Companies across a range of sectors — from car makers and airlines to travel companies — have been put on credit watch, or even had their credit ratings lowered, as a result of the coronavirus crisis, drawing increased attention to the issue of counterparty risk for renewable energy developers that sell electricity to such businesses.

Power purchase agreements, or PPAs, have become a central part of a renewables industry increasingly able to stand up without government subsidies, and corporations with long-term sustainability targets have emerged as key off-takers for projects.

In lieu of subsidies, PPAs — often spanning time-frames of 10 years or more — in many cases now represent a developer's entire revenue stream for a given project. They also help underpin the bank loans that finance the new capacity.

As a result, the creditworthiness of the businesses buying the green power is crucial for developers' financial stability. "Credit risk is extremely important," said Jason Tundermann, vice president for business development at PPA trading platform LevelTen Energy Inc. Most developers "need to take the PPA to the bank," Tundermann told S&P Global Market Intelligence, and that process of due diligence could come under added scrutiny now.

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"We're all going to have to be more cautious," said Zosia Riesner, director of power markets for Europe at solar developer Lightsource BP Renewable Energy Investments Ltd., adding that in the current economic environment, "there is less certainty around bankability."

Tundermann and Riesner both said they can imagine the current downturn changing the face of the PPA landscape, as some industries emerge from the crisis weaker while others prevail largely unscathed. Power demand patterns will also shift, as sectors like hospitality and retail slim down their operations.

Those who find themselves hit hardest by the crisis could also decide internally not to prioritize sustainability initiatives like PPAs, as manpower is diverted to dealing with the economic downturn at hand. "Certain activities that are related to sustainability could be pushed down on the priority list," said Kyle Harrison, senior associate for corporate sustainability at BloombergNEF. "For some [corporate social responsibility] teams, it's going to be a lot tougher to get deals through."

Danish wind developer Ørsted A/S, one of the largest actors in the global PPA market, also highlighted the heightened credit risk for counterparties in its March 25 investor update on COVID-19, but said the majority of its income comes from investment-grade, state-owned or state-guaranteed companies.

Many large power buyers are indeed expected to prevail through the crisis, with large technology firms continuing to build data centers and needing power. However, on March 26, just a day after CEO Henrik Poulsen's comments, the off-taker on Ørsted's — and the world's — largest ever offshore wind PPA, German chemicals giant Covestro AG, was placed on review for credit rating downgrade by Moody's in light of the crisis.

Risk management

With many developers still reliant on cash flow from PPAs, the market is looking at ways to mitigate risk. LevelTen's multi-buyer PPA facilitation, which allows developers to sell their power to a group of buyers and even across locations, can act as a risk management tool in this crisis, Tundermann said, and could provide access to green power for sub-investment grade businesses. Equally, off-takers can spread their risk across different renewables assets in bundled deals, too.

READ MORE: New off-take deals could slow as renewables market digests power price plunge

With the pandemic challenging developers' construction and delivery timelines, "you have to look at credit risk from a buyer's and a seller's standpoint," said BloombergNEF's Harrison.

Many renewables projects will see delays as construction sites and factories are closed and supply chains disrupted. Lightsource BP's Riesner said the crisis will stay in the market's collective memory and eventualities normally glossed over in negotiations will garner keener attention in the future.

It is also a moment for developers to show their operational capabilities. After watching how developers emerge from the disruption, "buyers will become more picky," she said.

In particular, smaller buyers entering the market "are a lot more risk-averse," said Harrison, which could be reflected in the design of new PPAs. As corporates seek to minimize delivery and price risks, the market may see more prevalence of so-called "collared" PPA deals, he said, where a floor and ceiling price is set, effectively limiting upsides and downsides. In addition, the market could see an increase demand for insurance products and exit clauses, said Harrison.

As the sector digests the disruption and the appetite for risk management strengthens, PPA contracts could become more complex. The legal mechanism of "force majeure" claims and even options like pandemic insurance could gain prescience, said energy lawyer Munir Hassan from CMS. "There will be a change in the way that people will look at risk insurance," he told S&P Global Market Intelligence.