Renewable energy projects generate revenues by selling energy - is it all that simple? In practice, various types of revenues exist.

By risk: Contract/Merchant

Most renewable projects have both contracted revenues and merchant revenues. Finding an offtaker and solidifying contracted revenues significantly derisk a project and are critical development milestones. In contrast, merchant revenues expose the project to the volatility of the future power markets. Depending on the project types and market characteristics, some developers are willing to take on more merchant risk when seeing an upside in power price or opportunities in energy arbitrage.

For a solar/wind project, contracted revenues are usually locked in through a PPA (Power Purchase Agreement), where the developer signs a contract with a utility company or a C&I customer, promising the delivery of a certain amount of energy at a certain price, usually over 10-15 years. For a battery project, a similar concept exists in the form of a Tolling Agreement, where the capacity of the battery is contracted out over a certain period.

By Attribute: Energy/Capacity/REC

Revenue can be also broken down by attribute. Different attributes serve different purposes and can be bundled into a single contract or unbundled and sold into different merchant markets.

While the most understood attribute is energy, essentially power generation, other attributes exist.

For example, one can get paid for simply ‘being there’, which is known as the ‘capacity’ revenue. This market exists, historically, for the need to ensure enough future capacity is available to generate electricity. Capacity revenues become even more relevant these days because of the energy storage needs. Unlike solar and wind projects, capacity revenue is usually the main source of revenue for battery projects.

REC (Renewable Energy Credit) is another source of revenue and is specific to renewable energy projects. It serves the purpose of accounting for the carbon emission impacts from energy generation to incentivize renewable energy development. Two markets exist in the US for selling REC: compliance and voluntary. Compliance markets are formed under the Renewable Portfolio Standard. RECs traded through compliance markets usually have higher prices than voluntary market RECs.

Why do these details matter to investors?

In the last few years, more growth capital has entered the clean energy space only to realize that financing clean energy projects is totally different from funding a software company. Most of these projects are capital-intensive and take a long time to scale. While I’m encouraged by the conversations going on around FOAK financing and how to mobilize different types of capital across the capital stack, I also want to call out one major type of funding that’s often overlooked - revenue! Clean energy investors, rather than relying on the old SaaS playbook when advising companies, which usually leads to ‘X as a service’ type of business mode, need to really hone the space and learn to help their portfolio company optimize their revenue streams.