Buying clean energy isn’t just for tech giants and global multinationals anymore. Companies of all sizes are finding ways to procure power directly from renewable sources – sometimes on their own, sometimes as part of a consortium, and using a variety of instruments to achieve their objectives.
Rising demand combined with a willingness to experiment is enabling a wider pool of off-takers to purchase wind, solar and other types of renewable power at prices similar to those paid by the Facebook’s and Google’s who led the way in direct procurement.
How are they doing it? Corporate Power Purchase Agreements (PPAs) are still the favoured way to obtain clean power volumes and hedge against price risk, but PPAs are evolving to address a more varied range of business use cases. And entirely new approaches to buying clean energy are also being devised.
We’ve gathered some of the most compelling of these to clarify the current and emerging options, and provide inspiration to corporate energy buyers still considering the best way to access the complex market for renewables.
Power Purchase Agreements, where companies negotiate volume and pricing directly from renewable energy projects, are surging in popularity. Corporate energy buyers use them to hedge against price volatility by locking-in or capping the clean power prices they’ll pay. That provides crucial visibility of future electricity costs for forecasting while ensuring targets for clean energy volumes will be met.
US tech giants like Apple and Google were among the first to sign renewable PPAs. But more established European companies like Norsk Hydro and Alcoa have also jumped on board, while mid-sized organisations are finding their own ways to leverage them.
PPAs have more than one form, including physical, virtual, and private wire. We’ll look at these in turn, as well as evolving PPA types from cross-border to multi-technology PPAs.
In a physical PPA, arguably the most popular type, the corporate energy buyer buys the power generated by a renewable energy producer directly. The power is delivered to the buyer from the seller directly or ‘physically’.
Physical Power Purchase Agreement
In some cases a buyer may choose to manage the purchasing arrangement through a utility company rather than in-house. This is referred to as a sleeved PPA, where the utility company acts as intermediary between producer and consumer, handling the transfer of energy and payment between both parties. The utility takes the power directly from the RE project and “sleeves” it to the buyer at its point of intake, typically topping-up additional energy supply where required.
Sleeved Power Purchase Agreement
In a virtual PPA (sometimes called a financial or synthetic PPA) the corporate buyer procures electricity from a renewable energy project at a negotiated ‘strike’ price. The project then sells the power into the wholesale market under a contract for difference (CFD). That means if the electricity 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.
Virtual Power Purchase Agreement
Thanks to exemptions in the UK’s power market regulatory framework, PPA’s can also be negotiated with unlicensed renewable energy projects. Referred to as a ‘private wire’ PPAs, they enable producers and buyers to avoid charges and policy costs levied when electricity is imported from the transmission grid. With the phasing out of many renewable energy subsidies, private wire PPAs offer more choice to buyers and more potential off-takers for renewable projects.
Cross Border PPAs
Within a harmonised regulatory environment like the EU (and US?) , it’s possible to source renewable energy from a clean energy project outside the buyer’s own country. Nike has recently signed a PPA with wind power giant Iberdrola to purchase 40 MW of clean electricity from the Cavar wind complex in Navarra, northern Spain. It will power Nike facilities across Europe.
A typical power purchase agreement focuses on a company purchasing electricity from one renewable electricity project, and relying on that project’s clean generation technology: solar, wind, hydro, geothermal, or biomass. In any power generation scenario, however, an asset’s forecasted generation can fall short of its actual output. 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.
According to Bloomberg, three-quarters of corporate power-purchase agreement volumes in the past have come from 20 companies. But that’s changing – close to 40 per cent of the PPA’s signed recently have been aggregated deals between smaller companies like Etsy and National Geographic. Along with the added buying clout banding together provides, there are also advantages for wind and solar developers. A larger pool of big buyers means they can build larger projects and take advantage of economies of scale.
Aggregated Power Purchase Agreement
Non-PPA approaches to clean procurement
Utility Green Tariffs
Having seen the popularity of PPAs explode, Utilities’ have been spurred to diversify their renewable offerings to avoid being side-stepped. While some are offering sleeved PPAs, arguably the most significant change has been the expansion of green tariffs for utilities’ commercial and industrial customers. Monitored by the World Resources Institute (WRI) and World Wildlife Fund (WWF) to ensure that green tariffs c ontribute to the growth of renewables, as of the beginning of 2019, 23 green tariffs had been approved or proposed to the EU.
Volume Firming Agreements
As renewables become a bigger part of energy procurement portfolios, concerns about capacity risks attached to specific generation projects become more pressing. Greater use of PPAs can also expose corporate buyers to the weather-related uncertainties around clean energy. While company electricity requirements are more or less static, renewable generation can vary on a daily, even hourly, basis.
The experimentation we’re seeing with multi-technology PPAs is one way the market is trying to address these worries. Another is the creation of Volume Firming Agreements (VFAs).
Microsoft and a group of partners including Allianz insurance, launched the first VFA last year. Not a replacement for PPAs, VFAs are contracts that sit alongside PPAs to help mitigate risks for corporate buyers. Insurers use their economies of scale to aggregate procurement of clean energy resources, bundling them with storage and other resources to reduce the risk of any PPA losing its financial value due to future changes in weather.
Finding the right option
As demand for clean energy grows and innovation opens the door to direct procurement for more and more companies, the array of mechanisms for making a long-term purchase will expand. That means more choice, but even more complexity.
Working out the best option for your organisation, and following the latest developments, is going to be crucial if all the objectives of renewable energy sourcing are going to be achieved.
Businesses will need to work collaboratively with developers, utilities and investors to get the most from existing mechanisms and support ongoing innovation. With continued collaboration and commitment to renewable procurement, new business models will continue to emerge that make it easier to achieve renewable energy goals.