What is Supplier-lite?
In recent years however, Supplier-lite has become increasingly common in smaller projects. So what is Supplier-lite and why has it become so popular as an alternative route to market?
Supplier-lite essentially involves a developer setting up a special purpose supply company (SupplyCo) and a separate renewable energy generation company (GenCo). A REFIT PPA is then put in place between SupplyCo and GenCo. Generally SupplyCo and GenCo are both controlled by the project sponsors and SupplyCo will have only one customer – GenCo. In this structure SupplyCo purchases the entire output of the generating facility (in compliance with the REFIT requirement for a physical PPA) from GenCo and participates in the SEM Pool as intermediary under the Trading and Settlement Code, or if the export capacity of the project is less than the de minimis threshold (10MW), the SEM Rules allow it to be registered as “negative demand” against a supplier unit.
What are the advantages of Supplier-lite?
The obvious advantage of the Supplier-lite structure is that it allows SupplyCo to pass through effectively 100% of the REFIT benefits and market upside (where market payments are > REFIT payments) to GenCo. A less obvious, but equally important benefit is that Supplier-lite arguably gives the developer (and its lender) more control over managing market change. The vast majority of traditional PPAs contain a market change clause which will invariably be trigged on the introduction of I-SEM in 2018. In the event of a dispute between the parties as to the amendments required to the PPA arising from the market change, most PPAs provide that the dispute will be referred to an expert for binding determination. While Supplier-lite projects will be affected in the same way by a market change, a developer will clearly have more control over how the market change is handled under a Supplier-lite PPA than if it was negotiating with a utility off-taker under a traditional PPA.
Are there drawbacks to Supplier-lite?
Supplier-lite does however have its drawbacks. There are higher set up and registration costs than the traditional PPA route. The developer will have to incorporate a SupplyCo and apply to the CER for a supply licence. There are application fees for the supply licence, registration fees for the registration of the supplier unit in the SEM and, assuming SupplyCo is not already a market participant, there are accession fees for SupplyCo to become a party to the Trading and Settlement Code. There is also a requirement to post credit cover in the SEM for the supplier unit and for Transmission Use of System charges and Distribution Use of System charges.
More significant however is the requirement for a working capital facility to fund the potential shortfall between the PSO payments received by SupplyCo, which are based on ex ante forecasts and the PSO payments that should have been received by SupplyCo based on actual output. This difference, known as the R-Factor, is not paid out until the following PSO year. A working capital facility is therefore generally required so that SupplyCo can pay the full contract price under the PPA to allow Genco to service its debt, pending the PSO reconciliation which can take up to 24 months to process.
In addition, while Supplier-lite is relatively easy to manage in SEM it is likely to be somewhat more complex in I-SEM. For this reason lenders will generally require the sponsor to outsource the Supplier-lite services to a specialist provider of Supplier-lite management services. There are a number of experienced Supplier-lite service providers currently operating in the market, including some of the traditional PPA off-takers.
What does Supplier-lite mean for developers and their projects?
In summary, Supplier-lite has become an attractive and bankable route to market for REFIT projects. However, it won’t necessarily suit every developer and/or every project. In each case the developer should carry out a comparative analysis between the traditional third party PPA and the Supplier-lite structure, taking account of the costs and benefits of each option in the context of the individual project. Furthermore, the developer should consult with its chosen lender to ascertain its attitude to the Supplier-lite structure and its requirements from a project finance perspective.
