Commercial, Energy Procurement, Industrial, Sourcing Renewables  -  August 4, 2016

Long-term PPAs, renewable energy not an easy mix

Long-term power-purchase agreements have long been a staple of budgeting for energy costs in the private sector, but wedding that concept with renewable energy can be a challenge, MP2 Energy director Clare Magee reported for Greentech Media on Aug. 2.

"Renewables are worth more than positive PR, but clean energy advocates have struggled to quantify the value," Magee said. "The formula isn’t readily standardized."

While a handful of Fortune 500 companies — including Apple Inc., Target Corp., Google, Wal-Mart Stores Inc. and General Motors Co. — have clear-cut green-energy goals, "procurement strategy isn't evolving with the rate of adoption." Private-sector companies, it seems, have an affinity for long-term PPAs, which are based on the assumption that wholesale energy costs will continue to rise in the future.

Locking in a set price for 10 to 20 years seems like a solid plan, but a contrary trend in energy prices over the last seven years has called the long-term PPA into question, and low-cost natural gas is likely to keep electricity prices down in the near future, Magee wrote.

Recent evidence aside, A 3Degrees executive was cited as defending the ultimate validity of the long-term PPA model, calling it a hedge and a tool to reduce costs. But Magee questions that rationale: "A long-term PPA is not a hedge. An actual hedge serves to reduce risk. A PPA merely fixes risk at an exorbitant premium."

In her report, Magee outlined methods to leverage clean energy to gain more than just a predictable bill, saying, "[O]n-site and virtual resources can transform renewables into flexible risk mitigation instruments."

Although the actual cost of fuel has flattened in recent years, the cost to deliver that energy is rising. Options such as "behind-the-meter solar" can hedge transmission and distribution charges by reducing coincident peak charges, Magee says.

"The 'shape' of solar generation naturally complements most customers' consumption patterns during the CP intervals," she says.

Additionally, companies with a virtual PPA may be paying twice for the same energy if they do not fit their retail electricity contract to renewable production.

Purchasing energy from wind generation under a PPA, for example, a company must liquidate that generation at the lower locational marginal price. That same company then must purchase the power a second time as conventional retail electricity delivered to its property.

It is important for a company's energy procurement team to collaborate with its sustainability group when negotiating renewables contracts to ensure that estimated interval production from renewables is incorporated into the load calculation for any given property, Magee said.

"Even firms for which energy is a principal cost input may be surprised to learn that it’s possible to achieve sustainability without sacrificing profitability," Magee said.

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