• Corporate Sustainability
  • Finance Investing
  • Decarbonization
  • Sustainability
  • Energy Transformation

Navigating Extreme Change in Energy Markets: The New CFO Toolkit

Sebastian Foot
Apr 24, 2020

Corp Governance

It has never been more critical for CFOs to take a serious look at their CAPEX and ongoing OPEX. Their goal is simple, but not easy: how and where can we conserve capital and eliminate or reduce reoccurring costs.

For many global firms that are navigating the shift to a distributed, low carbon economy, energy has become a CAPEX and an OPEX through:

  • Making facility upgrades to modernize operations and improve energy efficiency
  • Making direct investments in onsite generation assets to secure energy supply
  • Paying variable electricity costs to meet daily energy needs
  • Purchasing carbon credits to help meet ambitious sustainability targets

Early intelligence has highlighted that the current economic crisis has begun to accelerate many components of the transition to a clean, intelligent, distributed energy system:

  • Greater focus on business resilience and sustainability 
  • Enhanced focus on energy investment and security
  • Outsourcing of non-core, bottom-line costs
  • Greater partnership with investors and capital providers to deliver solutions smarter

For companies pursuing new operating models, the energy markets (and the ecosystem of financing partners that support the market) offer a number of immediate opportunities to create savings, return equity, and manage riskOpportunities are not just driven by record-low wholesale power market prices and below zero crude oil prices. These opportunities are driven by the rapid changes to how we do business in the transition to a low carbon economy and they are there for the taking. 

Here are five ways a CFO can optimize their balance sheet, reduce cost, release capital, and leverage their position to hedge long-term energy costs:

  1. Review all energy procurement contracts and look at the break clauses: Whatever price of power that was negotiated 6 months ago is now out of the money. It may be prudent to renew these early or consider breaking them, paying the penalty and negotiating new terms.
  2. Corporate Power Purchase Agreements (PPAs): Corporate PPAs can offer a long-term price fix for energy secured against a specific generation asset (i.e., a solar farm in Spain). As wholesale energy markets have sunk, they have also pulled corporate PPAs down, enabling green power to be secured at prices below the long-term forward curve. 
  3. Sell generation assets (and procure power via a PPA): Solar, wind, and storage assets are highly prized by institutional asset managers. Investors would be willing to pay a premium for these assets when they are backed by a long-term PPA. The corporations would continue to purchase power from the assets.
  4. Purchase shovel ready energy assets to secure ultra-low cost power: Many corporate clients have ambitious plans to procure their energy entirely from renewable power sources. As wholesale power prices have rapidly fallen, many solar and wind projects are unlikely to be commissioned in the near future. Instead, developers and asset owners are now keen to sell these shovel ready projects at attractive prices. While these assets may be consolidated on a corporations balance sheet, they do not require significant equity investment. Instead, by taking advantage of reduced borrowing rates (e.g., 100% debt financing through a green bond issuance) companies can avoid deploying their own capital.
  5. Sell and repurchase emissions allowances (REPO deal): Corporations with a strong operating business can complete a REPO deal to create immediate working capital at costs that would compete with commercial banking terms and could be executed faster. They would agree to sell a percentage of their EU Allowances today and repurchase them at a pre-agreed date within the compliance period. 

These options all have the potential to be executed within weeks rather than months, which will create immediate savings or new capital sources. Thoughtful consideration and a network of partners are required to execute the implementation of these options. Leveraging the experience of your energy advisor will help manage cost, navigate commercial terms, and handle legal complexity.