21st century energy: What you need to know about power purchasing

As more companies seek renewable energy options to make good on corporate environmental commitments, some encounter difficulty with existing power purchasing models.

When it comes to renewable energy, one thing is abundantly clear: New generating sources aren’t coming online fast enough to suit the needs of companies that have a made a serious commitment to it.

The availability of renewable energy certifications (RECs) has helped, but more organizations are looking beyond offsets to align green power procurement more directly with facility needs.

In late March, IBM added its voice to this movement. “We intend to match our purchased renewable electricity directly to our operations, as opposed to purchasing RECs as offsets, making a clear connection between our purchases and consumption,” said Wayne Balta, vice president of corporate environmental affairs and product safety for IBM.

That’s why pioneers such as Walmart, IKEA and Apple are investing so heavily in on-site solar, wind and biogas resources, and why they’re demanding that more utilities get their act together to make buying green power simpler.

In some cases, capital investments support installations of this. That approach makes sense for a retailer such as IKEA, which already owns a substantial amount of commercial real estate. It makes less sense, however, for companies that don’t own their facilities outright or that don’t want responsibility for managing those installations.

There’s another reality. Even large corporate property owners probably don’t have enough real estate to produce enough clean electricity to run their entire operation.

“You can only go so far with onsite generation,” said Rame Hemstreet, vice president of operations at healthcare organization Kaiser Permanente. “There are only so many parking lots, so many roofs.”

That’s why you’re hearing so much more about near-site corporate power purchase agreements (PPAs), which allow businesses to add new renewables capacity to the local grid without a big upfront expense.

“They ensure that a company is directly responsible for new, additional renewable energy generation,” said Ryan Hodum, vice president of strategic consulting firm David Gardiner and Associates.

PPAs clearly aren’t for every company, especially those that want stark transparency for progress against corporate renewables goals or greenhouse gas (GHG) emissions reduction targets. Here are some considerations to guide your company’s strategy:

1. Get creative

One term you’ll hear more often in coming months is “virtual” or “synthetic” PPA. These contracts might appeal to companies in states that aren’t deregulated, or with laws in place that prohibit traditional PPAs.   

“A virtual PPA is basically a form of price hedge,” Hodum said. “A company enters into a contract to pay a renewable energy project on an agreed take-off price. The renewable energy project sells the generated power into the local wholesale market on a merchant basis. The project pays the company if the electricity is sold into the market above the agreed contract price, and the company pays the project the difference if the electricity falls below the agreed price.” 

Kaiser Permanente uses both traditional PPAs and the virtual sort described above — through contracts with NextEra Energy Resources (which also works extensively with Google) and NRG Energy — because they have the benefit of “additionality,” Hemstreet said.

“Even when you’re reducing intensity, it’s tough to reduce overall demand [if your company is growing],” he said. “You need to work on the supply side.”

During the first four months of 2015, large companies committed to additions of at least 800 megawatts in clean power, according to figures cited by the Rocky Mountain Institute’s Business Renewables Center. Most contracts behind those installations are structured as PPAs; almost 75 percent of those transactions fall into the virtual category, said Herve Touati, managing director of RMI. 

2. Don't forget finance

One big benefit of any PPA (direct or virtual) is predictability when it comes to electricity rates. Modeling the multiyear return on investment, however, is not an exercise for the faint of heart. Another wildcard is how to report on them to organizations such as the Carbon Disclosure Project.

“You definitely need to make sure that your accounting firm and accountants understand the deal,” Hemstreet said.

It took Kaiser Permanente roughly 18 months to arrange two recently signed PPAs after beginning to evaluate the opportunities in summer 2013. That’s partly because the company didn’t have an established procurement process in place. With that experience now in the past, future contracts probably won’t take as long to negotiate, he said.

Two significant risk factors include the dramatic difference in REC pricing from market to market, as well as the potential impact of local, state and federal tax and production incentives — many of which face a questionable future. Kaiser Permanente is considering another PPA, potentially in Maryland. Whether the project will qualify for tax credits could make or break the company’s decision to participate, Hemstreet said.

Over the short term, that uncertainty could temper the flow of new PPAs but the economics of wind and solar are continuing to improve, especially if a company’s management is willing to look farther into the future.

“The movement may slow, but the cost reduction potential is still significant,” Touati said.

On the other hand, some businesses used to negotiating electricity procurement on an annual basis might not be comfortable with an agreement that lasts five, 10, 15, 20 or 25 years. 

3. Small buyers beware

For evidence, I'll point to one cloud computing company that is researching mechanisms, including virtual PPAs, that can increase its renewable energy procurement — even though most of the carbon footprint related to its power consumption comes through the network of hosting companies where it locates its data centers.

“This is not straightforward at all for companies like ours with distributed operational models and relatively small demand,” said the company's chief environmental sustainability officer, who asked to remain anonymous because her company hasn't yet discussed its renewable energy strategy publicly.

Still more of the company's customers are asking about green power: a significant percentage has made renewable energy commitments. In turn, they are looking to their business partners to help with that, the executive said.

Generally speaking, the experts interviewed for this article suggested that it’s relatively unusual to find PPAs that cover loads of less than 10 megawatts. The cloud company interviewed for this article is studying whether deals that aggregate “bite-sized” demand from several companies are feasible. To date, however, the sustainability team hasn’t found anything that meets existing needs.

“If we can come up with something that is viable, there is a latent market for this type of product,” said the tech industry sustainability manager.

Bill Bush, chief financial officer for financing company Borrego Solar, said one option for companies that influence smaller power purchases might be shared or community solar projects. The reality today is that many investors are comfortable with agreements at the developer or municipal level but still relatively skeptical about contracting directly with corporations for power purchase agreements, he said.

“Credit is a funny thing,” Bush said. “The more money you want to borrow, the easier it is to get. That said, we are starting to see more interest in underwriting corporations than in the past.”