Negotiating PPAs – Are You Adding Value or Splitting the Difference?

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The more prepared you are and the more variables you have, the more you can trade value and avoid haggling over price, Andy Archibald, a Senior Consultant at Scotwork tells ICON readers in this thought piece.

 

Most of the time, negotiations will come down to one thing – price. And while most of us think we’re negotiating, it’s more likely we’re haggling – we start low, they start high and both sides will concede incrementally until a deal is struck.

In other words, we split the difference on price.

That’s a haggle, not a negotiation. And by only making incremental movements on one variable, usually price, we miss the opportunity to add more value to the deal. I see this all the time in my role as a negotiation adviser and trainer, including with my renewables clients negotiating Power Purchase Agreements (PPAs). The amount of power to be supplied and the term will be factored in alongside price, and there will likely be some penalties agreed for non-compliance, but much of the time the opportunity to add additional value is missed.

For almost 50 years Scotwork has been consulting and training the world’s leading organisations in negotiation. And during this time, we have been gathering data on the key capabilities of organisations and therefore can confirm the main reason for this is that most negotiators fail to think about what else they might want before the negotiation begins. This has been ratified by both my own experience of working in the energy sector and consulting with my clients’ negotiators.

Andy Archibald (Image credit: Scotwork UK)

Back in my earlier career, before I did what I do now, I encountered this scenario when renewing an energy supplier contract. We believed we were in a slightly stronger position than the supplier but were overpaying on the existing contract, so we explained that the price in the new contract would have to be 20% less. (Our limit position was keeping the price as is.) The supplier, unsurprisingly, saw it differently and stated they expected the price to increase by at least 20%.

That gave us a classic negotiation conundrum – we’ve started low, and they’ve started high, and both sides need to figure out how a deal will be agreed. Over a long and at times arduous negotiation, and without diving too deeply into how it unfolded, both sides made incremental concessions on price until the deal was agreed on a 16% price reduction in exchange for a longer-term contract. Both sides in the end were comfortable with the deal.

I reflected on this situation recently when working with a renewables client to upskill their teams negotiating PPAs. And I thought back to how many missed opportunities to add value were missed – improved liabilities for non-performance, improved payment terms, improved reporting, additional marketing and publicity support, customer service support, volunteering support, etc.

In the case of my client, their challenge was ensuring opening bids were priced high enough to get on the shortlist of projects in the first place, and then negotiating the deal including any further demands on price by the supplier. Where to pitch proposals and trading value are crucial, but arguably more so is the preparation beforehand.

Preparation is vital in any negotiation and is arguably the most important step in the process. The more prepared you are and the more variables you have, the more you can trade value and avoid haggling over price. And the more complex the negotiation, the greater the need for effective preparation.

Having a list of tradeable items is only one part, however; to maximise its effectiveness, trained negotiators will do their desk research and be clear on the following before the negotiation starts: objectives, priorities, limit positions, strategy, information to get and information to give, and tradeable items including lower priority asks and possible concessions. And they will be flexible, revising and making changes where necessary as they move through the negotiation process.

To come up with a good list of tradeable variables, you’ll need two things: creativity, so do it in advance because it’s extremely difficult (I would argue impossible) to think creatively in a live negotiation when the pressure is on; and the best lists have a range of variables with a mix of higher and lower value asks and concessions, meaning they can be traded at different points in the negotiation process. For PPA negotiations, this might include more favourable liabilities, reduced risk, better payment terms, reporting requirements, joint marketing and publicity, etc. The list could go on.

And the one other thing I would say is to try and go into the negotiation with a curious mindset and understand where the other side is coming from, especially if they’re pushing back. It might help avoid getting into a haggle later in the process.

Preparing well in advance of the negotiation and being curious won’t always guarantee that you’ll always get everything you want in a negotiation, but it will set you up to be in a stronger position to add value to your negotiations and avoid the trap of splitting the difference on price.