Governments, municipalities, universities, and corporations all over the world are committing to a goal of achieving 100% of their electricity from renewable power. Their individual reasons for doing so vary. Renewables provide a stable source of electricity over the long-term that is increasingly inexpensive. They help organizations address a multitude of risks, ranging from a short position on energy to carbon and climate exposure. Renewables are seen in many markets as a progressive choice, particularly for organizations that have environmental goals like carbon reduction and social responsibility. Plus, renewables can help reduce water consumption and bolster economies where clean power facilities are located.
Regardless of what inspires an organization to make 100% renewable energy (RE) commitment, all of them must develop a strategy to get there. Many of our own clients sometimes find themselves scratching their heads after making their 100% renewable energy commitment, saying, “Okay—now how do we actually do this?” We find that most organizations rely on a combination of three different types of contracting mechanisms to reach a 100% renewable energy goal: offsite generation, onsite generation, and energy attribute certificates (EACs).
Offsite generation in the form of power purchase agreements (PPAs) has been in the news a great deal in the past year, as PPAs are the primary contracting mechanism that large multinational corporations are exploring to meet their RE targets. In a PPA, the buyer, or offtaker—who is, in this case, an organization—contracts directly for the clean generation from a renewable energy developer. This can be done through two mechanisms: the financial (or virtual) PPA and the direct (or physical) PPA.
Financial PPAs rely on a contract for difference (or fixed-for-floating swap) where the PPA is contracted at a fixed price. When the market price of power dips below the fixed price PPA, the offtaker must make the developer financially whole. But, whenever the market price of power is above the fixed price PPA, the offtaker receives the difference as a rebate on the cost of its electricity. For many organizations, this translates into a savings of millions of dollars over the life of the PPA contract.
In a direct PPA, the offtaker shares a grid region with the generator that enables the direct delivery of power. Direct deals are constrained by both wholesale and retail energy deregulation, so regions that allow for direct deals are limited. However, in a financial PPA, the offtaker and developer enter into a financial contract for differences where no power is actually transacted.
Although attractive, PPAs are a heavy lift for most organizations. The execution of a direct or financial PPA in the U.S. can take between 6-12 months and requires a variety of conditions to be met, not the least of which is establishing the load size and creditworthiness of the offtaker. Due to its risks, PPA execution generally involves decision-making at the C-suite or Board level. Many organizations may have the ability to get only one deal done, while others may not qualify for offsite PPAs at all. As a result, some large organizations—such as Google—are able to meet most of their RE needs with offsite PPAs, while the majority of companies will not.
The rapidly falling price of solar is making onsite generation more and more feasible. Organizations have greater choice in onsite generation, ranging from a ground-mounted system, to rooftop generation, to community aggregation via solar gardens.
Nonetheless, organizations are typically constrained in their use of onsite, particularly to reach a 100% renewable energy goal. For example, most institutions lack the space—either on the ground or the rooftop—to effectively meet all of their electricity needs with onsite. One solution to the issue of space lies in a mechanism known as virtual net metering. Similar to the financial PPA structure, virtual net metering allows organizations to reduce their electricity load using solar without being physically connected to the generating facility.
Building codes can further restrict an organization’s ability to site its panels. And, although the price of solar has fallen so dramatically, it can still be economically unrealistic for some organizations to invest the capital start-up costs required for onsite generation.
Remedies like onsite PPAs and community aggregation can help make onsite solutions more economical for organizations. But institutions with large or energy-intensive operations may struggle to reach 100% RE with onsite generation alone.
Energy Attribute Certificates
EACs remain a crucial part of the 100% renewable energy strategy. While many companies have used EACs—typically in the form of renewable energy credits (RECs)—for years to achieve 100% RE, EACs alone generally do not carry many of the co-benefits organizations seek from their RE purchase. These co-benefits include attributes like additionality and the displacement of global emissions.
EACs function as a “birth certificate” of renewable generation. In fact, for any renewable electricity to be considered clean, it must be bundled with EACs. EACs represent the environmental attributes of the clean generation, including an emissions factor of zero. Even if an organization is using onsite generation or an offsite PPA, if they do not own the EACs, they cannot claim that they’re using RE or reducing emissions.
The zero emissions factor of most EACs can be applied to electricity consumption, regardless of source, through market-based GHG reporting. For many organizations, though, the idea of being more directly involved in the development of the RE industry is enticing. However, onsite and offsite generation are not a fit for all organizations, in which case EACs remain an affordable means to meet sustainability goals.
Typically, we see companies use EACs in the following ways:
1. To provide them with clean generation and a claim to zero Scope 2 emissions when bundled with 100% of their purchased electricity.
2. As a stop-gap means to reach their goals while pursuing longer-term onsite or offsite generation.
3. In international markets, where availability of onsite and offsite generation options are limited and varied, and where the use of EACs must be matched to the location of operational load. EACs also provide a valuable signal to nascent markets about the importance of and interest in RE generation.
4. To help organizations meet their 100% renewable energy goal when combined with onsite and offsite generation, as it’s difficult to get to 100% using these contracts alone.
Schneider Electric applies a portfolio approach to working with our clients on their journey to 100% renewable energy; appreciating that no one strategy fits every situation. Contact us today to learn more about how we can support your pursuit of offsite, onsite, and EAC solutions.