Contributed By: Hans Royal, Director of Renewables and Cleantech at Schneider Electric Energy & Sustainability Services
The boom in corporate renewable energy buying over the past five years has changed the electricity landscape. Thanks to rapidly falling prices in clean technologies—bolstered in the U.S. by the federal Production Tax Credit (PTC) for wind and the Investment Tax Credit (ITC) for solar—corporate offtake from new capacity projects has played a major role in driving renewable energy adoption. In 2015, corporations were responsible for the majority of U.S. renewable electricity purchasing, and have purchased an additional 5.4 GW since.
Businesses buying renewable energy isn’t new. A decade ago, the use of renewable energy certificates (RECs) by companies was considered something of a mea culpa to excuse poor environmental behavior (unfortunately, this reputation has plagued RECs ever since). But even then, forward-thinking companies were looking for the right market opportunity. In 2009 Walmart seized it, by executing the first corporate, bilateral, offsite, utility-scale, wholesale power purchase agreement (PPA).
Corporate PPAs come in two varieties: 1) direct, where the company shares a grid with its utility and can use established retail transmission infrastructure to “sleeve” delivery of power directly to its facilities and 2) virtual, where the corporate buyer enters a financial contract-for-differences with the renewable power generator, allowing the project to be located almost anywhere on the interconnected grid.
To date, this buying behavior has been dominated by the largest tech companies in the world. In addition to Walmart, Google, Microsoft, Amazon Web Services, Facebook, Equinix, Digital Realty and Switch have all made major investments in global wind and solar. Newer entrants to the field include consumer products companies like Johnson & Johnson and Kimberly-Clark Corporation, telecom giants AT&T and T-Mobile, manufacturers Cummins and Kohler and financial services companies Goldman Sachs and Fifth Third Bank.
But interest in renewables is not confined to the biggest corporations. A rising customer class in this market is the small(er) buyer.
Unfortunately, it hasn’t been easy.
PPAs are effectively an offtake guarantee. Renewable energy generators seek credible, creditworthy buyers that can generally commit to a large piece of the project (80 MW or more) to secure financing. Typically, these financing arrangements take about 10 years (or longer) to fulfill.
For smaller buyers, those terms can be a barrier. They may not possess the requisite creditworthiness. They may not need nearly 100 MW of offtake. They may be reticent to enter into such a lengthy contract. And, unlike their larger fellows, smaller buyers may be less tolerant of PPA risk.
And still, this group of buyers dominates the market. About 50 companies have executed an offsite PPA so far; there are thousands worldwide who are hungry for the opportunity.
This demand is giving rise to purchasing models for small buyers, who have 5 options when they consider renewable energy procurement.
1. A Buyer’s Consortium
Also known as aggregation, or club-type purchasing, a buyer’s consortium is a joint venture between several offtakers who go to market together to procure renewable energy at scale. By joining forces, the buyers in the consortium can achieve the economy of scale that puts a large, offsite PPA in reach. The result is both shared savings and risk.
While attractive, in practice, buyer’s consortiums can be tricky. They require the identification and grouping of like-minded companies that are at similar maturity. They also require similar creditworthiness and tolerance for risk. Now, instead of one buyer navigating the project term sheet, it will be multiple, so clear roles and communication are a must. And, like any joint venture, the consortium requires the resources of outside counsel and a buyer’s advisor, and must have clearly defined governance, avenues for conflict resolution and exit arrangements.
Difficult, perhaps, but not impossible. Consortium-style purchases have been successful in both the U.S. and the Netherlands.
2. Joint Tenancy
For buyers wary of, or unwilling to enter, a joint venture, there is joint tenancy. In this small buying model, a business contracts for a smaller portion of a project that already has a large-percentage offtaker, or anchor tenant. For example, the larger buyer may only want 80 MW of a 100 MW PPA, leaving 20 MW available for purchase by a smaller buyer, or a buyer looking for a smaller parcel.
In this scheme, the buyer executes a normal PPA for the smaller offtake. As a result, it requires similar terms—creditworthiness and risk tolerance being key—to a large PPA. But, the buyer is the sole participant in the purchase, and may benefit from the larger offtake by achieving a lower contract length or more favorable credit terms.
3. Reseller Contracting
An emerging small buyer model is reselling. In this structure, a large and creditworthy buyer contracts for the PPA, and then parcels the project out to smaller buyers in a pre-packaged tranche.
This model is attractive for many companies because, in theory, this type of PPA requires less work to execute and potentially less risk. However, buyers lose autonomy in the process. Without the ability to take part in the project negotiations, buyers are subject to the reseller’s contracted terms. Buyers also potentially lose the ability to use the PPA to make environmental or leadership claims.
4. Onsite Generation
For many small buyers, the answer rests in onsite generation. While onsite alone typically won’t allow a company to achieve aggressive goals (such as 100% renewable energy), it can be a highly viable option for smaller buyers, especially if they have the ground or roof real estate to support a larger-scale project.
Onsite generation gives buyers flexibility in the type of generation they choose (typically solar, but may also be wind) as well as the contract terms. Systems can be purchased (with capital expenditure and ongoing operations and maintenance) or leased, can return cost-savings with short-term payback periods, and, when bundled with the project RECs, can convey environmental attributes.
Onsite solutions are not a panacea, however. Some regions are not favorable to onsite, either due to regulation or the intermittency of natural resources. When purchased, the initial capital expenditure can be a barrier. And most systems don’t exceed a few megawatts of generation. But they are a worthy consideration for the smaller buyer.
While some may have dismissed using RECs to meet goals in recent years—they’re an additional expense and may not make an additive impact on carbon reductions—RECs remain a highly valid, highly credible source of renewable energy. Indeed, they, and other Energy Attribute Certificates (EACs) around the world, remain the predominant form of commercial renewable energy buying. Thousands of companies rely on EACs to achieve zero carbon electricity and renewable energy purchasing goals.
EACs underpin global markets. They are typically the first clean commodity available to buyers in emerging regions. Even once those regions mature to the point of offering contracting structures like PPAs, EACs continue to form the backbone of the environmental attributes associated with that purchasing. They are frequently paired with traditional electricity in green tariff scenarios and remain the only mechanism that conveys the clean benefits of large-scale generation.
For some small buyers—without strong credit, without high risk tolerance, without large capex—RECs may be the best way to access renewable energy…for now. The continuously falling price of clean technologies may eventually put these technologies in the reach of every buyer, or sufficiently green the grid.
Interested in learning more about your purchasing options as a small buyer? We invite you to contact us.
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