“What’s the catch with offsite renewable power purchase agreements (PPAs)? They look too good to be true.”
This is a common question from the companies we’re talking to at Schneider Electric Energy & Sustainability Services. To dispel the misconceptions about PPA benefits and risks and to share with you our answers to some of these common questions, we sat down with Jake Hoheim, Client Development Manager in Renewable Sales.
Let’s start form the top: What’s an offsite renewable PPA?
An offsite PPA is a large-scale, long-term contract for renewable energy made directly between an offtaker—in this case, a corporation—and a project developer.
The PPA serves 4 important functions:
- The PPA allows the corporate offtaker to lock-in a fixed price for power for the duration of the contract, which can provide a hedge against energy market volatility.
- In some cases, the economics of the long-term contract may prove favorable for the corporation, who can use the PPA to save money on energy costs.
- By securing a long-term commitment to the project from a corporate offtaker, a developer puts themselves in a stronger position to receive the critical project financing that allows the project to take shape. This commitment, in turn, may allow the corporation to make claims of material leadership, sometimes called additionality, meaning that without them, the project would not have come online, and would not have displaced existing dirty generation.
- PPAs are large enough that they allow corporations to meet their environmental targets in a big way—sometimes helping them get to 100% renewable electricity in markets where the PPA is executed.
When it comes to your second point there, about using a renewable PPA to save money, my executives keep asking me, “Isn’t this too good to be true?”
A PPA can appear too good to be true. But, given the decline in the costs of renewable technologies and current level of global incentives, PPAs are attractive to many corporate buyers for economic and environmental reasons. And many of these buyers are reaping the benefits to the fullest—in some cases, our clients are saving millions of dollars in electricity expense over the life of the contract and getting to use their project to make environmental claims.
Part of the reason PPAs can seem too good to be true is that the economic upside comes with risk. The risk can hold up some buyers, so a critical step when exploring PPAs is to educate yourself about what they are and the many ways that you can mitigate them. For example: what if the PPA doesn’t perform as expected, which may expose the company to financial risk? Or, what if any of the counterparties involved in the PPA don’t hold up their end of the bargain?
This is why we advise buyers to always be cautious when entering a long-term renewable agreement. There are PPA products on the market these days which claim to be easy to execute. In our experience, if a PPA really does look too good to be true, it probably is. Many of these so-called “easy” PPAs are fraught with risk that the corporate buyer must bear.
I also want to add that PPAs aren’t a strategy that’s right for every company. There are many factors to consider, like the buyer’s creditworthiness, their appetite for long-term contracting, the risk profile of the available deals, and more. That’s part of why we encourage companies to talk to an independent advisor, so they can really assess their appetite for a PPA and look at the alternatives that might suit them better.
When we start to peel back the layers of the metaphorical PPA onion, many customers realize they would be in the dark without the guidance of a team of experts. It can be daunting at first, but we’ve built a process that’s set up to help break down the work into manageable pieces and provide the education a buyer needs along the way, at the time that they need it – ultimately to help drive a yes or no decision as efficiently as possible.
Once you dig into the benefits and risks and start to gain a foothold on the PPA process, most buyers find that what seemed daunting becomes less scary. Executing a PPA takes commitment and time, but about 80% of customers that initiate the process with us decide it’s the right option and move forward with a deal.
To read the rest of our Q&A with Jake, and to learn what other questions we hear from companies who are wary about renewables, click here.