How Kaiser Permanente uses virtual PPAs to scale solar
How Kaiser Permanente uses virtual PPAs to scale solar
New purchasing mechanisms, along with the freefall of the price of solar photovoltaics, are making it easier than ever for businesses to leverage the power of the sun to meet their growing energy needs.
In many areas, utility-scale photovoltaic solar has become cost-competitive with conventional forms of electricity, particularly for facilities with large energy needs. And energy demands for large commercial and industrial facilities are mounting, as businesses rely more on energy-intensive operations such as data centers and manufacturing facilities.
But onsite installations aren’t always enough — or practical — for meeting a company’s energy needs.
"Companies want to offset a high volume of load efficiently and in a scalable manner," said Karl Brutsaert, director of Global Commercial & Industrial Origination at First Solar, during a recent GreenBiz webinar on next-generation solar strategy for commercial operations. "Going rooftop to rooftop or facilities to facilities sometimes does not meet their overall objectives and they want a more scalable solution."
That’s why new mechanisms have emerged, including power-purchase agreements, virtual power-purchase agreements and renewable energy credits, which allow firms to purchase solar energy that reduce or suppress upfront costs, remove siting barriers and ensure a level of price stability not achievable with fossil fuel electricity.
Power purchase agreements allow businesses to procure solar electricity at a predictable cost for up to 25 years, including financing, design, engineering, procurement, permitting, construction, commissioning, operations and maintenance. They free a business from having to own or manage a solar power plant, while enabling them to take full advantage of solar electricity’s predictable pricing.
An added benefit of PPAs: enabling companies to push the adoption of renewable energy.
"We are increasingly seeing buyers not just wanting to reduce their own negative impact. Instead, they want to increase their positive impact by leading the way and paving a path for others to also go renewable," said Brutsaert.
The rise of the virtual PPA
For large companies spread across wide geographic areas, virtual PPAs are rising to the forefront.
"In the market, we are increasingly seeing virtual PPAs," said Brutsaert. "In a virtual PPA, many corporate facilities that are distributed across a wide area can be virtually powered, renewably powered by one or just a few large-scale renewable power plants."
He cited many benefits for pursuing a virtual PPA, including increasing efficiency by allowing several facilities to be powered by 100 percent renewables in a single transaction; developing larger solar projects that can achieve economies of scale, and creating an "energy hedge" against future power cost volatility.
[Rame Hemstreet of Kaiser Permanente will speak in person at VERGE 16, Sept. 19-22, in Santa Clara, California.]
Companies also find virtual PPAs attractive because it always allows them to claim credit for catalyzing new solar projects.
"With this, they can say, 'If we weren’t involved, this project wouldn’t have happened,'" said Brutsaert.
Kaiser Permanente's solar ambitions
For Kaiser Permanente, investing in renewables is an extension of its core purpose to promote public health, said Seth Baruch, the company's national director for Energy and Utilities.
"What we’ve tried to do is make the link between the impacts of climate change and health, and how that affects the health of our members and the communities that we serve," he said. "The investments that we make are driven primarily by our desire to reduce our own carbon footprints and mitigate our own impacts on climate change."
Chief among the company’s climate action goals is becoming carbon net positive by buying enough clean energy and carbon offsets to remove more greenhouse gases from the atmosphere than it emits. Kaiser is pursuing this through a mix of onsite and offsite solar projects.
"We looked at all of our facilities, and wherever we could put solar we did so," said Baruch. "We feel that onsite solar is a great way to both improve our environmental footprint as well as save us and our sites a good chunk of money."
This has led the company to sign a 20-year PPA with NRG energy to add 70 megawatts of solar arrays at 85 hospitals in California. Under this agreement, NRG will own and operate these onsite facilities — mostly carport canopies — and Kaiser will purchase the output at rates generally lower than utilities' rates.
But onsite solar wasn’t enough to meet Kaiser’s massive energy demands, which is why the company also has embraced virtual PPAs for offsite projects. Currently, Kaiser has two such projects already underway: the 100-megawatt Blythe Solar Project in Riverside County and the 43-megawatt Golden Hills Wind Project.
"How the deal is structured and how we sold this internally… is as a hedge," said Baruch. "It’s a virtual power purchase agreement with Nexterra where they build, own and operate the facility and the electricity is sold to the grid — it does not actually come directly to Kaiser’s facilities."
Kaiser pays Nexterra a fixed price for every megawatt coming out of the two offsite projects, which Nexterra then sells to the grid or other buyers. If energy prices are higher than that fixed price, Nexterra pays Kaiser the difference.
Conversely, if the price in the wholesale market is less than the fixed price, Kaiser pays the difference. The certainty afforded by the agreement enabled Nexterra to finance the project, but Kaiser was allowed to keep the associated renewable energy credits. It’s a win-win.
"If electricity prices spike in California… our sites are exposed to higher electricity prices and higher costs, but that is offset by the fact that we would get the difference in the contract for differences — so we would make money," said Baruch.
As you might imagine, the notion of being contractually obligated to pay another company for decreases in wholesale energy costs might be difficult to sell to executive leaders.
"These deals had to be sold to senior leaders as a hedge, and even then it was difficult," said Baruch. So far, with currently low energy prices, Kaiser is on the losing side of the hedge.
However, even as wholesale energy prices have fallen, so have direct access costs. Direct access involves large commercial users in California being able to purchase a limited supply of energy directly from the utility or buy directly from the wholesale market — which tends to be cheaper than standard energy rates.
"Effectively, the message is that the hedge has worked as intended and energy prices will no doubt over the course of this 20-year power-purchase agreement change… and if prices change in the future, we will come out ahead," said Baruch.