

By and large, the CCA platform in California is considered a success and has positive momentum. Other states are actively investigating a similar-to-California choice for customers and untangling potentially complicated matters of regulation and assessing price and controls.

Though structured to provide modest discounts to customers, CCAs strive to offer a more durable value proposition in their delivery of innovative, locally focused customer programs. In fact, they’re banking on it. Rates may fluctuate over regulated utilities at some point, but with tailored programs to meet the specific needs of a customer base and their priorities, CCAs are confident in their resilience and in maintaining the vast majority of their customer base.

There’s a continued evolution on the path to 100% clean energy goals and CCAs are an integral component. As the industry develops and CCAs grow in prominence, so too will the number of parties willing to provide financing for projects with CCA offtake agreements and financing.

© 2019 McDermott Will & Emery

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About this Author

Edward Ed Zaelke Energy Lawyer McDermott Will
Partner

Edward (Ed) Zaelke is the head of the Firm’s Global Energy Project Finance group. He focuses his practice on project finance and private equity in renewable energy transactional matters. With more than 30 years of experience, he advises clients on all elements of alternative energy development and finance, including equity and debt financing, merger and acquisition transactions, equipment purchase and sale agreements, power purchase agreements, siting and other real property issues, governmental approvals, and engineering, procurement and construction (EPC) contracts....

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