As the price for renewable energy falls, it becomes competitive with traditional sources of electricity, driving the convergence of the renewable power and traditional, fossil fuel-based power markets. This equilibrium is making renewable energy increasingly available while also complicating traditional energy procurement and management.
In part II of this three-part Q&A, market experts at Schneider Electric respond to some of the most common questions we receive about energy convergence, focusing on the key considerations companies should take in when exploring renewable electricity options. To begin with common questions about what renewable electricity options are available to corporate buyers, read part I. And stay tuned for part III, where our experts will discuss why renewable energy skeptics should start to listen up.
Part II: What should I consider if my company is looking at renewable power?
Once companies understand what renewable options are available, they want to know how to compare them so that they make a decision that achieves the organization's goals. The affordability and availability of renewable power make it a valuable addition to any procurement portfolio. But what are the deeper considerations your company should make when looking at developing an integrated sourcing strategy that combines renewable and traditional generation?
Q: My company wants to be a leader on renewable power. Should we be looking at EACs, green tariffs, onsite generation, or offsite PPAs?
A: The answer may be all four and will depend on what is driving your desire to lead, as well as your timeline. Does your company want to make a public commitment, such as joining the RE100, to reduce its carbon footprint or satisfy stakeholders? Does it want to save money on energy sourcing? Does it want to increase resilience or future-proof against energy market volatility?
If you want to act quickly, have CapEx to spend, don’t have a high tolerance for risk or complexity, or have a broad geographical distribution to your load, EACs or a green tariff may be the answer. Whether bundled with your electricity supply, or purchased unbundled on the open commodity market, EACs convey the same environmental benefits. When purchased in a volume equivalent to your grid-sourced electricity usage, EACs allow you to make Scope 2 emission reduction claims. They do not typically convey material leadership/additionality, which is how some companies define market leadership.
If you have a longer time horizon, are looking to an integrated sourcing strategy to save money, have a tolerance for risk, are creditworthy, or have specific regions of load concentration, offsite PPAs may be for you. These instruments are more complex, requiring anywhere from nine to 18 months to execute, and come with more risk than EACs. But the payoff can be big, resulting in cost savings, carbon reductions, and material leadership.
Onsite generation can be a valuable complement to any strategy. However, companies typically find that they either do not have the real estate or the CapEx to address all their electricity needs with onsite solutions.
Why is a longer-term contract for power more impactful?
Long term energy buying can allow companies to lock in a price for power over a specific duration—a welcome reprieve from volatility. This also provides ongoing financing for power developers and generators. In the case of renewable energy, long term contracts such as PPAs provide evidence to financiers that the project is viable. This allows developers to obtain the capital needed to finance new renewable energy development—driving greater grid penetration of renewable generation.
What is the difference between a compliance market and a voluntary one?
Renewable energy can be subdivided into compliance and voluntary markets. In a compliance market, entities are required to develop or utilize a specific volume of renewable electricity. Compliance regulations drive cases like the U.S. state Renewable Portfolio Standards or the European Union’s Renewable Energy Directive. In a voluntary market, market growth and development are driven by the action of private players, such as corporations, who choose renewable power in addition to, or instead of, traditional grid sourced power.
Both markets play a critical role in the growth of renewable energy penetration.
Is the renewable power market maturing in such a way that I will have more options to mitigate risk on long-term renewable deals?
Yes. As renewable power markets mature, contracting options become more flexible.
How might renewable power sourcing impact my overall energy management program? What are the “gotchas” to consider when developing an integrated sourcing strategy?
Renewable power comes with different terms and different structures that buyers must acquaint themselves with to avoid risks and pitfalls. For example, there is the potential to double hedge when purchasing both renewable and traditional power. There can also be accidental mismatches in electron flow or poor adherence to critical performance terms. It’s important to take a portfolio view when sourcing traditional and renewable power to appropriately balance both the upside and downside.