Author: Sarah Penndorf

Sarah Beth Penndorf is a director in the 3Degrees energy and climate practice. She has been working with Fortune 500 clients since 2011.

FAQs: PPA and VPPA

solar panels representing PPAs and VPPAs

Answers to your PPA and VPPA FAQs

Get your most questions about PPAs and VPPAs answered here. Check back frequently for updates. Have a question that you need answered? Contact us.

Frequently Asked Questions:

  1. Why are so many companies signing power purchase agreements (PPAs)?
  2. What is a power purchase agreement (PPA) and how does a PPA work?
  3. What is a virtual power purchase agreement (VPPA) and how does a VPPA work?

Q: Why are so many companies signing power purchase agreements (PPAs)?

A: Over the last 3 years, corporations have signed approximately 7 GW of either virtual or physical PPAs in order to offset their scope 2 emissions, support a de-carbonized grid, take advantage of all-time low costs of renewable energy and capture the value of declining tax benefits.  Most of these early movers used a well-proven structure (called a “contract for differences”) to enable them to gain economies of scale by signing large volumes from wind or solar projects in a financially optimal part of the country and then using those RECs to offset their load elsewhere. These long-term corporate contracts were directly responsible for enabling the financing of these renewable energy assets, thus also giving corporates the ability to prove their commitment to tackling climate change.  

Q: What is a power purchase agreement (PPA)? How does a physical PPA work?

A: A power purchase agreement (PPA) is a contract between two parties where one party (usually a renewable energy project developer) sells both electricity and renewable energy certificates (RECs) to another party (the buyer, sometimes called the offtaker). PPAs are a good mechanism for companies to make a long-term commitment to purchasing renewable energy.

Traditionally, the most common type of PPA has been the physical PPA. This type of contract is used most often by utilities for their energy procurement but a few experienced companies have also utilized this structure.

A physical PPA is structured as follows:

  • In order to participate in a physical PPA, both the buyer and the seller must obtain a license through the Federal Energy Regulatory Commission (FERC).
  • The seller (e.g. the project developer) builds, owns and operates the renewable energy project and sells the project generation and corresponding RECs as the revenue source  to finance the construction of the project.
  • The buyer purchases the energy and RECs as they are generated by the project.
  • The buyer takes legal title to the energy and the RECs at a delivery point agreed upon by the parties, either the project busbar or a nearby trading hub.
  • After the buyer takes title to the energy, it is responsible for the management of the energy – moving and scheduling the energy to its load or selling it into the wholesale power market. In addition to the aforementioned FERC license, this also requires forecasting of the project generation, the company’s load and scheduling experience. Some companies elect to use a third-party service provider for scheduling.

Companies that have elected to pursue physical PPAs typically are highly experienced energy buyers and have large, geographically-consolidated electricity load. They prefer to actively manage their energy supply and demand in parallel with meeting their renewable energy goals.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements

Q: What is a virtual power purchase agreement (VPPA)? How does a VPPA work?

A: A VPPA is a specific type of a PPA contract, used to procure long-term renewable energy. Unlike a physical PPA, with a VPPA the buyer does not receive, nor take legal title to the energy and thus the “virtual” moniker. The buyer continues to receive physical power from its utility or retail provider, allowing the buyer to utilize a VPPA in a different region than where it uses electricity.

In a VPPA (also sometimes called a “contract for differences”), a buyer pays a fixed price to the seller for the project’s generation and associated RECs. Instead of taking title to the power from the facility, which requires a FERC license and scheduling expertise, the energy is liquidated into the wholesale power market by the seller. When the energy is sold into the wholesale power market, it receives the corresponding floating market price and this revenue is passed through to the buyer.

More specifically, a VPPA is structured as follows:

  • Similar to a physical PPA, the seller in a VPPA is typically a renewable energy project developer who builds, owns and operates the project. The fixed PPA price it receives from the buyer under the VPPA is the revenue source used to finance the construction of the project.
  • The buyer agrees to pay the seller a fixed price for every MWh renewable energy generated by the project. This fixed PPA price is the guaranteed price the developer will receive for its project.
  • The project developer (or its agent) is responsible for selling the project output into the wholesale power market, receiving a market price on the agreed upon delivery point – either the project node or a nearby trading hub.
  • The “contract for differences” settlement is a comparison between the fixed price and the floating market price. When the market price exceeds the fixed VPPA price, the developer passes the positive difference to the buyer. When the converse is true – the market price is below the fixed VPPA price ‒ the buyer pays the developer the difference.
  • The buyer retains all of the RECs associated with the generated energy purchased under the VPPA.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements.

VPPAs: Four surprises for first time buyers

Desks-with-wind-turbines

Power purchase agreements (PPAs) – and virtual power purchase agreements (VPPAs) in particular – have become a popular and valuable way for companies to meet renewable energy and greenhouse gas (GHG) reduction goals. As many of our clients have experienced, there is a significant learning curve that comes with executing your first PPA–and one that should not be underestimated. 3Degrees has helped a number of organizations execute their first PPA or VPPA and have found that many of them are surprised by or unaware of certain key components for success.

Four important keys to success are:

  1. Advisor selection
  2. Defining the value of a PPA to your organization
  3. Stakeholder education and engagement
  4. Understanding that price and value are not the same

This article provides advice on how to successfully address each of these common stumbling blocks. If you are looking to execute your first deal, understanding and carefully thinking through these areas ahead of time will help ensure you have a smooth PPA procurement and implementation process.

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1. Advisor selection: be skeptical of deals that sound too good

Some advisors pitch VPPAs as money makers with no upfront costs for your company. These claims should be viewed with skepticism and examined closely. We recommend the following considerations when you are evaluating and selecting an advisor:

  • Know how your advisor is getting paid. Some advisors are making windfall profits based on a success fee pricing model. With this model, the advisor receives payment from the project developer upon contract execution and the fee is based on the long-term project revenue ($/MWh) or the size of the selected project ($/MW). The buyer benefits by avoiding upfront costs but this method is more costly over the long term. As important, it can also create a misalignment of incentives–the advisor gets paid more with a longer term and/or a larger sized deal. See our article on VPPA transaction fees for more details on how to make an informed pick for your advisor.
  • Be cautious of easy money. VPPAs are sometimes advertised as positive cash flow for buyers–meaning that buyers will actually make money by entering into the contract. If a VPPA truly provided easy money, then we would expect to see project developers or investment bankers (who always follow the money) building projects on spec to reap the rewards. Ensure you understand the underlying modeling assumptions that result in a VPPA with positive net present value.
  • Don’t bank on increasing wholesale power prices. Natural gas prices, which are highly correlated to wholesale power prices, are at historic lows due to the shale gas boom. We see no sign of a slowdown in US natural gas production [Source: EIA Annual Energy Outlook 2018], so be wary of price forecasts that show significant increases in wholesale power prices over time (and therefore increase the potential value of a VPPA for a buyer).

reason-two

2. Defining the value: creating a PPA “mission statement”

When the sponsor of the PPA or VPPA initiative sits within the sustainability team, the “why” behind procuring renewable energy is often so obvious to them, it goes unsaid. Consequently, they may be surprised when they face resistance from others in the organization. For example, a facility manager might be more focused on keeping the electricity bill low. Or an energy buyer might view renewable energy as an unnecessary and frivolous use of company resources. Or maybe the company attorney resists dedicating time to learning a new contract structure.

Stakeholder engagement (more below) is a key part of working with these naysayers. But before launching stakeholder engagement activities, it is important to define why the company is heading down this path. Your PPA initiative needs a mission statement.

The mission (or purpose) of your PPA initiative provides the foundation for all internal and external discussions. For example, your company’s values may align with procuring renewable energy. There might be public goals that need to be met. Or you may be facing shareholder, customer or competitive pressure to act on climate change. Understanding and being able to explain why a PPA is well-suited to meet your needs provides the proper context for internal discussions.

In addition, a clearly defined purpose provides guiding principles for assessing the many trade-offs that come with the PPA selection process. Some common VPPA trade-offs include:

  • A project located in the same state as your corporate headquarters versus a project in a less expensive part of the country
  • The desire for additionality versus preference a shorter contract commitment
  • Executing a single transaction to meet goals versus multiple contracts to diversify risk

When a company has a clearly articulated mission for their PPA initiative, the answers to these questions become simpler and the best-fit PPA can readily emerge.

reason-3

3. Stakeholder engagement: ignore at your peril

PPAs are complex contracts that require significant buy-in from across the organization. You will be introducing people to a lot of new concepts – concepts that are typically not part of the organization’s core business and outside people’s comfort zone. This leaves many stakeholders feeling uncertain and afraid to ask a “stupid” question. As a result, we’ve seen stakeholders avoid asking questions and internal deal champions that assume this lack of questions equals support for moving forward with a PPA. Unfortunately, the silence is often indicative of continued confusion and can create last minute project roadblocks.

So how do you get meaningful engagement with your stakeholders (and avoid unpleasant surprises later)?

  • Stakeholder mapping: Think carefully about all of the different departments that may be impacted by a PPA and/or may have decision-making authority. It can be useful to look at other major initiatives that required multi-departmental buy-in to ensure that a complete list is created.
  • Outreach: After the stakeholder map is complete, find the decision maker in each department. Build the relationship by telling them the renewable energy story, the PPA “mission statement” and the importance of their department’s role in the overall decision-making process.
  • Education: Renewable energy, wholesale power markets and the mechanics of the “contract-for-differences” are key topics for the stakeholder group to understand when pursuing a VPPA. These concepts are usually new to stakeholders and have very little to do with their day-to-day responsibilities. People do not need to be experts — that’s what advisors are for — but they do need to understand the value drivers and risks. Be very intentional about setting the tone for stakeholder meetings. Simple statements such as “we are all here to learn” and “please ask questions” can create an environment where real questions will emerge.
  • Follow-up: Individual follow-up goes a long way. This can be a simple email or a small group discussion on the specific topics that correspond to an individual and their role. This kind of targeted follow-up can create a comfortable environment for asking detailed questions, thus giving stakeholders the ability to confidently support your initiative.
  • Repeat: True stakeholder engagement requires building trust over the term of the PPA initiative. Stakeholders need to be given regular progress updates and provided with opportunities to ask further questions.

If you are working with an advisor, they should be able to provide some tools and resources to guide the stakeholder engagement process.

4. Evaluating offers: VPPA value is not just about price

We all like a good deal. There’s a reason why retailers run special promotions for items at $9.99 instead of $10 – we like paying the perceived “lower” price. So while our natural instinct is to select the lowest price, for VPPAs, the lowest price offer is often not the best value for the buyer.

Instead, consider: What is the long-term value of the VPPA for our company? And how can I ensure I’m making an apples-to-apples comparison between projects?

For example, how do you compare:

  • A wind project against a solar project given that these technologies have different generation profiles?
  • Projects with different start dates or different contract lengths?
  • Projects in different states or regions?

There are no simple answers, but a comprehensive quantitative analysis can provide insights that will allow a buyer to make a clear-eyed selection. Some of the most common approaches to the quantitative analysis include:

  • Using multiple forecasts of the floating wholesale power price and comparing these to the fixed contract price, resulting in a range of expected implied REC values
  • Stress-testing wholesale power price forecasts to understand potential value under a range of market conditions
  • Using a historical look-back to see how the contract would have performed if it had been executed three-to-five years ago

Executing a PPA is an incredibly powerful tool for meeting your corporate sustainability, renewable energy and GHG reduction goals. We encourage you to think critically about the early steps you can take to set yourself up for the successful execution of a well-understood and risk-mitigated contract.

If you are looking for help with an upcoming PPA or VPPA transaction, learn more about our renewable energy procurement services or contact us.

 

Renewable energy power purchase agreements

Wind Turbine

This article was updated in February 2018.

Viable procurement options for corporate and industrial buyers

As we discussed in the first article of this series, today’s renewable energy landscape has dramatically changed in recent years in large part because of the increasing pool of potential buyers –commercial and industrial (C&I) organizations. This new buyer pool has wider, easier access to a broad array of large-scale direct renewable energy procurement options and is implementing on-site solar and off-site PPAs at a record-breaking pace. But deciding which option is right for your organization can be complex.  This series helps lay the foundation to answer that conundrum. In the first article, we covered the benefits and challenges to C&I customers looking to use on-site renewable generation. This article will explore the potential of procuring renewable energy through power purchase agreements (PPAs), both physical and financial (defined below). Both types of PPAs can be powerful tools to help C&I customers develop robust clean energy portfolios and achieve sustainability goals. However, they do differ in a number of significant ways, and this article identifies these differences and other factors to consider when evaluating PPA opportunities.  

What is a PPA?

A power purchase agreement, at its core, is a contract between two parties where one party sells both electricity and renewable energy certificates (RECs) to another party. In corporate renewable energy PPAs, the “seller” is often the developer or project owner, the “buyer” (often called the “offtaker”) is the C&I entity. C&I renewable energy PPAs can take two primary forms – physical or financial (the latter often referred to as “virtual”). The best structure depends on the markets where the offtaker and projects are located, as well as the goals, priorities, and risk tolerance of the offtaker. Too often, these deals are framed as money-makers, but the real story is much more complicated. This related article dives deeper into the risks embedded in renewable energy PPAs and how to mitigate them.

Physical PPA

Physical PPAs are most commonly used by organizations that have heavy, concentrated load (e.g. data centers). This is because under a physical PPA, the seller delivers renewable electricity to the offtaker, who actually receives and takes legal title to the energy. Physical PPAs are best suited for competitive retail or direct access energy markets, such as Texas, Illinois, and California. They are possible – but significantly more difficult – in a regulated market. A physical PPA is structured as follows:

  • The offtaker buys renewable energy directly from a seller. In a typical renewable energy PPA, the developer builds, owns, and operates the renewable energy project, and sells the output to the buyer at a specified delivery point.
  • The offtaker takes title to the energy at the delivery point, as well as associated RECs.
  • The offtaker is responsible for moving the energy away from the delivery point to its load, typically done through 3rd-party service providers.

Virtual (or Financial) PPA

Unlike a physical PPA, a virtual PPA (VPPA) is a financial contract rather than a contract for power. The offtaker does not receive, or take legal title to, the electricity and in this way, it is a “virtual” power purchase agreement.

In a VPPA, an offtaker agrees to purchase a project’s output and associated RECs at a set fixed price. The developer then liquidates the energy at market pricing and passes the revenue through to the offtaker.  More specifically:

  • Similar to a physical PPA, the seller in a VPPA is oftentimes a developer who builds, owns, and operates a project and delivers the energy output to the specified point.
  • The offtaker agrees to pay the seller a fixed price for renewable energy delivered to a specific point, typically a market hub or project busbar. This fixed price set by the VPPA is the guaranteed price the developer will receive – no less and no more – irrespective of the floating market price.
  • The seller generates and liquidates a project’s energy at market pricing. When the floating market price exceeds the fixed VPPA price, the developer passes the positive difference to the offtaker. When the converse is true, the market price is below the VPPA fixed price, the offtaker must pay the developer the difference.
  • The offtaker retains all of the RECs associated with the delivered energy, as long as that is specified in the contract.

This type of structure is called a contract for difference (CFD). See the graphic below for an illustration.

VPPA - how it works

In this way, the seller is guaranteed a fixed price for the output it sells – which is critical for developers that are looking to finance new projects. These projects can be particularly attractive for buyers that want to contribute to the development of new renewable energy resources and that have electricity load that is widely dispersed.

VPPAs are typically only available in organized markets such as a regional transmission organization (RTO) or independent system operator (ISO), which serve as third-party independent operators of the transmission system, ultimately responsible for the flow of electricity within its domain. This is for two important reasons. First, VPPAs require market liquidity – where the developer, an independent power producer (IPP), is permitted to sell its power directly into the grid. This is the case in RTO/ISO regions, but not necessarily so in a vertically integrated market where a single entity is responsible for the generation, transmission, and distribution of electricity. Second, the economics of a VPPA hinge on the difference between the floating market price and the VPPA price. RTO/ISO regions pay a uniform, transparent price (varying based on time and location). The floating market price, therefore, cannot be manipulated by the developer, creating a reliable dynamic for the VPPA financial settlement.

Importantly, because no energy actually changes hands, the VPPA offtaker does not need to make any changes to how it purchases the electricity required for its operations.

Why enter a PPA?

There are four primary benefits to a PPA, regardless of whether it is physical or financial:

  1. Financial: PPAs provide a hedge against future energy fluctuations. In a physical PPA, the hedge value is realized because the buyer’s energy costs are kept flat. In a VPPA, the value is realized when revenues from the VPPA increase because market pricing has risen above the PPA price – offsetting similarly rising retail electric rates. It’s important to remember though, a hedge instrument is not intended to create upside but rather to manage downside exposure. Be wary of VPPAs with hockey stick forward energy price curves promising high net present values (NPVs)!
  2. Environmental: Both physical and virtual PPAs put clean energy into the electric grid, and the offtaker owns all the environmental benefits (RECs or carbon offsets) associated with its portion of the project. Both types of PPA RECs from wind or solar will have zero emissions and apply to WRI’s GHG Protocol Scope 2 market-based reporting methodology. And, if the PPA is with a new project, offtakers can easily and credibly claim “additionality” which, in its mostly widely-accepted definition, means directly causing a new renewable project to be built.
  3. Ability to Transact: Although PPAs are complex, they are well-understood structures. Some form of physical PPAs may even be part of an offtaker’s existing procurement practices. In addition, awareness of renewable energy PPAs has become more common through high-profile press releases by well-known companies (e.g., Google, Walmart, Amazon, etc.). All of this should facilitate internal stakeholder conversations and ultimately leadership buy-in. While VPPAs may face more scrutiny than their physical brethren – due to unfamiliarity as well as their potential accounting impacts (see below) – these barriers are surmountable.
  4. Marketing: PPAs are a well-understood renewable energy story to share with internal and external stakeholders. They also move the needle on a double bottom line – helping to achieve important corporate environmental goals while also (potentially) saving money, which makes for powerful brand and marketing narratives. And because the offtaker owns the RECs, it can make marketing claims and report on greenhouse gas reductions.

PPAs have financial, environmental, transaction, and marketing benefits.

Physical vs. Virtual

Despite these shared benefits, physical and virtual PPAs do differ in some material ways:

  • Regulatory: Physical PPAs require that the offtaker obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the power producer. While not insurmountable, doing so may be outside of the offtaker’s core business or simply be too time-consuming. An offtaker can engage a third party already authorized to buy power at wholesale, serving as the market participant. This, of course, has its own risks (see below). Because no power is changing hands in a VPPA, the offtaker does not require FERC authority.
  • Regulatory (again): Although the regulatory requirements for VPPAs are still being formed, the prevailing view is that these contracts are “swap” agreements and therefore bound by Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which includes reporting, recordkeeping and registration requirements for swap transactions. Physical PPAs are not typically considered swaps subject to Dodd-Frank. However, if a physical PPA contains specific terms (e.g., price optionality, buyer curtailment rights, option for financial settlement), it may in fact be deemed a swap and subject to ongoing reporting obligations. See this article for more.
  • Transmission/Delivery: Physical PPA offtakers need to consider what happens with the energy once they receive and take title to it and find a solution to move the purchased energy to its locations, requiring transmission, distribution, and delivery. C&I offtakers would typically contract with third party providers for these services, and perfectly syncing the deal terms of these services (typically limited to a couple to several years) with those of longer-term PPAs is unlikely and can add a compounding layer of risk and complexity to the overall transaction.
  • Location: As mentioned above, physical deal structures where the energy is delivered to an offtaker’s facility are limited to competitive retail markets (i.e., PJM, Northeast, ERCOT and other isolated states in MISO and WECC). Virtual PPAs have broader potential, possible in any RTO or ISO. Further, because VPPAs are financial in nature and don’t involve moving electricity, they are not inherently location-dependent. This means offtakers can find the most attractive project, no longer limited to projects located within its immediate region. It also allows offtakers to consolidate its demand across the country to capture economies of scale.
  • Internal Approvals: PPAs will require learning on multiple levels for an organization, but VPPAs tend to be a new procurement mechanism for most offtakers, requiring education on technical and non-technical topics alike. Not to be under-estimated, VPPAs require new departmental interdependencies within organizations, which can have cascading affects across the company. Processes will need to be developed, building a new ecosystem of collaboration among otherwise distant and unfamiliar stakeholders. All this takes time, effort, and persistence.

Each of these factors should be considered when evaluating PPA opportunities.

 PPAs and VPPAs have important regulatory differences. 

Risky business?

Although PPAs are increasingly common among the C&I segment, they are not risk-free. There will be tradeoffs in every deal structure, and special attention should be paid to the following risks and potential mitigation measures.

  • Market risk:  Although offtakers have market exposure without a PPA, there is market risk within these transactions, especially VPPAs. Because a VPPA relies on a floating market price, the importance of understanding the forces which can affect that floating price – and drive it up or down – can’t be overstated. Factors that can impact future electricity pricing include renewable energy penetration, natural gas pricing, transmission and distribution upgrades, energy capacity additions and retirements (renewable and conventional), the regulatory environment, carbon pricing, severe weather occurrences, etc. Offtakers should have clear visibility into the market risks embedded in the transaction so they can make informed decisions about what risks they are, and are not, willing to take, ultimately structuring a transaction in line with their specific risk tolerance.
  • Accounting treatment: For many C&I offtakers, the accounting treatment of a VPPA is the first make-or-break decision regarding a potential transaction. In many cases, the offtaker will obtain initial approval to explore offsite renewables only if they can keep the PPA off of the balance sheet. They ask, will the deal trigger mark-to-market accounting? Fortunately, there are well understood ways to manage this risk through careful deal structuring and specific PPA language. For example, one way for an offtaker to manage a developer’s performance is to include an output guarantee – a minimum amount of generation the developer will deliver. However, an output guarantee is considered a notional value to the contract, thus triggering derivative accounting. As a result, contracts are often structured with an availability guarantee which accomplishes similar assurances of developer performance but avoids the risk related to accounting treatment of the VPPA. The bottom line here is that VPPAs will require the deal champion – and an advisor – to work extensively with your organization’s various accounting stakeholders and an experienced energy accountant.

The importance of a trusted advisor

Both physical and virtual PPAs offer strong financial and environmental opportunities to C&I organizations, but they can come with material complexity and risk. VPPAs are most common in today’s market but they are not right for every organization. We recommend working closely with a trusted advisor to determine which option is best for your organization.

Interested in learning more about PPAs and VPPAs? Check out our consulting services or contact us.

An Introduction to Renewable Energy Procurement: Onsite Solar Generation

busy city street out of focus

These are exciting times for companies and institutions interested in expanding their commitment to renewable energy. An evolving landscape is providing more options. But with more options comes more complexity.

At 3Degrees, we talk to a lot of clients that are interested in the procurement of renewable energy but aren’t always sure where to start. The purpose of this series is to help those new to renewable energy procurement better understand – at a high level – the options available to them. We will provide an overview (including the pros and cons) of each of the main options, including:

  • on-site generation
  • off-site, physical power purchase agreements (PPAs)
  • off-site, virtual PPAs
  • virtual net metering
  • direct investment, including tax equity

In this first article, we will discuss on-site generation. In later articles we will discuss the other options.
Before diving in, it is useful to review the primary benefits renewable energy procurement provides to organizations. They are fourfold:

  1. Sustainability initiatives: Most companies considering direct procurement have clear corporate goals to reduce their carbon emissions and/or increase their usage of renewable energy.
  2. Economics: For the organizations we work with, the economics of a transaction are as important as the sustainability results. Generally speaking, projects must provide both financial and environmental benefits to the company. Direct procurement can reduce costs, diversify energy supply, and hedge against future energy market volatility.
  3. Brand reputation: These projects can help a company strengthen its reputation as an environmental leader. Press coverage is common and can build positive brand impressions. Further, direct procurement can meet customer and investor requests to achieve meaningful sustainability goals.
  4. Transparency: Investors and customers are increasingly interested in companies disclosing the impacts of their operations on the environment. Companies that measure their environmental risk are better able to manage it and drive desirable action. The Carbon Disclosure Project is a good example of this global movement towards transparency.

On-site solar generation

Overview

Simply put, on-site solar generation involves installing equipment to generate renewable energy at the location where it is consumed. These projects are most often installed in states that allow net metering. Net metering is a state-specific policy set which allows customers to deliver surplus generation to the electric grid and spin their meters backwards, resulting in a credit from their retail energy service provider. However, on-site systems don’t have to be net metered and can simply serve on-site load directly. On-site renewable energy procurement is well established and examples of such corporate and institutional transactions are widespread. Solar power is most common (examples include IKEA and Kohl’s), but on-site generation can also include wind (Budweiser, Nestle), geothermal (Colorado, Idaho, and Oklahoma state capitols), biogas (New Belgium Brewing Company), and landfill gas (BMW, GM).

Pros

On-site generation has a number of things working in its favor: cost savings, availability, ease of transaction, and visibility.

  • Cost savings: On-site systems can provide immediate savings with a PPA or equipment lease structure or an attractive return on investment over time with asset ownership. In these cases, the PPA or lease payments are less than the customer’s retail electric rates and are fixed for many years to come, as compared to retail tariffs which tend to rise with inflation. Similarly, with direct ownership, the upfront cost of the system will be offset over time by reductions in the electricity bill. In certain cases, on-site generation can also help reduce demand charges (i.e., those retail charges tied to the maximum power required to serve the customer)
  • Availability: On-site opportunities are also broadly available. Forty-four US states (and DC and Puerto Rico) – or forty-three depending whether you consider the recent changes to Nevada net metering rules – allow net metering helping to create economic opportunities across the country.
  • Ease of transaction: On-site PPAs, leases, and asset purchase are common, and the contracts themselves have become more standardized over time. The direct consumption of on-site generation (and the resulting economic benefits) is also simple and straightforward, making it easier to gain support from internal stakeholders. Together, these dynamics can facilitate a swift and smooth contract execution. In addition, on-site generation can be integrated easily into a diversified and well-balanced renewable energy portfolio.
  • Visibility: On-site projects are often visible to the host company’s employees and customers, which helps in messaging. Equally important, on-site projects are easy to explain and easy for stakeholders to understand, creating strong marketing and brand building opportunities.

On-site solar generation can be integrated easily into a diversified and well-balanced renewable energy portfolio.

Cons

One of the most significant benefits of on-site generation – location – can also be its largest drawback. The location of the system can be a challenge in a couple of ways: space and resource availability and site permissions.

  • Space and resource availability: First, these projects can require significant space – either rooftop or land, which may not be readily available. The result is that on-site projects typically only offset a portion of the electricity purchased from the customer’s retail electric provider. It is also important to take the energy resource into consideration. In the event of poor resource exposure, large buildings, trees or other obstructions, the projects may not generate the desired level of savings.
  • Site permissions: Next, a company must also have the right to install the on-site project. In situations where the customer leases the property, they may not be permitted to install the project or the term of the PPA or solar lease may be longer than the underlying property lease.

Risks

Although on-site facilities tend to fall lower on the risk spectrum, we see two main types of risks: performance and regulatory.

  • Performance risk: There is always the risk that the system does not operate as designed, which can affect cost savings and projected returns. This risk is minimal as solar power is a mature technology and can be further mitigated by working with experienced developer and installers.
  • Regulatory risk: The economics of on-site projects typically hinge on the existing regulatory framework (most notably related to how excess generation is credited to the customer). Often, operating on-site projects can be “grandfathered” from the impacts of regulatory changes, but there is no guarantee that this will be the case. 3Degrees helps customers monitor the regulatory landscape to identify any potential rule changes early, understand the potential impacts, and advocate for rules that maintain the benefits in place when the project was installed.

Procurement

There are number of options for structuring and realizing an on-site deal. The three most common are:

  1. Asset purchases by which companies purchase the system outright and realize the tax benefits by monetizing the investment tax credit (ITC). The advantage of this structure is that the project is fully owned and, if properly maintained, will have a significantly longer useful life than the typical 15-20 year PPA or lease. The primary disadvantage of this option is the upfront capital requirements which can make it more difficult to sell internally.
  2. Power purchase agreements (PPAs) are a very common way to purchase on-site renewable generation. In this scenario, a developer owns and operates the project, and the customer pays the developer for the energy generated by the project at a predetermined rate. The benefit of this option is that it does not require upfront capital and the system Operations & Maintenance is handled by the developer. Importantly, this option necessitates a long-term relationship with the owner/operator of the project (increasing the importance of picking the right one).
  3. Renewable project leases are similar to PPAs, but the payment is not directly related to energy production. The costs and benefits of an onsite renewable project lease are similar to a PPA, and customers can similarly protect themselves through performance guarantees in the leases.

In summary, on-site generation projects are a common, easily understood way to procure renewable energy. This structure offers substantial (typically limited) benefits but must be implemented carefully to optimize cost savings and mitigate potential risks, highlighting the importance for even savvy customers to engage a partner who can help them navigate the many decisions along the procurement process. In future articles we will cover the pros and cons of off-site renewable energy projects.

How the Renewable Energy Market is Evolving

Aerial view of wind farm

Corporate power purchase agreements (PPAs) are being talked about everywhere — from water coolers to boardrooms to industry conferences. Today, corporate and institutional (C&I) end users have unparalleled access to bilateral agreements directly with utility-scale renewable energy facilities — greening their energy portfolio and creating financial benefits. How did we get here?

While a number of interrelated factors have driven this change, we have identified two clear eras in the development of renewable energy.

The two eras of renewable energy market development

ERA 1: The Early Days of Deregulation, RECs, and RPSs (1990s–2000s)

The first era, starting in the 1990s, was characterized by deregulation, the creation of renewable energy certificates (RECs) and the development of the renewable portfolio standard (RPS). During this time period, renewable energy was purchased through compliance and voluntary programs, and renewable energy cost a premium to conventional power.

In the mid- to late 1990s, options were few for commercial and institutional customers that wanted renewable energy. An end user could install an on-site solar PV system, or if in a deregulated market, could select a retail provider that combined RECs with normal brown power. Over time, the number of deregulated markets and options increased substantially.

By the early 2000s, some utilities began offering green power options to customers. At the same time, unbundled RECs provided a new way to purchase green power without having to go through utilities or power retailers — even in a regulated power market. EPA Region 10 executed the first large retail REC deal (PDF) with Bonneville Environmental Foundation for 2.7 million kWh in 2000. A year later the EPA launched its recognition program, the EPA Green Power Partnership, to acknowledge voluntary buyers of renewable energy and encourage new ones. In 2002, Center for Resource SolutionsGreen-e Energy program, the third-party certification for RECs, certified 1.7 million MWh.

By the middle of the decade, momentum grew and a number of states legislated renewable portfolio standards, and compliance markets emerged as the dominant source of renewable energy demand in the United States. Statutory requirements varied by state, but many allowed both PPAs and unbundled RECs to satisfy compliance. At the same time, the groundwork was being laid for future changes with the development of third-party financing models.

The solar PPA (and solar leasing) was born in 2006 (PDF), a brainchild of SunEdison and MMA Renewable Ventures, with early pioneers quickly jumping on board. While the compliance markets grew, so too did the voluntary market. End users demonstrated clear demand for renewables — primarily through RECs — and by 2009 Green-e certified sales grew to 22 million MWh.

ERA 2: The Modern Time of PPAs and the C&I Segment (2000s–present)

Around the same time, the landscape began to shift as more companies became interested in PPAs. The growth of the solar PPA market played an important role spurring industry growth. The most popular method of solar installations transitioned from ownership to PPAs, and the upward trend continued as more states approved third-party financing. In 2008, Walmart and SC Johnson executed the first large-scale off-site corporate renewable energy PPAs for 200 MW. Others followed, and by 2014, the renewable market was reoriented and forever changed.

“We are approaching 1.5 GW of executed large-scale off-site corporate renewable energy PPAs in 2015, with more expected in the coming months.”

While end users can still support renewables directly with the purchase of RECs, demand shifted toward options which both reduce costs and meet sustainability goals. To guide this emerging industry, WWF and WRI published the Corporate Renewable Energy Buyers’ Principles in July 2014, and established six criteria to accelerate progress in connecting companies directly with renewables. Today, there are over 43 signatories, collectively representing more than 30 million MWh of demand for renewable energy.

By the end of 2014, more than 23 percent of all wind contracts were executed not between generators and utilities (the traditional two counter-parties), but instead directly between generators and C&I end users, demonstrating robust support for these new options.

And today, in 2015, something truly big is happening. With an abundance of projects, increased comfort by C&I decision makers with various PPA structures, and a rush to beat expiring tax credits, we are approaching 1.5 GW of executed large-scale off-site corporate renewable energy PPAs in 2015, with more expected in the coming months. We also see a growing number of industry associations and corporate commitments.

 

theRE100.org

theRE100.org

 

Rocky Mountain Institute launched the Business Renewables Center to accelerate corporate renewable energy procurement. At the same time, 36 companies have committed to the RE100, a global initiative to showcase companies committed to using 100 percent renewable power. A line has been crossed; end users are paving a new path to renewables, resolving challenges with innovative partnerships and creating a new landscape of renewable energy.

A tipping point for renewable energy

It is clear that we are at a tipping point today for how corporate and institutional organizations treat renewable energy. Renewable energy markets have fundamentally changed in profound ways.

Tatanka wind farmWith nearly two-thirds of Fortune 100 and nearly half of Fortune 500 companies having made renewable energy commitments, the collective impact can have a rapid and significant effect on the energy system in America. C&I decision makers have more power and influence than ever before. They are creating new markets, no longer only just responding to them. They are tapping solar and wind through physical and virtual PPAs, ownership and leasing.

Opportunities once only available to the Googles and Facebooks of the world, the largest end users with concentrated load, are becoming ever more available to a broader set of organizations.

Originally published on RMI Outlet