Diversification: the key to de-risking renewable power procurement

Posted 23rd October 2019 | 927 words | 5 minutes

Corporate clean energy buying is in a boom phase.

diversified energy portfolio

The IT sector continues to lead the pack, while major industries like manufacturing, telecommunications, retail, and healthcare are also jumping into the fray.

That’s great news for the economy and the planet, but an expanding market for renewables also brings an expanding array of risks.

Every company is unique. Factors like size, structure, sector and geography mean each will have a unique energy consumption profile. The fact that different organisations use energy in different ways and at different volumes may not be surprising, but there are also differences in risk appetite to consider.

If a company’s consumption patterns, operational requirements, regulatory obligations, and clean energy procurement strategy aren’t in alignment, the potential for unplanned costs or even disruption to power supply is real.

The good news is that there are effective ways to mitigate those risks. Corporate energy buyers can start by understanding the three areas where their expanding renewable energy portfolios may be leaving them exposed:

1. Technology risks

As renewables become a bigger part of the energy mix, concerns about capacity risks attached to specific generation projects become more pressing.

Direct procurement typically involves a company purchasing electricity from one renewable electricity project and relying on that project’s chosen clean generation technology: solar Pv, on- or offshore wind, hydro, or other. In any power generation scenario, however, an asset’s forecasted generation can fall short of its actual output - particularly with weather-sensitive technologies like solar and wind.

Failing to meet a buyer’s overall volume requirements is one concern, and then there is the general ssue of intermittency. The power requirements of most businesses have a predictable ebb and flow, but increasingly popular (and cheaper) generation from wind and solar projects can be intermittent.

If the intermittency affects production and production doesn’t meet forecast, alternate (and likely more expensive) power sources will need to be sourced by the corporate buyer. Suppliers have a role to play in ensuring predictability in supply, and helping shape the baseload for corporate customers.

renewable energy risk

2. Market risks

The locked-in nature of pricing in renewable power purchase agreements works as a hedge against future price increases but doesn’t necessarily take into account the potential for market or wholesale energy prices to drop below what’s been agreed in the PPA.

Price volatility is an issue in every energy category, and with annual price swings of up to 40 per cent still the norm in power markets, buyers are increasingly looking for additional risk mitigation.

They want enough flexibility in their purchase agreements to trigger an adjustment should market prices for renewable energy fall below what they’ve negotiated.

renewable energy risk

3. Project and performance risks

As companies come to rely on clean energy projects for day-to-day consumption, the possibility that those projects fail to perform as expected or don’t begin operation as scheduled need to be back-stopped.

Projects may not achieve a minimum level of mechanical availability, fall short of their warranted power curve (if wind is the technology), or with solar, fail to hit the agreed performance ratio.

In order for corporate clean energy procurement to flourish, purchase agreements need to reflect and de-risk the possibility of supply disruption and unplanned costs for the buyer.

wind power output

##Options for de-risking renewable power purchase

To manage risk as the market expands and matures, diversification is becoming more critical: diversifying the corporate energy portfolio by avoiding over-reliance on any one technology, but also adding diversity to the contract mechanisms used to make agreements between buyers and off-takers.

The corporate power purchase agreement (PPA) is still the most popular way to procure clean energy. PPAs are evolving to meet the needs of a more diverse group of buyers, while supplementary mechanisms are developing that offer corporates additional ways to de-risk clean energy procurements .

PPA baseload

Multi-Technology PPAs

To limit exposure to capacity risks from any single technology, multi-technology PPAs are emerging that enable procurement from multiple projects using different generation technologies.

By allowing buyers to purchase from a mix of solar, wind and other technologies, companies place themselves in a better position to manage the intermittency inherent in any weather-sensitive clean energy source.

Volume Firming Agreements

Volume Firming Agreements (VFAs) are supplementary agreements that sit alongside PPAs. Large insurers use their economies of scale to aggregate procurement of clean energy resources and bundle them with storage and other resources to reduce the risk of any PPA losing its financial value due to future changes in weather or unexpected price reductions.

Aggregated PPAs

To increase their buying power, smaller companies are organising aggregated deals. Along with the added buying clout banding together provides, there are also advantages for renewable project developers.

A larger pool of big buyers means gives them access to more financial options and enables the creation of more extensive projects better able to minimise the unit costs of production.

PPA baseload

The corporate market for renewable energy is growing rapidly as costs go down, and businesses look for concrete ways to support environmentally friendly positioning. As the market expands beyond the IT giants who were its early adopters, a wider range of purchase options is needed to meet the needs of different sectors, company sizes, and risk appetites.

Recent changes to the European Union Renewable Energy Directive should help drive that process along, with member states now explicitly instructed to find and eliminate administrative barriers to corporate PPAs for wind and solar.

But the complexity companies face as they source appropriate renewable sources remains a factor. De-risking procurement requires expert support and a data-driven approach to analysing matching buyers with appropriate projects.