For much of the 20th century, vertically integrated utility monopolies owned and controlled the electric generation and transmission lines needed to serve homes, businesses, schools and hospitals within their territories.

This system was paternalistic. Like children, retail customers got security but had little freedom — and became crucially dependent on fossil fuels.

Today we are in the midst of a fundamental disruption of the utility sector, the birth of “energy 2.0,” based on sustainable, renewable fuel sources, smart digital technologies and robust customer choice. The cumulative impact may well be a dramatic reduction in the role of monopolistic utilities.

Among the most recent — and potentially the most disruptive — developments related to this trend is America’s major corporations maneuvering around utilities, going directly to independent wind and solar generators to purchase thousands of megawatts of clean energy.

How are companies doing this, and will it prove to be a lasting shift or a mere blip in the long and complex history of power markets?

The rise of the PPA

Direct corporate renewable energy procurement is possible today because of changes going back 40 years.

U.S. energy policy began to grow up when the oil crisis of the 1970s shook customer faith in energy security. The crisis kicked off two developments which define our 21st century energy ecosystem: the rise of independent power and customer choice; and reliance on renewable energy in lieu of fossil fuels.

In 1978, Congress enacted the Public Utility Regulatory Policies Act, which authorized private, non-utility entities — known as Independent Power Producers, or IPPs — to develop energy generating plants, and to require local utilities to buy their power at a defined price.

The long-term power purchase agreement (PPA) was developed in this era to govern the sale of independent power.

At first, independent producers could not reach retail customers and had to sell all their power to utilities. But federal and state regulators soon began allowing IPPs in some regions to use utility wires to deliver power to, and enter into PPAs with, retail customers directly.

These deregulated markets were said to provide customers with “direct access” and “retail choice.” Congress also soon passed a tax credit to stimulate IPP development of renewable energy projects. This first credit soon expired, and in 1998 the modern form of tax incentive was enacted.

After federal tax credits, state renewable portfolio standards, technical improvements, cost reductions and growing concern about energy independence, the U.S. by 2015 had installed over 85,000 MW of renewable energy capacity.

The rapid deployment of renewable energy is remarkable, but equally disruptive is the growth of retail customer choice. In the past decade, millions of customers have been able to install solar on their roofs and corporate campuses.

Interest in solar power has opened the floodgates to viewing energy as a matter of individual engagement and consumer preference; consider the rise of “smart” features, such as intelligent thermostats, LED lights, electric vehicles and, most recently, customer-sited energy storage units.

Utilities caution that Pandora’s box has been opened. But for customers, it’s like Christmas morning.

Early adopters

Growing customer choice and affordable renewable energy have led to an exciting new opportunity: direct corporate offtake.

Over the past five years, independent producers have sold several thousand megawatts of wind and solar power directly to major corporate customers such as Amazon, Apple, Facebook, Google, Microsoft and Yahoo.

Because of the large amounts of energy and household-name companies involved, some people claim that corporate PPAs are the biggest disruption to the power status quo yet.

Google kicked off the current corporate PPA trend in 2009 with its purchase of 114 MW of wind from a NextEra project in Iowa. Since then, the most publicized deals also largely have been in the consumer-driven, brand-obsessed high-tech sector.

But companies in many sectors understand that through renewable energy PPAs they can meet corporate sustainability goals, while also saving money and hedging against future price spikes in fossil fuel.

Walmart, IKEA, GM, Dupont, Johnson & Johnson and Mars are all part of this marketplace. And although the majority of corporate PPAs to date have been for wind power — it was markedly cheaper than solar at the time of Google’s first PPA — solar PPAs have emerged over the past two years and continue on a steep growth trajectory.

Corporate PPA deals announced to date are $100 million and up transactions. In part, this is because the underlying wind and solar projects are also nine-figure affairs, and thus have little motivation to deal with small buyers.

It is also because the transactions are complex and require, for first-time buyers, an exhausting process of analysis and internal alignment of corporate departments including facilities, procurement, treasury and legal. Many well-intentioned companies outside of the Fortune 50 have considered this level of effort and decided it was not yet worth it.

Still, excitement about corporate PPAs has spurred environmental groups to exert pressure on certain companies. Greenpeace, for example, publishes an annual “Click Clean Report” grading high-tech companies on whether they use renewable energy to power their data centers.

Other organizations have convened facilitating initiatives, such as the Rocky Mountain Institute’s Business Renewables Center and the Center for Resource Solutions’ Corporate Direct program.

Finally, energy and sustainability managers at America’s top companies have joined together around a well-publicized demand for even more customer choice: the 2014 “Corporate Renewable Energy Buyers’ Principles.”

What’s holding renewables back

All of this activity, however, masks some sobering realities. First, corporate PPAs are the exclusive domain of huge companies that can devote the staff to analyzing and pursuing deals in complex new markets.

Even those large, sophisticated buyers remain quite limited by federal and state energy regulations of the types of deals they can do, with whom they can make these deals and in what parts of the country PPAs are actually viable.

Because many buyers have national and global footprints, regulatory limits and compliant deal structures often prevent them from attaining company-wide price, sustainability and energy security goals.

For Fortune 1000 companies considering a renewable energy PPA, perhaps the most challenging and most overlooked issue is deal structure. Due to utility regulatory regimes, deal structuring takes more than putting together a willing seller and a willing buyer to negotiate terms.

IPP project owners can sell power at wholesale, but none are generally authorized to make retail sales to end users. America’s corporate power buyers are retail customers, so there is a regulatory issue right off the bat.

This means that an IPP and a corporate buyer need to find an intermediary — an entity authorized to buy power at wholesale from the IPP, and then transport it to the corporate customer and resell it, at retail.

Utilities could serve in this intermediary role, but would have to secure state regulatory approval and generally have been uninterested in trying. Alternatively, private “energy service providers” who have been licensed to serve retail customers under state “direct access” programs in deregulated states could step in.

To date, almost all corporate PPAs that involved the physical delivery of an electricity product were done with these providers, rather than utilities.

But there is still the matter of location to contend with, particularly when it comes to Renewable Energy Credits (RECs) in vogue with companies of many types.

Although corporate buyers often wish to say a given renewable energy project “powers” the company’s factory, campus or data center, wind and solar resources are not available everywhere. And not everywhere they are available has sufficient electric grid access or an appropriately permissive regulatory regime.

In the U.S. at least, there is an established system of verifying and tracking RECs so that legitimate claims can be made by the ultimate corporate buyer. This system is not global in reach, however.

Even in the U.S. some corporate buyers are entering into complex “REC swap” and “REC arbitrage” transactions in the attempt to cover the greatest range of facilities at the lowest cost.

Making a system for renewable credits work globally — and creating a fair, understandable set of rules about what corporate sustainability claims can be made based on use of a particular REC transaction structure — must be done for the corporate PPA market to continue to be seen as legitimate by the environmental community and by the American public.

Seeking solutions

Sellers, buyers and the NGOs supporting these transactions are aware of these myriad roadblocks for corporate power purchasing and actively exploring solutions.

Sellers have become more willing to carve up projects so multiple corporate buyers can take small slices of the project output. Buyers are looking at club or syndicate style deals, where one large buyer will oversee diligence, negotiations and then underwrite a PPA transaction, allowing smaller buyers to participate on equal, pre-arranged terms.

All sides are making progress on understanding project risks, deal terms and on standardizing transaction terms.

Many corporate buyers also have sought to avoid these regulatory challenges by entering into a more arcane deal structure: the so-called “virtual” or “synthetic” PPA.

In virtual PPAs, no electricity is bought or sold. Instead, the IPP and the buyer enter into a financial arrangement, such as a fixed-for-floating price swap, with reference to a specific project. They also transfer to the buyer the “green tags” associated with that Project.

As no electricity changes hands, the aforementioned utility regulatory issues do not exist, yet the buyer still can claim honestly that its PPA was the long-term revenue agreement that made the project happen.

Virtual PPAs also require compliance with the post-recession financial industry regulation known as Dodd-Frank, and are complex and somewhat challenging to explain internally (especially at companies that pride themselves on never entering hedging transactions or other complex purely financial transactions).

All of this activity shows that corporate America is waking up to a truly disruptive idea: that energy can be cheaper, smarter, more secure and friendlier to the environment. Beyond that, energy 2.0 may be available not from utilities but from a deregulated private sector.

Whether most companies will go back to sleep and the corporate PPA will remain mostly just a dream depends on innovative financial and transactional structuring, market legitimacy supported by NGOs and limited regulatory reform.

The jury is most definitely still out, but there is great reason to believe that corporate demand, along with the connection to many parallel and consumer-friendly disruptions in the energy sector, in the end will mean corporate PPAs become a major, lasting part of the energy sector.

By Peter Mostow - Partner, Wilson Sonsini Goodrich & Rosati