Commercial, Distributed Generation, Finance, Sourcing Renewables - January 25, 2016 - By Blaine Collison
Switching your company to renewable energy? Read this first
The renewable energy opportunity for Fortune 1000 companies has never been better. Renewable energy provides direct bottom-line benefits: Reduced energy costs, protection from price volatility, protection from regulatory risk, and positive reputational/brand value. Importantly, the recent extensions of the production tax credit for wind and the investment tax credit for solar have created market certainty, at least for the life of their extensions. For companies considering a renewables effort, this short review of key issues and risks to manage will help accelerate your efforts to harness clean, domestic energy.
From the 30,000 foot level, corporate renewable energy transactions are relatively straightforward: A company makes a long-term commitment to purchase power – and perhaps environmental attributes – from a specific generation facility. The power purchase agreement, or PPA, spells out the terms, conditions and prices for the transaction. Done.
The fact that over the last 12 months companies including Bloomberg, General Motors, Home Depot, Iron Mountain, Microsoft, Procter and Gamble, Yahoo, 3M and others completed more than one gigawatt of new renewable energy transactions underscores the fundamental value of renewable energy and its increasing accessibility to the corporate market.
But there are numerous complexities to address along the way. For you to successfully integrate renewables into your business, issues that include market access, economic and risk analysis, and execution must be managed. What follows are some recommendations and best practices that can help you do just that.
Market access
There are more than 5,000 renewable energy projects in North America: Which one is right for a given corporate customer? Many energy managers report a similar experience: They’re deluged by calls from suppliers, project developers and others, all promising career-making economic performance. Much of what’s offered sounds too good to be true, which raises the fundamental question: How does a company understand which project(s) meet its needs? Which projects offer the right economic value? Which mitigate risk? Which organizations will be good partners and which won’t?
Some companies address this by issuing an RFP and hoping the responses include a good option. This is risky: It can be challenging to normalize RFP responses, companies may not include the right data or complete data, and it’s very difficult to ask all of the right questions without some expertise in knowing what to ask.
Successful companies address this challenge by comprehensively evaluating the marketplace. Specifically, it’s important to have current tracking, development, economic and risk data in hand which enables energy managers to quickly identify compelling opportunities that may align with their company’s specific needs and criteria.
Economic and risk analysis
As much as electricity is a commodity, a price per kilowatt-hour of generation is only a fraction of the economic and risk analytics picture. A full treatment of these issues will need to be deferred to a longer space, but normalizing project economics and risks into comparative metrics is fundamental to making good corporate decisions. Issues to be considered include, but are not limited to: project size, project location, conditions within the project settlement zone, the specific type and model of generation technology proposed, the developer’s track record, financing structures, contract structures, permitting status, interconnection arrangements, contingencies, ownership structure, and more.
In many of the PPA contracts being used in the market, there are specific discretionary risks that can be borne by either the developer or the off-taker. A PPA structure that effectively meets the corporation’s needs will manage those risks contractually, often by placing them back on the developer. It’s critical to the long-term, ultimate value of the PPA to be able to identify and manage those risks.
Risk mitigation and reduction are critical areas of due diligence for a corporate renewable energy deal. Energy managers need to be absolutely clear about their company’s risk tolerance threshold. Not surprisingly, developers are most interested in offering the terms and conditions that are best for them, often without concern for the buyer’s risk tolerance.
Execution
Typically, a corporate renewable energy transaction will require the buy-in of multiple internal stakeholders, including: energy, finance, treasury, facilities, accounting, operations, real estate, taxation and legal. Each of these departments will have their own specific questions that need to be addressed.
In order for companies to successfully navigate these waters, it’s important to identify each internal stakeholder group’s specific questions, criteria, timelines and decision-making processes as early as possible.
Next steps
So with this overview in hand, what can you do to get ready to take effective action on renewable energy? Here are some first steps:
1. Map out your internal team: Make a list of all of the people and job titles that will need to be engaged in a renewable energy process, and begin to consider where each function will slot into the ultimate review and approval processes.
2. Gather your data: It will be helpful to have between 12-36 months of electricity and natural gas facility-level usage data. You need to know what you use, where you use it, and when.
3. Understand company goals: Does your company have a greenhouse gas emissions goal? A renewable energy goal? CDP reporting? Cost control goals? Green Power Partnership rankings? Renewable energy will provide compelling benefits across many of these. Knowing what goals are in place or pending may inform timing, scope and scale considerations.
4. Triage on-site and off-site renewables: Start to consider your specific facilities portfolio early and think about what facilities may or may not work for on-site applications; leased versus owned space, roof condition, etc. This will help clarify some basic strategic chunking for your company’s renewables efforts.
5. Work with an expert: A 10-20 year renewable energy deal commits millions of your organization’s dollars. Very few energy users have the direct experience necessary to navigate the full suite of specialized requirements of project identification, analysis and execution. A renewable energy advisor service can greatly reduce execution risk while accelerating the implementation timeline.
Blaine Collison is a Managing Director at Altenex, the leading provider of corporate renewable energy advisory services, and manages Altenex’s Washington, D.C. office. Prior to joining Altenex in 2014, Blaine spent 17 years at the U.S. EPA working on a variety of voluntary energy programs, including 10 years as the Director of the Green Power Partnership. He can be reached at [email protected] and you can follow him on Twitter @blainecollison.
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