We’re Not an Energy Company…So Why Would We Want to Do a PPA?

November 7, 2016 Jason Wykoff

Periodically, our prospective clients ask us this question, or a variation on: “We’re not an energy company, so why would we want to do a PPA and find ourselves so intimately tied to work on energy?”

Our answer is simple: all organizations need to have energy on their radar, for a number of reasons:

#1: Your Short Position

If you intend to be operating more than 2-3 years into the future, your organization is likely facing a short position on energy.  What does that mean? Essentially, this means you are going to need electric power that you haven’t purchased yet.  And because energy is the most volatile commodity in the world, it is likely that what you’re paying for your energy costs today will not be what you’re paying in the future.  For power generated by coal or gas, the price of energy is likely to increase over time as the demand for both outpaces supply and as extraction costs (including those costs associated with reserve development and transportation of coal/gas) go up.  In addition, while low natural gas prices have depressed the cost of wholesale electricity, overall retail rates for power have still risen.

A PPA fixes the price of clean wind, solar, or geothermal power and keeps it there over the course of the 10-25 year term of the contract, with only a modest price escalator.  PPAs can do this because renewable sources of electricity do not rely on volatile fuel costs but rather on technology, construction, and financing that are predictable and fixed.  Renewable energy is also a stable source of generation, particularly useful in regions like Mexico and India, where grid reliability can fluctuate.

#2: Your Bottom Line

Right now is an outstanding time to consider a PPA, thanks to the Production Tax Credit and

Investment Tax Credits that were extended at the end of 2015.  These subsidies—along with technology advancements and economies of scale—have helped lower the price of renewable generation so dramatically that wind and solar are now the fastest growing forms of new power.

For some organizations, this translates into the very real possibility of using a PPA to save—or even make—money.  In a financial PPA, the low fixed price is swapped for the floating market price of power through a mechanism called a contract for differences or a fixed-for-floating swap.  The buyer (also called the offtaker; in this case, your organization) uses the PPA to contract directly with the generator for the fixed price.  Whenever the fixed price is lower than the floating (market) price, the buyer receives a payment for the difference from the developer.

While the possibility exists for the inverse to occur—for the floating price of power to be lower than the fixed price—a number of risk mitigation measures can make this outcome more unlikely, potentially saving the buyer millions of dollars on electricity costs over the life of the PPA.

#3: Your Carbon Risk

Now ratified, the Paris Agreement became effective on November 4, 2016 and the 87 ratifying countries will then begin implementing their agreed-upon solutions to address and mitigate climate change and carbon risk.  Companies are following suit as the impacts of climate change begin to reverberate throughout their operations, particularly in areas susceptible to drought, severe weather, worker displacement, and the resulting stranded assets.

According to the Sustainability Accounting Standards Board (SASB), 93% of U.S.-based public companies face risks related to climate change.  In 2016, CDP began requesting that reporting companies disclose their plans to address these risks through climate action and begin to set science-based targets on carbon reduction.  Other NGOs, including BSR, are also focusing work on corporate climate resilience and adaptation.

PPAs can directly help organizations manage their climate risk by accelerating the greening of the grid.  Electricity accounts for 25% of total global greenhouse gas emissions.  By using PPAs to get more clean generation on the grid, companies have a material—or additional—impact on global emissions reductions.  Companies that execute PPAs and retain the energy attribute certificates (EACs) associated with their purchase can further claim that they are using zero carbon electricity in their Scope 2 market-based reporting.

#4: You Don’t Have to Do It Alone

For many companies, doing a PPA can be daunting.  The contracts are considerable in both scope and duration, and PPA execution comes with a number of risks that must be actively addressed and managed.  Most PPAs will require the approval of the C-suite, or even Board of Directors, and for sustainability champions, getting an audience at this level can potentially expend significant political capital.

The good news is that buyer’s agents like us are here to help.  An experienced buyer’s agent should help you identify an appropriate project and support your internal pitch.  Renewable Choice’s deep expertise in PPA execution, combined with our unparalleled access to the best projects worldwide, mean that we can do a lot of the heavy lifting for you.  Plus, we’re agnostic to project type or location—we work for you, meaning that your success is our highest possible outcome.

Please contact us today to learn more about how PPAs can benefit your business—and why you don’t need to be an energy company to profit from these valuable economic and environmental tools.

 

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