In the past few years, natural gas prices have hovered at historic lows. As a result, some commercial, industrial, and institutional (C&I) buyers have been more hesitant to commit to long-term renewable energy contracts in the form of power purchase agreements (PPAs). Contracts for renewable PPAs typically require a term length of 10-25 years: longer than most of the supply contracts C&I buyers are accustomed to signing.
While low natural gas prices driving lower short-term electric power prices may be attractive in the near term, there are four reasons why renewable PPAs are still a compelling choice for C&I buyers, both now and in the long run.
Energy is the most volatile commodity in the world. The spot price of natural gas can swing widely in a matter of moments depending on supply and demand and, largely, the weather. In June 2016, the Wall Street Journal reported that gas prices had risen 34 percent since the previous month thanks to summer demand. These rapid, unpredictable changes in natural gas prices can have dramatic consequences for C&I organizations, whose electricity budgets must react accordingly. Historically unstable gas prices present a considerable source of operational risk as they impact direct natural gas and electric power expenditures.
Renewables like wind and solar, on the other hand, incur little to no fuel costs and marginal operating costs and thus display no such price volatility. C&I buyers who enter into renewable PPAs can expect to see no or only slight variation in electricity pricing throughout the duration of the contract, reducing operational risk and securing a more stable energy price over the life of the PPA. This presents the potential for C&I buyers to manage millions of dollars in budgeted costs, often driving more competitive rates while allowing for more robust expense planning.
Although fossil fuels like natural gas have historically been less expensive than renewables, wind and solar prices have become competitive with — and in some markets even cheaper than — natural gas-driven power prices. These prices are expected to continue to decline over time as technologies improve and benefit from economies of scale. A report from IRENA predicts that wind power prices will drop dramatically over the next 10 years, decreasing 26-59 percent globally by 2025.
The attractiveness of renewables is further bolstered by the fact that they are available indefinitely, whereas natural gas supplies are almost certainly finite. As these resources become scarcer, power prices will inevitably rise.
In an environment with declining wind and solar prices, it may be tempting to wait for costs to come down before locking in a price. An argument against this line of thinking is the extension, with a planned phase-out, of the federal Production Tax Credit (PTC) and Investment Tax Credit (ITC). These subsidies for wind and solar are a driving force behind price parity, accounting for anywhere from 30-60 percent of the value of the solar or wind project. The imminent phase-out of these credits in the next few years means that there is a window to lock in low prices for renewables, as it will take some time for efficiency to replace that 30-60 percent value once the tax credits are gone.
Mounting international commitments to carbon neutrality, such as the Paris Agreement, and the continued fight for climate action by both states and the private sector, will constrain the ability of natural gas to meet future U.S. energy needs, with the potential to impact both price and availability of conventional generation. Eventually, the gas rush will come to an end.
Despite the current political atmosphere, the U.S. remains committed to net-zero greenhouse gas emissions by 2100 as a part of the Paris Agreement. Regardless of federal support, the business case for renewables has never been clearer — from job creation to energy cost savings to public health benefits. While natural gas may have played a role in stabilizing emissions to date, its success will be short-lived due to methane leakage, among other issues. The global warming potential of methane is at least 20 times more potent than carbon dioxide and the EPA now believes that methane leakage from fracking is more prevalent than previously determined. Additionally, natural gas still emits approximately 50-60 percent of the greenhouse gases that coal emits — too high for the commitments set by the Agreement.
Countries and corporates are stepping up to the challenge when it comes to climate action. China and India are among countries pursuing aggressive renewable energy targets, and initiatives such as Science-Based Target setting are becoming more common among corporate leaders worldwide.
Environmental commitments & social responsibility
Many C&I buyers have publicly agreed to reduce their carbon emissions or improve their performance on climate change. These goals are often best accomplished through a combination of efficiency and the purchase of renewable energy. Initiatives such as the RE100, the NEO Network™ (a peer collaboration networks to accelerate renewable energy investment), and the World Business Council on Sustainable Development’s “REScale” continue to reinforce the fact that C&I buyers are committed to moving the needle on renewables globally.
C&I buyers must also consider the impact of their facilities on the communities in which they have a license to operate, and specifically the impact of fossil fuel generation on human health. In 2012, air pollution from fossil fuel combustion played a role in the death of 7 million people worldwide, leading the WHO to declare it the single greatest environmental risk. In Europe alone, the costs of pollution-related illnesses and deaths surpassed $1.6 trillion in 2010. By contrast, U.S. wind installations in 2015 are estimated to have resulted in the savings of $7.3 billion on public health.
While attractive in the short-term, low natural gas prices should not derail renewable energy purchasing by C&I buyers. Wind and solar outperform natural gas in price and stability and are essentially carbon-free. C&I buyers that want to save money and meet environmental commitments are more likely to achieve their goals using renewable PPAs than relying on gas as a long-term energy solution. A diversified energy strategy is key for C&I buyers in today’s evolving energy landscape.
Growing availability of renewable energy projects around the globe in need of creditworthy off-takers, makes now an opportune time for C&I buyers to consider renewable PPAs. Buyers that move now, while others hesitate, will have access to the best projects with the most favorable terms. Contact us today to speak with one of our industry experts.
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