Why is it still so difficult to purchase power from clean energy sources?
Demand for renewables is growing. From households to boardrooms, the people with decision making power over energy purchases have made it clear they want more of their electricity to come from carbon-free sources.
Clean energy generation is rising as a result. Some 33 per cent of the UK’s power production last year came from renewables like wind and solar. However, purchasing green electrons and then routing them into your home or business remains a less-than-straightforward process.
Source: BEIS Energy trends section 5: Electricity (ET 5.1) . Information correct as of July 2019
Corporate energy buyers face a maze of complexities that make hitting their companies' clean energy commitments difficult, time-consuming, and complicated.
Why is that?
The truth is that energy markets are still in a period of transition, from an old world reliant on fossil fuel generation to a future where power is created with minimal to zero impact on global warming. The path from the old entrenched reality to an emerging new one was probably never going to be straight and narrow.
Even as governments were agreeing the original Kyoto Protocols back in 1992, advances in hydraulic fracturing technology unleashed America’s vast reserves of shale gas and oil. At a time when renewable power technologies were still in a nascent stage of development and adoption, fossil fuels suddenly became even cheaper and plentiful.
Awareness of global warming and a change in consumer and business attitudes means the shift to clean energy sources is finally happening, but the decades between Kyoto and today saw a build-up of regulatory measures designed to mediate between green policy objectives and the economic advantages of fossil fuels. That’s added significant complexities.
Regulation: helping and hindering
A broad mix of incentives, subsidies, emissions trading mechanisms, and clean energy certificates have been created by governments to make it easier for clean energy projects to find investors, distributors and buyers. Understanding how those mechanisms inter-relate - and then knowing how to take advantage of them - has never been a straightforward task.
Each country has its own approach to energy market regulation and subsidy regime. And rules everywhere have had to evolve with changes in the energy market.
All of this has happened against a backdrop of other market variables: intermittent renewable energy production (determined heavily by the weather), technology advancements, new market entrance and steady reductions in the cost of renewable generation versus traditional sources.
Current technologies evolving, new technologies emerging
If your image of renewable energy production is defined by tall white windmills and rooftop solar panels, taking a closer look can be surprising. Labels and jargon abound: zero carbon, onshore and offshore wind, solar, PF, geothermal, clean, green, hydro, tidal, biomass, and so on. Making sense of it all takes time.
Source:UK Energy Statistics, Q1 2019 https://www.gov.uk/
For instance, you could accurately label nuclear power a zero-carbon technology because of its emissions status, but grouping it under ‘‘renewables’’ is misleading. Much has been made of the potential for electricity generation using biomass - a ‘‘renewable’’ source to be sure, but there’s much debate about its benefits. Would purchasing power from a biomass project contribute to a company’s overall green commitments? The picture isn’t clear.
Developments in more mainstream technologies like wind and solar are rapidly lowering the cost of production, but how, where, and to what extent this is happening needs close examination on a project by project basis.
Energy storage technology - a key piece of the zero-carbon puzzle that promises to minimise the impact of weather on production - is an emerging technology factor with the potential to make a renewable energy project more (or less) appealing.
How to determine the value of these and weigh them into supplier assessments is a specialised skill set all its own.
How we buy renewable energy is changing]
The choice of clean energy buying arrangements is also expanding. This a good thing, but knowing what each option entails, and determining if it’s a good match for your company, adds another layer of analysis to the clean energy buying process.
Power purchase agreements (PPAs) are the preferred contractual mechanism. They come in three main forms:
Physical PPAs, where the corporate energy buyer buys the power generated by a renewable energy producer directly. If the buyer chooses to manage the purchasing arrangement through a utility company rather than in-house, this is referred to as a sleeved PPA.
Virtual PPAs (also called financial or synthetic PPAs) where the corporate buyer procures electricity at a ‘strike’’ price negotiated under a contract for difference (CfD). If the power is sold into the market above the strike price, the project pays the company the difference. If the electricity is sold-in below the agreed price, the company pays the project the difference.
Private wire’ PPAs, where the buyer purchases clean energy from an un-licensed project that doesn’t distribute its energy via the wholesale market. They eliminate many of the charges levied when electricity is imported from the transmission grid.
In addition to PPAs, new types of purchase agreements are being developed that allow buyers to increase their buying power and minimise risks related to any single project or technology.
This is all good news that expands market choice - but doesn’t it make the purchase process any easier.
Even if you can get to grips with technological, contractual, and regulatory complexity, there are still the normal market risks around price, project execution, and operations attached to any renewables project. They all need to be mitigated and managed.
From complexity to simplicity: the next transition
Have we made purchasing renewable energy too complex? Obviously yes. No one intended it this way, but the transition from fossil fuel to clean energy generation has moved forward in fits and starts.
Progress has been helped along by government regulation and lowering production costs, but in an environment of rapid technological change, contractual complexity, weather-defined variability, and a host of market risks.
For corporate energy buyers simply trying to find the best clean energy deal for their company, there’s a lot of complexity to factor in before even getting close to a procurement decision.
How do you know if the project, technology, and buying arrangement is the best fit for your organisation?
The answer lies in data, and in working with experts who know how to connect the dots between a company’s energy consumption profile, renewable commitments, procurement objectives, and the projects best suited to meet them all.