Commercial, Finance, Industrial, Sourcing Renewables - July 14, 2017 - By John Hoekstra
PPAs: The answer to a corporate energy trilemma
The push for corporate sustainability and the adoption of renewable energy has accelerated in recent years due to a number of factors.
The first is that plummeting costs have made wind and solar power commercially viable for many organizations. Secondly, organizations have placed a greater emphasis on demonstrating leadership in climate action by participating in groups like the RE100 and the Science Based Targets Initiative to drive climate action forward. And, finally, today’s companies are striving to make meaningful impacts on the environment in order to mitigate carbon risk, reduce water scarcity and improve the quality of the communities in which they do business.
All of this is evident in the fact that nearly 25% of the global Fortune 100 have defined renewable energy targets in place today and many are seeking to use 100 percent renewable energy in the long term.
Despite these advances, some corporations face challenges in moving their sustainability strategies forward as a result of the perceived complexity that comes with the use of renewable energy. As the global energy landscape continues to evolve at a rapid pace, it becomes increasingly difficult for organizations to anticipate and react to the opportunities and technologies that could have a positive effect on their environmental goals and bottom lines.
In addition, the impacts of energy purchasing are likely to be felt within an organization across multiple departments, by diverse stakeholders, across disparate geographies. This intricacy of coordinating global sustainability and renewable energy programs and ensuring cross-functional stakeholder education and buy-in can be a hurdle to getting projects off the ground.
Fortunately, commercial and industrial companies can learn from the successful strategies of early corporate adopters.
Many organizations have already made significant, sustainable and cost-effective strides in clean energy through offsite power purchase agreements, or PPAs. The use of PPAs has surged in recent years. In 2015 alone, C&I buyers were responsible for the majority – 52% – of newly contracted wind capacity. These industry leaders are using PPAs to address their energy “trilemma” – finding solutions that ensure supply security, sustainability and profitability.
So, what exactly is a PPA? They are financial agreements where a developer arranges for the design, financing, installation and maintenance of a renewable energy system, and a company – known as an offtaker – agrees to buy the power that is generated at a fixed cost over the course of a long-term contract, usually 10-20 years. Virtual PPAs or VPPAs - also called synthetic or financial PPAs - allow a buyer to use a contract-for-difference model to acquire the benefits of renewable generation without many of the standard geographical and logistical constraints.
For example, a company’s physical location may limit its ability to install onsite wind or solar resources. While a U.S.-based company with sites in the western states may wish to implement wind power, constraints such as the regulatory environment, capital expenditure or intermittent natural resources quickly outweigh the potential benefits. But with the help of a VPPA, that company can invest in renewable energy from a wind farm in the Midwest, where wind resources and space are plentiful, while still realizing the environmental and fiscal benefits of renewables.
Procuring onsite generation for every site in a global company’s portfolio is also challenging. Most companies will be unable to fully address their energy load with onsite alone and the costs can be daunting. A VPPA provides the opportunity to generate green energy across multiple sites with a single transaction, leveraging the efficiencies and economies of scale a developer can deliver. On the financial side, a VPPA’s reliance on a contract-for-difference mechanism can be used as a practical risk mitigation tool, despite the lack of a grid connection. One of the distinct advantages of VPPAs and PPAs in general is the ability to lock in a fixed price for electricity in an environment of fluctuating power prices.
VPPAs offer a strategic tool for achieving ambitious renewable goals while simultaneously presenting distinct financial advantages. Today’s companies should leverage the invaluable roadmap that early corporate adopters of renewable energy have laid out. While substantial progress can be made with the use of a VPPA, offsite renewables are only one component of an integrated portfolio strategy. Organizations should also consider the strategic use of energy attribute certificates, such as renewable energy certificates, as well as distributed generation to meet their goals on a global scale.
VPPAs are uniquely suited for addressing financial, logistical and public perception issues that can challenge corporate renewable efforts and will continue to reshape renewable energy purchasing around the world. How will you use renewables to make step-wise progress towards your organization’s sustainability and financial goals?
As vice president of sustainability and cleantech services at Schneider Electric, John Hoekstra leads companies through the processes of strategic planning, greenhouse gas emissions reporting, renewable procurement, carbon position management and other sustainability related services. Past experience includes working in the environmental affairs and corporate governance departments at Dell Computer Corp. and Brown-Forman Corp. Hoekstra has a bachelor’s degree in chemical engineering from the University of Louisville and is a registered professional engineer.
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