Power-Purchase Agreements Propel Corporations toward Clean Energy
Businesses can align their energy costs with climate-change mitigation strategies by buying solar energy via power-purchase agreements (PPAs). Planning and executing successful PPA deals was the focus of lively discussion at the Renewable Energy Markets 2015 (REM) conference on Oct. 18-20 in Washington, DC.
The conference hosted federal and state government leaders, large corporate purchasers, leading utilities, and other participants in voluntary renewable-energy markets. Speakers discussed the role of utilities in providing innovative green products, the growing demand to acquire green power from commercial and industrial customers, and the options for procuring renewable energy.
REM 2015 was organized by the nonprofit Center for Resource Solutions with significant support from the United States Environmental Protection Agency. All resources from the conference are available online.
A Milestone in Procuring Renewable Energy
Kevin Rackstraw, vice president of Customer First Renewables, said that PPAs have many advantages compared to direct ownership of renewable power. Signing a contract eliminates not only the upfront cost of construction, but also the need for detailed in-house technical expertise. In addition, if properly structured, PPAs have limited risk and can be considered off-balance-sheet investments.
Two varieties of PPAs exist: virtual and physical. Rackstraw said the main difference is who holds the title to the output. In a virtual PPA, the seller maintains the ability to handle scheduling and all related market interactions. Thus, the virtual PPA is essentially a financial hedge against any increases in the price of electricity. Being financial instruments, virtual PPAs are subject to reporting requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. A physical PPA guarantees the buyer control over the actual flow of energy.
Reasons for Signing PPAs
According to data from National Renewable Energy Laboratory (NREL), the share of the voluntary power market is about two percent of national electricity generation. The main users of PPAs are non-residential customers such as big industrial manufacturers and corporations. According to Stephen Abbott, senior associate at Rocky Mountain Institute (RMI), “Companies are buying renewable energy because it helps them meet their sustainability commitments and PPAs provide a cost-effective tool to make that happen.”
Procuring renewable energy through a PPA also delivers significant cost savings and long-term price stability.
Another advantage of PPAs is the large-scale solution they provide. Meghan Chapple, director of the Office of Sustainability at George Washington University, said that, since the campus has multiple space constraints and little rooftop availability, procuring green energy through a PPA is an excellent solution that would also drive the university to meet its carbon neutrality target for 2025.
Created in partnership with Duke Energy Renewables, a new 52-MW photovoltaic project will supply green power to two campus locations in Washington, DC – American University and George Washington University Hospital.
The economics of a PPA are compelling. In Texas, the price provided by a wind PPA was $23.50/MWh in 2014, compared to the spot price of wind-generated electricity of $35.72/MWh. This comparison is based on statistics from the service area of the Electric Reliability Council of Texas (ERCOT). For solar, the difference was a little over $10: $38.70/MWh with a PPA compared to $50.31 on the spot market.
Companies Seeking out PPAs
Big corporations are setting long-term targets to run on 100 percent renewable energy. Data from RMI show that through August 2015, the year-to-date market corporate procurement of wind power and utility-scale solar energy has been 1.4 GW. Platforms such as RE100, the Business Renewables Center and the Green Power Network, provide resources and opportunities for companies to collaborate and share best practices.
Whereas federal and public renewable-energy procurement has grown quickly, companies in the information and communications technology (ICT) sector have demonstrated the highest interest in PPAs in industry thus far. According to NREL’s data, in 2014 113 ICT companies used 8.3 million MWh of renewable energy. Recently Yahoo signed a virtual PPA to procure 23 MW out of the Alexander Wind Farm in Kansas, joining a long list of brand names such as Facebook, Hewlett Packard, Microsoft, and Google.
Kaiser Permanente is another early adopter. The company has committed to cutting its greenhouse gas emissions by 30 percent by 2020 compared to its 2008 levels. In the beginning of the year, Kaiser Permanente signed a deal to purchase the green energy produced from a 110-MW solar-energy plant as well as the output from a plant producing 43 MW of wind power. Both plants are in California. The efforts of the healthcare service provider have been rewarded with the 2015 Green Power Leadership Award.
The Devil Is in the Implementation
Implementing a PPA can be a challenging undertaking. The process is complex and time-consuming. Businesses need to work out the financial structure and the risk allocation between the parties for each deal.
PPAs also generate accounting and operational difficulties. Abbott said hurdles to generate buy-in from within an organization are common. These obstacles relate to three crucial departments: accounting, finance, and procurement and facilities. Accounting departments experience difficulties in relation to derivative and lease-accounting structures. Finance departments see challenges due to the hedging characteristics of the virtual PPA. Procurement and Facilities departments that oversee the contract duration and are in charge of the reliability of electricity procurement have to plan to incorporate PPAs.
“Embarking on a PPA requires engaging all key stakeholders,” said Greg Pool, managing director of power purchasing programs at Altenex. Based on his experience working with universities, he said key steps in procuring renewable energy are ensuring everyone around the table understands the goals and motivations of signing a PPA and enabling the various parties to participate in defining the initial strategy. Rame Hemstreet, vice president for operations and chief sustainable resources officer for Kaiser Permanente, also considers the strong team behind launching the PPA as pivotal in generating buy-in for the idea within the organization.
It takes an extra effort to convince management at big corporations of the advantages of a power-purchase deal. Anthony Davis, project manager of renewable energy and facility sustainability initiatives at General Motors, said that it took his company roughly two years to implement a PPA. “It is all about taking down boundaries,” he said.
Because the concept of a financial hedge was seen as problematic at General Motors, it took extra education to convince the staff. Davis said that, so far, progress has taken place mainly in the United States operations of the company. However, once a successful deal is implemented, it becomes easier to spread the positive influence to other countries.
Chapple said the lack of subject matter experts within organizations sometimes requires senior staff to convince stakeholders that the PPA is a reliable option for procuring renewable energy and a viable pathway toward meeting sustainability goals.
As voluntary markets for renewable energy are projected to continue growing, PPAs will be an increasingly useful tool for purchasing green power. Closing a successful deal and propelling desired results requires education, inclusive communication, and commitment from various parties in each organization.
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