Achieving game changing growth

First among the two main approaches to corporate renewable energy procurement is “energy certification” – currently the number one method of green electricity procurement globally, although it provides only limited visibility of a corporate’s renewables commitment.

Certificates match annual electricity consumption with production and are the only legal way for corporates to claim energy is renewably sourced. If you have a power purchase agreement (PPA) with a solar farm, but you don’t have the certificates from that farm, then you can’t say your electricity is coming from there.

In Europe, and other parts of the world, they are known as Guarantees of Origin (GOs), in the U.K. they’re energy attribute certificates (EACs), and Renewable Energy Certificates (RECs) in the U.S.

They can be sold as either “bundled” or “unbundled” contracts. In the former, certificates are sold together with the underlying electricity. While the more common unbundled contracts see corporates purchase non-renewable electricity from one supplier and certificates from another.

Pros

In general, certificates are seen as relatively convenient and cheap, hence their popularity. According to Level10, a marketplace for renewable assets, bundled certificates may also help support the income of new renewable energy projects.

“Bundled RECs often come from new-build projects because in order for developers to receive financing and construct the project, they must show guaranteed revenue streams for the expected energy rather than merely the severed REC,” according to its Introduction to Renewable Energy Certificates.

Toby Ferenczi, founder of U.K.-based EnergyTag, a non-profit, industry-led initiative trialing certificate timestamping so consumers may match supply and demand on an hourly or half hourly basis with the power market to create price signals, tells pv magazine the current certificate scheme has been very successful overall, in driving the early adoption of renewables among corporates. He adds that they will represent an increasingly important revenue stream for new projects and developers who are using storage and are able to produce electricity at other times. “Now you’ve got price cannibalization issues because you’ve got lots of solar in the grid and the more solar you add the more energy you’re producing in the middle of the day, which pushes down power prices, and that creates an incentive to produce energy at other times,” he says.

Cons

While certificates may appear the “easy” option, on their own, they present several issues. Particularly in the case of unbundled contracts, prices can be artificially low, and do not encourage additionality (new renewable capacity). Greenwashing in this category is a big danger.

“When you’re trying to be 100% renewable you can’t rely entirely on certificates,” says Kyle Harrison, who heads BloombergNEF’s sustainability research. This is because certificates come from built projects, and when a renewable project sends electricity to the grid there is no way to distinguish green electrons from gray. Thus, you cannot confidently claim your certificate represents clean energy or is incentivizing new clean energy build.

Harrison believes utilities and retailers play a vital role because they could take on the risks and shield corporate customers. “I think this model is very important to scale especially for those risk averse buyers that are not comfortable locking into a 20-year deal for solar. They can instead work with one of these middlemen and know what they’re paying for.”

The game changer

Corporate Power Purchase Agreements (cPPAs) are the second most adopted purchasing method, and growing – providing almost the highest level of visibility for a corporate’s commitment to renewables.

Broadly speaking, a cPPA is a contractual agreement between a buyer and seller for the exchange of renewable electricity for an agreed price. They can be located on- or off-site and agreements typically last between 10-20 years. The two most popular models are offsite physical PPAs and virtual PPAs (see table for others).

In Europe, the trend has been towards offsite physical PPAs. Under this business model, a contract is signed between a developer and a company for the physical transmission of electricity via the grid. The two sides agree to set a price or pricing structure, and the asset owner maintains and operates the plant.

Virtual PPAs, also known as financial PPAs, are growing in popularity in Europe, reports Hannah Hunt, Impact Director at RE-Source, a European alliance representing clean energy buyers and suppliers. In the United States, they are the leading type of PPA, according to BloombergNEF and the Rocky Mountain Institute. “Roughly three quarters of the PPA’s in the U.S. are virtual,” says Harrison.

In some Asian markets, like Japan and areas of China, virtual PPAs are not viable since there is no legislation in place to allow for this type of transaction to take place, continues Harrison. “As a result, companies need to rely on a physical PPA, certificates or sleeved programs.”

With a virtual PPA, there’s no physical transmission of power between buyer and seller; rather, they enter a financial transaction, whereby the price for the underlying electricity is set with a Contract for Difference (CfD).

“Corporations that use significant amounts of baseload power in a single location – like data centers or energy-intensives – might prefer a physical PPA, while companies consuming lower amounts of electricity across multiple locations might find virtual PPAs a better fit,” says Hunt.

Harrison points to Spain, where a lot of companies are signing “pan European PPAs” where a contract is signed in one market to offset electricity consumption elsewhere.

“Companies are relying pretty heavily on that virtual model in a lot of markets across Europe,” he says, adding that intermittency issues mean physical PPAs are currently unable to be relied upon for 100% renewable goals.

Pros

Since cPPAs allow companies to pay a fixed price for energy over a specific number of years, they reduce electricity cost volatility and generate long term savings on energy bills. They can also offer an effective procurement method to reach 100% renewable electricity, help spur new renewable capacity build out, and thus reduce overall electricity costs.

Cost-effective storage is also helping to grow the physical PPA market by removing intermittency. “You can rely on a battery and, combined with physical ownership, you can move power from A to B in a more reliable manner,” says Harrison.

Cons

Companies are increasingly looking to sign shorter PPAs, continues Harrison, in the five-to-10-year range; however, the shorter a PPA, the more difficult it is for project developers to secure financing.

“There needs to be the right balance struck here, because it might be desirable for a corporation to sign that five year PPA, but can they really claim they’re helping to get a project financed if it’s only for five years and a developer probably needs somewhere in the 15 to 20 year range?” asks Harrison.

PPAs can be very good for helping developers get new plants built, notes Toby Ferenczi, if the PPA is long enough, because there’s a fixed price, and the counter party is bankable. “If the corporate doesn’t have a good credit rating and isn’t able to take risk, then it’s much less valuable to developers, so only a small number of corporates can really help developers.”

Furthermore, as Harrison explains, as more clean energy is added to the grid in a wholesale market, it reduces prices, because it is generated at zero marginal costs. “It’s pushing some of those higher marginal cost units of generation off the supply curve, meaning they’re not generating when they’re shut off, and what that does is bring power prices down and reduces the economic viability of clean energy projects,” he says.

This is a concern in markets with high renewables penetration, such as Texas. “You can continue to lower PPA prices to compete with those lower power market prices, but then developers aren’t making any money. Companies need to start thinking more about the financial returns on their deals, as well as the buying.”

As the table shows, many PPAs are not suitable for smaller corporates, but this is already changing. Experts Simon Göß and Michael Claußner at Energy Brainpool, a European market analyst focused on energy trading, told pv magazine, “There is potential for energy companies and electricity providers to fulfill the PPA and renewable energy needs for smaller corporates that are too small to engage profoundly with energy markets.”

What is more, smaller corporates can benefit from business models like aggregated or “multi-buyer” PPAs. “Aggregated PPAs allow smaller buyers to combine expertise, resources, and electricity demand with other buyers. In some cases, smaller buyers may pair with larger, more experienced buyers to leverage their comparative expertise,” says Hunt, who recommends governments set up financing and credit de-risking facilities, as Norway has done, where energy-intensive companies and buyer consortiums can benefit from public guarantees. “We also recommend looking to the Spanish government, which recently announced a financial support scheme for corporates seeking PPAs that will include credit risk guarantees to help drive investment,” she says.

Overall, RE-Source stresses the importance of understanding the underlying structure of the different models as they can have a significant impact on negotiated prices. Not all PPA structures will suit the risk appetite of corporates, and not all PPA structures can be suited for the different business models, it says in its Renewable Energy Buyers Toolkit.