Renewables are surging in the US and abroad as traditional fossil fuel markets begin to lose ground. Corporate buyers, in particular, are playing an increasingly powerful role in shaping the face of the US grid as Power Purchase Agreements (PPAs) lead to increased new wind and solar installations.
But why are renewable PPAs so favorable for commercial buyers? The answer rests within the grid.
The North American grid includes 10 Regional Transmission Organizations (RTO) and Independent System Operators (ISO). Each RTO/ISOs serves as a third-party, independent operator of the transmission system, and is responsible for managing the flow of electricity in its region. The RTO/ISO ensures that no preference is given in the dispatch of a utility-owned generator over a competitive generator.
Image Source: IRC; the ISO/RTO Council
RTO/ISOs use a uniform clearing price auction for the “spot” (or real-time) price of electricity within all wholesale markets. In these auctions, electricity generators place bids with an independent market administrator for a particular time period. The administrator then dispatches the generators from lowest to highest bids until all power demand is met. Each generator that was dispatched is then paid the same price as what was paid for the last–and highest priced–unit of electricity needed to meet the total demand. The uniform clearing price auction drives generators to reduce their operating costs so that their bids can be lower and, hence, accepted.
Wind energy is typically the lowest cost option for generation. Wind plants can offer power at low prices because they have low operating costs, unlike fossil fuel plants. Moreover, the cost of wind energy is expected to continue to decline. Wind plants can also offer competitive prices thanks to the federal Production Tax Credit (PTC), which generates tax benefits whenever the wind plant is producing electricity. The result is that wind generators can offer their wind power into the wholesale electricity market at much lower prices than other generators.
Based on the dynamic auction process, PTC-eligible wind energy is almost always able to bid lower than conventional fossil fuel generators. For example, even if the auction is bid down to $0/MWh, wind generators would still operate, because while they wouldn’t receive any spot market value, they would still receive the value of the PTC. A gas plant would not bid into the auction at $0/MWh because it would lose money for every MWh produced and sold at that price, due to operational/fuel cost.
The wind energy market has grown rapidly due to this favorable price competitiveness. The total new wind capacity installations in the United States in 2015 were 8,598 MW, nearly double the 4,854 MW installed in 2014. In Texas, the rise in wind energy has been more significant. Less than 100 MW of wind capacity was installed in the 17 months from January 2013 through May 2014, but more than 4,000 MW was installed in the 16 months from June 2014 through September 2015. The outlook for renewable energy development going forward is also very favorable, with renewables expected to grow substantially in the coming decades.
Any renewable energy project that a C&I buyer helps to bring on line will deliver power onto the grid to be consume. Since the actual electrons in a given region consist of a mix of each type of generation connected to the grid, it is impossible to determine exactly where each electron is consumed. However, if a buyer supports the building of a new renewable energy project connected to the grid and uses electricity in the same grid region, that organization has fundamentally increased the amount of renewable energy that makes up the total mix of the grid. Buyers can then legitimately make claims to project additionality, renewable energy use, support of an increase in renewable energy penetration, increased health benefits, improved air quality, and impact on reducing carbon intensity in that grid.
Herein lies the value of the corporate PPA. When a PPA is physically delivered, the off-taker itself obtains a license to operate from the Federal Energy Regulatory Commission (FERC), allowing it to influence the grid operators in the region where the project is located. In a virtual PPA, buyers work directly with competitive generators (project developers) to get new projects built, creating healthy competition with existing utility-owned generators. A new class of emerging deal structures (such as utility green rider tariffs) puts the buyer squarely in the transmission mix by working directly with utility-owned generators.
The Bottom line: Corporate PPAs are good news for organizations looking to save money on their energy costs while simultaneously contributing to the expansion of renewables on the grid. Contact us to learn more about how your organization can benefit from this unique opportunity.
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