The worlds of power markets and renewables are colliding, and nobody seems quite sure what to do about it.

Though still a miniscule fraction of grid power in many places, renewable energy resources have momentum on their side. As they grow, they alter the functioning of the markets in ways that look different from traditional generation.

Wood Mackenzie launched its Power & Renewables Summit last year to unpack these changes, and in the intervening time, the signs of change have grown clearer. Deployment queues in every U.S. region show a dramatic turn toward wind and solar, proving this is not just a groovy California thing anymore.

Once built, these resources, which are essentially free to dispatch but cannot be called on command, push down wholesale prices, initiate transmission congestion and create sharp ramping needs for dispatchable power plants.

Ask what power markets and utilities should do about all this and the clarity quickly evaporates. To extend the "worlds colliding" imagery, it’s as if two planets’ gravitational fields are intersecting, warping space-time here and there, but nobody knows exactly what will happen when power markets and renewables connect head-on. Nobody’s witnessed it before.

There are early indicators that cheap wind is pushing down revenue for Texan gas generators and could ultimately make it harder for those plants to make money and stay open to balance the grid. But suggesting a change to ERCOT’s energy-only power market comes across like telling Texan high schools to dump football in favor of tai chi.

The variability of renewable energy generation suggests an increasing value for energy storage, which can shift those electrons to more useful times and offset transmission congestion, among other tasks.

From the power markets perspective, though, storage hasn’t made a dent, and investors aren’t interested in financing it without some long-term contracted revenue. The P&R Summit's many storage panels ended with the sense that everyone had better sit tight until the Federal Energy Regulatory Commission finalizes its Order 841 later this year. That won’t guarantee a viable business model for battery developers, but it will clarify how they can participate in wholesale markets.

Solar development has advanced much further than batteries, but as more and more capital rushes into that space, deals are taking on new risks by expecting certain returns after the period of contracted revenue.

California recently solidified its clean energy goals by legislating an end to carbon emissions in the power sector by 2045. That guides the market in the long term, but developers are scrambling to figure out how to turn such goals into projects between now and then. One idea that was floated at the conference: restructuring solar contracts to look more like capacity payments.

Corporate customers are diving into renewables in a big way, and they’re also trying to figure out the right way to do it. Corporate buyers shared what they need to see from energy deals to sell them to their executives.

If the event raised more questions than it answered, then it reflects the real turbulence in the sector right now. Plus, naming the question is the first step in answering it.

Financial outlook: Risky

Solar and wind have gone mainstream. While that’s a boon to projects in the short term, it could present financial challenges looking ahead.

According to finance experts the cash flowing into the large-scale solar industry, particularly from financiers willing to accept lower returns like pension and infrastructure funds, has put downward pressure on cost of capital. That constriction has coincided with an increase in risk as more projects rely on residual value when a power-purchase agreement (PPA) ends.

Taken together, the industry may currently have more questions than answers about whether projects can deliver on expected returns.

“When you put all that together, you get into a scenario where returns are not just tight, at a top level, but they’re also increasingly exposed to the revenue you get after a PPA expires,” said Cory Honeyman, director of solar research at Wood Mackenzie Power & Renewables. “We’re in a seller’s market. […] To win a lot of deals and acquire projects, you often need to have aggressive assumptions on residual value.”

At the summit, panelists said more and more financiers are clamoring for viable projects — and making risky bets in the process.

Kathryn Rasmussen, a principal in Clean Energy Infrastructure at asset management firm Capital Dynamics, said the last year has brought a tide of new entrants to the solar market.

“In the past 12 months, it’s become very frothy,” she said. “There’s a lot of risk being taken on that may not necessarily match the asset.”

While developers and financiers may not expect higher returns, they are willing to shoulder more risk, such as shortened PPAs, to win a project.

For some market players, it’s beginning to look like a race to the bottom. But Chris Archer, Macquarie Capital’s head of Green Energy Americas, said the market may be starting to recognize the challenges.

“I don’t think sponsors are just going to step up and accept lower returns. Maybe they’ll take a few in some cases,” he said. “I think we’ve gotten to a point where sponsors are starting to question the pricing that’s out in the market. I think that’s yet to flow through to what people are bidding on the development side.”

Added uncertainty stems from the approaching phase-down of the federal Investment Tax Credit for solar in 2020 and the Production Tax Credit for wind in 2021. According to Honeyman, the ITC phase-down will only add pressure to an environment where economics are already tight.

In a panel about the sunset of those credits, Brian Callaway, vice president of structured finance at sPower, said it will likely lead to a scramble.

“Uncertainty is where we flag and flail a little bit,” Callaway said of the broader industry. “Hopefully we can work together as an industry...to not compress these returns even more.”

How do you meet a 100% mandate?

California’s 100 percent clean electricity by 2045 mandate offers a strong market signal to clean energy developers, as well as the flexibility they need to meet it, said Julia Zuckerman, senior manager of external affairs at Clearway Energy Group, formed this year from the purchase of NRG Renewables and NRG Yield.

But even with a mandate, there’s still some market uncertainty. The challenge with a long-term goal, said Zuckerman, is that it’s set so far in the future that developers don’t have a clear understanding of how to progress in the near term.

“What we really want to know is what’s going to happen this year to make that happen and to get us on that track, especially with the PTC and ITC on their step-down tracks,” she said. “Renewables are arguably cheaper now than they’re going to be a year or two from now.”

The problem with increasing a goal set for 20 years in the future is that it doesn’t necessarily impact procurement today.

“So there’s still a lot of work to do on the implementation to make sure that those goals...translate to steel in the ground that people can see and feel the benefit [from], and you get the economic development,” said Zuckerman.

Restructuring PPAs is a part of that implementation process, she said. In Hawaii, where there’s a 100 percent renewable electricity goal and a high percentage of renewables on the grid already, PPAs are being structured more like a capacity payment.

“There’s the expectation going in — that it’s more important for these projects to be dispatchable than for them to provide megawatt-hours to the grid every hour that the sun is shining. They’re likely going to be incorporating storage, and there’s some expectation that they’re going to be curtailed,” said Zuckerman. “Once you’re in that mindset of [getting] to 100 percent, I think that helps to shift the way we approach some of these questions like curtailment.”

In restructured electricity markets, developer needs are different, she added. In those states, concerns center more on how markets for capacity and other services are designed, as well as the market rules around eligibility and how products need to evolve as a result.

Corporates ask for help

While it represents an enormous opportunity, there’s also a fair amount of uncertainty specifically within the corporate renewable energy market.

“Corporate offtakes have become almost standard in the market now. It’s probably about half the deals out there, at least,” said Gary Durden, managing director at CohnReznick Capital.

“They’re going to be driving demand for renewable energy projects [going forward],” he added. But “they do come with their own risk profile that tax equity investors and sponsors need to be aware of.”

That’s because corporates are generally newer to procuring renewables and aren’t as creditworthy as other, more traditional counterparties like utilities. Corporate buyers, meanwhile, have their own set of concerns around doing renewable energy deals.

“The more options we have, the better,” said John Pflueger, principal environmental strategist at Dell, speaking on a corporate renewables procurement panel. “Anything that reduces risk for us will be seen positively.”

Pflueger admitted he doesn’t have any specific suggestions for the clean energy sector. That’s partly because the industry needs to further educate people at companies like his. “The simpler you can make it for us to understand and communicate, the better,” he said.

Clear communication is important for several reasons. For one thing, it familiarizes sustainability leaders within the company with the process, and it arms them with the information they need to get executives on board — especially the CFO.

“It’s about getting that executive-level education and...executive-level buy-in,” said Tim Jones, manager of environmental compliance and regulatory affairs at Samsung. Sustainability leaders aren’t only educating their executives, he added. In some cases, corporate buyers also need to bring their utility up to speed.

Samsung has already achieved its 100 percent renewable energy goal through the purchase of renewable energy credits (RECs). The tech giant is now exploring virtual and traditional PPAs. As deals become more complex, the education piece will be critical.

Dell is also in information-gathering mode. The company has a goal to purchase 50 percent of its electricity from renewable energy resources by 2020, and it reached 29 percent last year. But the strategy to date has been centered on purchasing RECs, not the actual power. Pflueger said that Dell is now actively in the process of updating this sustainability plan and making it more ambitious.

“Given who Dell is, given what our portfolio of electricity use is — where we use, where we sit and what we want to accomplish as a company and who we are financially, because we’re a fairly conservative company financially — what does that strategy need to look like?” he said.

“Once we get that figured out, we’ll be talking [to industry] about projects and initiatives,” said Pflueger.