Procuring Utility-Scale Solar Projects (Can You Really Afford Not To?)

Even before the introduction of the RE100, internal and external stakeholders have been pushing organizations to minimize their impact on the environment by embracing renewable energy options like utility-scale solar power. Today, companies are continuing to use renewable energy growth to differentiate themselves as leaders with a brand-shaping sustainability commitment. But as more and more corporations and institutions set goals for procuring renewable energy, those who fail to act will be at a reputational, branding, and economic disadvantage. For those considering corporate renewable energy procurement, now is the time to turn commitments into action. Utility-scale solar power projects are the most impactful and often economically beneficial way to reach sustainability goals. 

What Does Procuring Utility-Scale Solar Power Cost?

As a developer of utility-scale solar projects, we  are often asked the question, What will a Solar Power Purchase Agreement (PPA) cost? For renewable energy buyers, the simple answer is there is no upfront capital cost. Under a Solar PPA:

  • The solar project development is handled by a utility-scale solar developer, like Urban Grid Solar
  • Engineering, equipment, and construction costs are covered by the project developer and/or the long term owner. Operation and maintenance costs of the utility-scale solar project are the responsibility of the project owner/operator 

As with any contractual agreement, utility-scale solar costs include  transactional fees, including legal and accounting costs, for which the buyer is responsible. A renewable energy PPA ensures a fixed price for a solar project’s energy, and often the accompanying environmental attributes and renewable energy credits (RECs).    

How Are Solar PPA Prices Set?

In the construction of a utility-scale solar power project, there are three main drivers that contribute to solar PPA prices:

  • Cost to Build
    The cost of building utility-scale solar projects is falling due to ever-improving technology.
  • Cost to Develop
    Solar project development costs are driven by land costs, local approval costs, and interconnection costs. These costs will vary by location, time, money, and effort the developer must put into the approval process.
  • Cost to Finance
    Due to historically low interest rates,  investors are seeking yield in new investments. Many large institutions including  pension funds, private funds and insurance companies, with lower costs of capital are seeking  the relatively higher returns of solar investments.   

Why Enter A Solar Power Purchase Agreement Now?

There are many benefits of utility-scale solar  power purchase agreements that make it a smart decision from both a financial and environmental perspective. 

The Price of Utility Scale Solar Power Is Falling

The cost of solar energy generation continues to fall and in most areas and can now compete on cost with fossil fuels. Utility scale solar power has also become increasingly competitive with wind on a levelized cost of energy basis in many traditional wind states.  

The primary benefit of a Solar PPA is that it provides a fixed, predictable cost of electricity for 10+ years.  Many current project’s PPA rates are at or below competitive market rates. A retail PPA locks in a potential savings over the contract term and a VPPA often models a positive net present value.

Renewable Energy PPAs Can Act as a Hedge Against Rising Energy Costs

With solar PPA prices falling and the cost of fossil fuels increasing, power purchase agreements can act as a hedge against rising energy costs. The closer the utility-scale solar project is to a conventional energy supply source, the more tightly correlated the hedge. If the RECs purchased from a utility-scale solar project are bundled (can be traced back to its project), the buyer is able to claim additionality — meaning that their purchase directly contributed to the increase of renewables beyond what would have otherwise occurred.  This is an unquestionable display of sustainability leadership.  

There Are Significant Competitive and Reputational Advantages

To date, over 200 Corporations have joined the RE 100 and made the commitment to go 100% renewable. Third-party reporting and benchmarking programs are growing, and the number of companies from around the world that are setting science-based carbon reduction targets has surpassed 500. These companies are making this move not only to improve their bottom line, but also because they realize that sustainability measures can impact their competitive advantage and brand reputation. Many companies are going as far as calling out others within their industry and encouraging them  to follow their lead in becoming more sustainable.  

Given the potential economic upside, pressure from investors, consumers and even competitors, and the potential for improved talent attraction, it is no wonder many companies are finding that they can no longer afford not to procure utility-scale solar power. 

If you’re interested in exploring utility-scale solar options, please give us a call at  (866) 256-0912, or contact us online today.

What Is Utility-Scale Solar? An Overview

Answers to the question“what is utility-scale solar?” vary greatly within the solar project development industry. While there is no official utility-scale solar definition, most, if not all, large scale solar projects share common characteristics.

What is Utility-Scale Solar Power?

The primary defining characteristic of utility-scale solar projects are that they sell the power they generate directly into the electric grid. Often, utility-scale solar projects are described as being “in front of the meter” as opposed to distributed generation systems, which are “behind the meter” — i.e. a system that is paired with the energy load of a facility and supplies that facility directly with power. Beyond these key features, what is considered utility-scale solar is highly nuanced and determined by a number of factors including size, location, interconnection type and voltage, state policy, and where the solar power is ultimately sold and how.

Differences in Utility-Scale Solar Definitions

A good example of the challenge in defining utility-scale solar is “Community Solar.” Community solar connects “in front of the meter” and often has a larger system size than traditional Distributed Generation, but is still not considered utility-scale. In many markets, community solar falls under the state’s net metering program, just like “behind the meter” projects.

The Solar Energy Industries Association (SEIA), a leading trade group for solar developers, defines a solar project as utility-scale if it generates greater than 1 megawatt (MW) of solar energy. The National Renewable Energy Laboratory uses a 5 MW threshold to qualify utility-scale solar projects. Unfortunately, the size-based definitions used by SEIA and NREL do not provide a full answer, as most of the time, size requirements for utility-scale solar projects depend upon the market in which the project is being built. In some markets, the threshold is 2 MW and up, in others it’s as high as 25 MW and up.

How Urban Grid Defines Utility-Scale Solar Design

For Urban Grid, utility-scale solar projects are 20MW or greater in size, which is enough energy to power thousands of homes or major manufacturing facilities. Our definition of utility-scale solar is driven primarily by the business opportunity. Unlike “behind the meter” projects that can offset the retail electricity rate, projects 20 MW and above are almost always required to compete in the wholesale power markets with other “merchant” generators like coal and natural gas.

The Two Types of Wholesale Electricity Markets

Another key factor that helps us define utility-scale solar is the market design. At a high level, there are two types of wholesale electricity markets: Regulated Markets and Deregulated Markets.

Regulated Wholesale Power Markets

Regulated power markets, like those in the Southeast, are constrained by vertically integrated monopoly utilities. In these markets, utilities generally own and operate all of the generators, transmission lines, and distribution networks which take electricity from the power plants and deliver them to homes and businesses. In some cases, the utilities will buy power directly from renewable energy projects.  In regulated markets, the utilities, and to a certain extent the Public Service Commission, sets the definitive markers for utility-scale versus not utility-scale solar.

Deregulated Wholesale Power Markets

Deregulated power markets are competitive, organized electricity markets. The power that’s generated becomes part of the wholesale electricity market where it is traded like any other commodity. These electricity grids, also known as Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs) are considered to be interconnected, which allows for broad-based trading of electricity across geographies. In these markets, there is opportunity for  financially settled Virtual Power Purchase Agreements and other unique offtake structures for utility-scale renewables. Territories such as PJM and MISO stretch across multiple states and allow power generators to sell energy at the market price for that electricity. Because of this structure, utility-scale solar projects like those that Urban Grid develops must be of a certain size, and be built efficiently so as to reduce the cost of the energy to a point where it’s competitive with other generators in that market.

Power Purchase Agreements

Utility-scale solar power projects require a certain kind of contracting mechanism in order to achieve the financing necessary to get constructed. As part of the solar project development process, utility-scale solar developers enter into a renewable energy contract called a Power Purchase Agreement (PPA) with utility, commercial, industrial and institutional customers. The PPA provides price and revenue certainty for the project’s energy over a fixed amount of time, with contracts usually spanning 12 to 20 years.

Virtual Power Purchase Agreements

Increasingly, corporations have moved to PPA’s to take advantage of the low cost of utility-scale solar. Most of these agreements are in the form of a Virtual Power Purchase Agreement (VPPA), also known as a Synthetic PPA. In a VPPA, the power purchaser (offtaker) enters into a financial contract for differences based on the project’s solar energy at an agreed-upon price (strike price). The energy is then sold at market prices. If the market price is greater than the fixed VPPA price, the offtaker receives the difference. However, if the market price is less than the fixed VPPA price, the offtaker pays the project to make up the difference. Under this contract structure, a VPPA can act as a financial hedge against unpredictable electricity prices.

Unlike in a sleeved or retail  PPA, with a VPPA, there is no physical delivery of power to the offtaker. However, the offtaker can choose to receive and retire the project’s Renewable Energy Credits  (RECs) allowing them to make claims regarding their sustainability efforts. The retirement of bundled RECs also provides the opportunity to claim additionality, i.e responsibility for the direct addition of new renewable energy to the grid.

Retail Power Purchase Agreements (PPA)

The Retail PPA is a structure that is only suitable in deregulated retail electricity markets, such as Maryland and DC, in which customers can shop around for energy plans from retail energy providers. This consumer choice has led to an increased demand for renewables which can be purchased with a Retail PPA. In this scenario, the buyer enters an agreement with their retail electricity supplier and takes delivery and title to a renewable project’s energy. In many cases, the buyer also receives the RECs as part of the agreement. In other cases, the project sells the RECs on the market separately to improve the PPA’s economics.

The Future of Utility-Scale Solar Power

According to the SEIA, there are over 100,000 MW of utility-scale solar projects currently in operation, or under development. Due to government and corporate sustainability targets (like the RE 100), continued  declines in the cost of solar, and the spread of solar-plus-storage, we expect to see utility-scale solar capacity grow by double digits between now and 2020.

What Is A REC & How Do They Work?

How Do Renewable Energy Certificates Work?

When renewable energy is produced, it goes into the local power grid and becomes indistinguishable from energy generated by other non-renewable sources. Renewable Energy Credits (RECs) were created to help energy buyers distinguish between renewable and non-renewable energy sources, by accounting for and assigning ownership to the attributes of renewable electricity generation and use. 

What Is A REC (Renewable Energy Credit)?

Renewable Energy Credits (RECs), also called Renewable Energy Certificates, are tradable instruments that represent the clean energy attributes of renewable energy and give the owner the legal right to claim renewable energy use from a specific source.One REC is created for every megawatt hour of renewable energy generated from sources such as solar, wind, hydropower, and geothermal energy.

Each Renewable Energy Credit is uniquely identified, and includes data such as where it was generated, when it was generated, and by what source. When the owner of a REC makes a renewable energy claim based on that REC, it is then retired and no longer a tradable asset.

The Renewable Energy Certificate Program

RECs are certified by independent third parties. The most common certification standard in the U.S. is Green-e®, which is administered by the Center for Resource Solutions. Green-e® certified RECs meet strict environmental and consumer protection standards. This ensures that the electricity and its associated RECs are produced by the reported renewable facility, in the amount specified, and are not claimed by more than one party.

Who buys RECs

In the Renewable Energy Credits market, REC purchases fall into two categories: Compliance and Voluntary. 

Compliance REC Market

Compliance buyers are utilities or electric suppliers that are required by state regulations called Renewable Portfolio Standards (RPS) to have a certain percentage of their electricity generation or sales from renewable sources. These buyers satisfy the RPS requirements either by buying RECs or generating them at their own renewable energy projects.

Voluntary REC Market

Voluntary REC buyers are environmentally conscious organizations or individuals interested in reducing their carbon footprint or greenhouse gas emissions. These buyers purchase RECs to offset carbon emissions associated with their purchased electricity, or to meet commitments for purchasing renewable energy.

Bundled vs. Unbundled RECs

If RECs are sold with their associated energy then they are known as bundled RECs. If they are sold separately from the underlying energy then they are known as Unbundled RECs. Unbundled RECs are nationally available and can be sourced from a single type of resource such as solar or wind.

Understanding How Unbundled RECs Work 

Unbundled RECS can provide organizations a cost-effective, flexible means to support renewable energy development and meet sustainability goals, even if clean energy products are not available locally. By purchasing RECs, businesses do not need to alter their existing power contracts and a single REC contract can offset load in multiple states or regions. However, because the abundant supply of RECs has outpaced demand, unbundled RECs can be so cheap they do not have any real financial impact on the projects they came from. Hence, buyers of unbundled RECs cannot make additionality claims, the claim that their purchase enabled a new project to be built. 

Power Purchase Agreements

Power Purchase Agreements (PPAs) and Virtual Power Purchase Agreements (VPPAs) are much stronger in terms of additionality than the purchase of unbundled RECs. The long-term contract to buy a project’s renewable energy is a critical factor in enabling the financing and construction of a new renewable energy project. The purchase of bundled RECs along with their underlying clean energy through the PPA/VPPA enables the buyer to objectively claim the purchase of clean energy from a specific project, often located within proximity to the organization’s load, and to claim additionality.

In markets with an RPS, RECs can carry a higher price making bundled PPA/VPPA deals more challenging for the offtake. For those PPA offtakes whose motivations are more financial, or who have an organizational need for renewable energy in a state with a mandatory RPS, the project can replace expensive project RECs with cheaper national RECs. This structure is often called a REC Swap or REC Arbitrage. 

REC Swap Arrangements with VPPAs and Retail PPAs

In RPS markets with higher priced RECs, or resource specific credits like Solar Renewable Energy Credits (SRECs), a REC swap can provide PPA offtakes the ability to achieve their goal of renewable energy usage claims in a more cost-effective way. 

In a REC swap, the project retains its  RECs, selling them on the open market and replacing them with cheaper, nationally sourced Green-e® RECs. The difference in price between the project RECs and the replacement RECs provides the project additional revenue which can be used to reduce the PPA rate to the offtake. The result is a more competitive PPA price while maintaining the offtake’s ability to claim the use of renewable energy. However, they will not be able to claim that their renewable energy comes from the specific project. Instead, their renewable energy claims must match the attributes of the replacement RECs, whether that is solar, wind or other renewable sources.

Urban Grid is currently developing projects in Maryland and Pennsylvania where the state legislatures have enacted aggressive Renewable Portfolio Standards with solar carve-outs, which place a premium market value on SRECs. In both of these markets, a REC Swap is almost always the best route for an economical Retail PPA or VPPA.

Choosing Which REC to Purchase

RECs give companies, institutions, and individuals a simple way to offset their carbon footprint and support clean energy. Choosing whether to buy inexpensive national RECs, or bundled RECs via a long-term PPA depends on your budget, your risk tolerance, and your emissions reduction and public relations goals. Buyers who want to have the most impact with their renewable energy procurement should utilize bundled REC PPA/VPPAs to achieve additionality and maximize impact. In RPS markets with higher priced RECs, a PPA with a REC Swap approach may be the best choice. Unbundled RECs provide the least in terms of impact and marketing ability, but still play an important role in transitioning the grid to cleaner electricity and reducing carbon footprints.

ITC Step Down: Understanding Solar Federal Tax Credits

The Federal Investment Tax Credit for solar energy is one of the most important federal policy initiatives to support the growth of renewable energy in the US. The ITC currently allows you to deduct 30% of the cost of installing a solar energy system, which has commenced construction through 2019. The ITC then steps down to 26 percent in 2020 and 22 percent in 2021. As we enter the period of the ITC step down, it is important for corporate buyers of renewable energy to understand how this reduction could affect clean energy prices in the future.

How Does the Solar Federal Investment Tax Credit Work?

The original solar investment tax credit (ITC) was established in 2005 as part of the Energy Policy Act and is based on the amount of investment in solar property. Both the residential and commercial ITC are equal to 30 percent of the basis that is invested in an eligible property. Since 2005, the solar investment tax credit has been extended several times, most recently in late 2015 — leaving us with the policy in its current form. The 2015 extension included an ITC step down schedule that reduces the tax credit amount for commercial installations between now and 2022. After the step down from 30 percent to 22 percent in 2021, the residential credit will drop to zero, while the commercial and utility credit will drop to a permanent 10 percent.

For corporate renewable energy buyers, the decrease in federal investment tax credits from 2019 to 2022 could result in increased solar PPA/ VPPA rates.

The ITC Phase Out & Safe Harbor Guidance

With the impending step down of the solar investment tax credit, there remains one area of uncertainty — when a project begins to be eligible for the credit. The IRS issued a guidance statement, Notice 2018-59, which provides two methods a taxpayer may use to establish that construction of a qualified solar facility has begun; for the purposes of claiming the solar investment tax credit (ITC).

Those two methods are:

  1. The Physical Work Test, or
  2. The Five Percent Safe Harbor Test

The Physical Work Test

Under the physical work test stipulation, a project can satisfy the begin construction requirement if  “physical work of a significant nature” has been initiated. Activities like acquiring permits and funding do not count as “physical work”.

The Five Percent Safe Harbor Test

Projects can also satisfy the begin construction requirements by paying or incurring 5% or more of the total cost of the project. This is often the more flexible and reliable method to “begin construction”.  

Both tests require continuous progress towards completion.

As utility-scale solar developers look to secure the full 30% ITC for their projects, we expect to see many procure equipment early, such as solar modules, to meet the 5% threshold. This will put a strain on the supply of modules in the short term and may lead to a rise in solar module prices over the next couple of years. This is just another reason for corporates to get moving on a solar PPA and take advantage of today’s low prices.

What Happens After the ITC Step Down?

According to projection data released in 2015 by the George Washington University Solar Institute, if the 30% solar investment tax credit had not been extended, residential solar installations could have plunged 94% in 2017, and utility-scale projects could have declined 100% — with neither recovering anywhere close to today’s levels. Bloomberg New Energy Finance also predicted solar installations would drop by another two-thirds in 2017, which the Solar Energy Industries Association estimated would have cost America over 100,000 jobs. These predictions were used to help successfully lobby for the ITC’s multi-year extension and phase-out. 

The 2015 extension and ITC step down seems to have prevented dramatic decreases in residential and utility-scale solar development. However, we won’t begin to see the phase out’s impact until 2020. In the short term, we expect the overall steady decrease in corporate PPA rates to flatten out, or even increase in some markets, due to pressure on solar panel prices. Even with upward pressure on prices due to the ITC step down, there are factors that could mitigate this. The following market conditions will continue to influence the amount of solar that gets deployed over the next several years, and the value proposition to corporate buyers in particular.

Solar Market Drivers:

  1. Declining costs of solar equipment
  2. Demand for residential, commercial  and utility-scale solar projects
  3. Rise of retail electricity rates
  4. Increase in natural gas prices — a key variable in wholesale electricity prices
  5. Rise in coal-fired electricity

Additionally, the ITC phase out may actually lead to greater competition among tax equity providers as it expands access to the market for investors with sufficient tax liability to absorb the lower tax credit. Solar developers could eventually take traditional tax equity investors out of the capital stack altogether in the future. Solar energy’s low risk and steady returns are attracting new investors whose profit expectations are much lower than current tax-equity investors.

The ITC phase out may also lead to reduced financing costs, as the need for separate tax equity investments for financing solar projects requires complex deal structures and due diligence.

The cost of solar power purchase agreements (PPAs) could increase as the investment tax credit steps down over the next five years.  Corporate buyers have an opportunity to take advantage of today’s low prices by executing PPA’s before the tax credit reductions take effect. If you are in the market for purchasing renewables or have sustainability commitments that could be accomplished via renewable energy purchase, it makes good financial sense to prioritize it now, with a little bit of urgency. 

Solar Energy FAQ: 14 Frequently Asked Questions About Utility-Scale Solar Projects

According to new figures from Wood Mackenzie Power and Renewables and the Solar Energy Industries Association (SEIA), there are now over 2 million solar photovoltaic (PV) installations in the U.S. These solar projects range from small, residential rooftop systems of 2 kilowatts to utility-scale solar projects as large as 500 Megawatts. Despite the rapid growth of large scale solar in the US, many details about this clean energy source are not widely known. Listed below are some solar energy FAQs. If you’re looking for investment options in utility-scale solar, check out our post on the different types of power purchase agreements.

How do solar panels work?   

Solar panels, also known as photovoltaic modules (PV modules), work by turning sunlight into direct current (DC) electricity. These panels are supported by some type of racking structure that can be fixed, or it may rotate on an axis. Solar panels are paired with inverters that convert the DC electricity into a more useable form of electricity known as alternating current (AC.) The AC electricity then passes through a transformer to ensure that the power is the appropriate voltage before it is sent to the electric grid.  

Where does the electricity generated by a utility-scale solar project go?   

The power produced from a utility-scale solar project installation is injected directly into the electric grid at the project’s “Point of Interconnection”. This injection can be into a distribution line (low voltage) which is what connects to your house or business or into a transmission line (high voltage) which takes power from power plants to the distribution grid that serves your house or business.

Can Solar Energy be Stored?

Yes, solar energy can be stored. There have been tremendous advancements in battery technology and reductions in costs that have led to an increase in the application of battery storage with renewable energy projects. When batteries are added to utility-scale solar projects, it allows the project to control how much and when energy is released into the grid. Additionally, the project can control when the batteries are being charged. Utility-scale solar plus battery storage projects are not widespread yet, but as costs continue to decrease,  we expect to see a steady increase in implementation, enabling the transition of large-scale renewables from intermittent to dispatch-able energy resources.

What is a “Utility-Scale” solar installation and how is it different from a rooftop solar array?

Urban Grid considers utility-scale solar projects to be 20MW or greater in size, which is enough energy to power thousands of homes or major manufacturing facilities. These projects require an interconnection to the power grid and use of the local electric grid to transmit power to the end user.

Rooftop solar and ground mount distributed generation installations are generally small, supplemental energy sources usually totaling less than 2 MW of generation capacity. These installations are also typically “behind the meter”, meaning the energy is being fed straight from the panels to the end user. In many markets, the surplus power not utilized by the house or facility is injected into the grid. Depending on the utility serving the facility, the utility may pay the generator for this power at a predetermined rate.

Interested in Utility-Scale Solar?

 

Do utility-scale solar projects prevent homeowners from installing panels on their roofs?

No. People are free to install solar panels on their roofs if the circumstances are right for them and if the local regulations permit.  

How long is a utility-scale solar project operational?

At Urban Grid, we fully expect our utility-scale solar projects to have the capability of producing electricity efficiently for more than 35 years. Here are some key factors that will impact the project’s life:

  1. The solar panels used in utility-scale solar projects typically have a manufacturer’s warranty for 25 years or longer. Solar panels will continue to produce energy past their warranties.
  2. The project may have land control for 50 or more years, depending on the specific terms of the land agreement.
  3. Solar projects have life spans of approximately 30-40 years (or longer) until the panels are no longer efficient. With the underlying land secured, the project will be able to be upgraded or re-powered over the course of operation with new more efficient equipment, extending the life and improving efficiency.

What happens after the useful life of the solar project?    

When the solar facility is no longer efficient, the system will be decommissioned and the equipment removed, recycling everything that can be, and returning the land to the condition in which it existed prior to the installation of the solar project. Solar has a minimal impact on the land, unlike fossil fuel power plants. When the project is removed, the land is returned to essentially its original state. Many landowners see leasing land for utility-scale solar projects as a form of land banking, as it has minimal long term impact on the value of the land.

Do utility-scale solar projects make any noise?   

Solar panels do not produce noise, but the inverters that change the current of electricity from DC to AC do produce a slight hum that is not audible past the property boundaries. Solar projects are  considered quiet neighbors.

Will the project produce glare?   

Urban Grid utilizes the best available Photovoltaic solar (PV) panel technology for all of our utility-scale projects. These panels are dark in color and are treated with an anti-reflective coating. The purpose of solar panels is to absorb as much sunlight as possible to produce energy efficiently so the point of the panels is to be as minimally reflective as possible. Solar panels are generally less reflective than windows and have been approved by the Federal Aviation Administration for installation on and around airports across the country.

How tall are solar panels for utility-scale solar projects?

Solar panels can range in height from  8-15 feet high depending on the racking structure and solar module used.

How does Urban Grid approach landscape design and management?

Urban Grid works hard to ensure that our projects will not change the look or feel of the community. Solar arrays have a low profile (8-15 feet from grade) and we use setbacks and vegetative buffers to shield the project from view. We see this as part of being a good neighbor.

If you’re a landowner looking to sell your property to a utility-scale solar developer, contact us today!

Are there long-term stormwater concerns with utility-scale solar?

Utility-scale solar projects do not increase runoff and may actually improve soil and water quality. Stormwater management plans are a required part of the solar development process. These plans are prepared by professional engineers to ensure that projects do not contribute to erosion or flooding. Once operational, the use of perennial ground cover and elimination of annual tillage, irrigation, and fertilizer (in the case of farmland) allows the soil to absorb water and rejuvenate during the life of the project. A solar project has maximum ground permeability and is much better in terms of stormwater runoff than most other types of development.

What are the impacts on wildlife?

Solar farms do not pose a threat to wildlife. Wildlife studies are an important part of the development process — trained experts study proposed sites to ensure that utility-scale solar development minimizes impact to wildlife. Solar projects can also provide important habitat for birds and pollinators like bees and butterflies.

What benefits do utility-scale solar projects bring to the community?

In most cases, solar projects are sited on land that generates relatively little tax revenue. The change in use provides the locality with a new higher tax revenue source. Additionally, solar projects utilize minimal public infrastructure (water, sewer, police, etc.) relative to commercial or residential development so the cost to the locality is very low. Utility-scale solar projects create local construction jobs and increased business for local services such as hotels and restaurants. The solar projects also create a small number of long term jobs for vegetation management and Operations and Maintenance of the facility.

This  Economic Impact analysis on utility-scale solar in Virginia provides more information: https://www.vml.org/wp-content/uploads/pdf/VTCApril19_Mangum_22-23.pdf

Sustainability Marketing: Promoting Your Renewable Energy Purchase

As concern for the environment grows, both consumers and stakeholders are pushing companies towards developing long-term sustainability goals. Organizations looking for innovative, economic, and impactful ways to meet major sustainability commitments has led to a rapid increase in corporate renewable energy procurement. But how can organizations effectively communicate everything they’re doing to support clean energy usage? By engaging in sustainability marketing.

What Is Sustainability Marketing?

Sustainability marketing, also known as renewable marketing, green marketing or green PR, is a type of marketing strategy that focuses on an organization’s commitment to the environment by promoting its sustainability efforts. Developing the right green marketing strategy can have a huge impact on securing investors, cultivating loyal consumer relationships, hiring and retaining employees, and gaining a competitive edge. 

Using RECs to Create Green Marketing Strategies

In order to demonstrate their investment in renewable energy, companies acquire Renewable Energy Credits (RECs), which is the mechanism that allows a buyer to claim the renewable benefits of a clean energy project. The EPA defines a REC as the property rights to the environmental, social, and other non-power qualities of 1 Megawatt Hour (MWh) of renewable energy generation. Solar Renewable Energy Credits (SRECs) are a form of RECs which represent the attributes from solar projects.

How a company procures RECs is extremely important as this can frame or, in many cases, limit how the company can market their renewable energy efforts. In the past, companies were able to make broad green marketing claims regarding their renewable energy usage. But now, the market,and many market participants,  will evaluate or even police these claims to ensure that the company is accurately representing its impact.

It can’t be overstated enough that your REC purchases need to support your sustainability marketing claims. There are many 3rd-parties and competitors that will evaluate your green PR claims and check to make sure that they are accurate. There are a plethora of examples of large companies whose green marketing efforts backfired due to misrepresentation.

The Three Ways to Purchase & Market Renewable Energy Credits

Renewable Energy Credits (RECs) can be purchased three ways; through a Direct purchase, through a Power Purchase Agreement (PPA), or through a Utility sponsored program. 

Direct purchase — Least opportunity for green marketing

Purchasing RECs directly is a popular option but gives you the least opportunities to engage in sustainability marketing. Often, these RECs are called “unbundled”, meaning they are not specific to a particular renewable energy project. Unbundled RECs are widely available at very low cost, and in some cases represent electricity generated from “dirty” resources such as  trash incineration. The availability and low cost of these unbundled RECs means that your REC purchases didn’t support the construction of a new Renewable Energy project, so there’s no way to claim additionality. This also limits your efforts real impact and any claims that you might make related to these sustainability efforts. 

Utility programs with RECs

Across the country utilities are responding to customer demand by creating programs to purchase renewable energy through new tariff structures, often called Green Tariff Riders. One example of this would be a utility tariff that adds a rider to utility bills for the purchase of renewable energy. As part of the tariff, the utility transfers RECs from a renewable project to the customer. In Virginia, Dominion Energy created Schedule RF for this purpose. These tariffs, depending on their particular structure, provide large customers a way to procure renewable energy and make green marketing claims. The downside is that utility tariffs are often more expensive.  Depending on the program, the RECs may come from new renewable energy facilities, giving you the opportunity to claim additionality, in other cases the program may not. It is important to understand the specifics of the program to confirm the extent of the claims you can make based on your purchase, and get transparency about what type of generation produces the RECs. 

Entering into a PPA with bundled RECs — Most opportunity for Green PR

Purchasing RECs by entering into a PPA gives your organization various green marketing opportunities, and it’s the most cost effective way to buy RECs. By entering into a traditional Power Purchase Agreement (PPA), or Virtual Power Purchase Agreement (VPPA) — that includes transfer of the project specific RECs — an organization can verify the exact source for those RECs. Plus, because of the significance of signing a PPA with a project, and that projects ability to secure financing and be built, you will be able to claim additionality. Additionality means that, without your organization’s investment, the renewable energy project otherwise would not have been constructed. This can be a powerful statement to consumers and stakeholders.

PPAs ensure all green marketing claims originate from the real, measurable impact of an organization’s investments in procuring RECs or renewable energy. There is definitely a wide spectrum of impact. It ranges from the minimal value of a low cost REC with no additionality, to procuring RECs from a renewable energy project in close proximity to your facilities. As mentioned above, additionality is a key criterion in evaluating the impact of your investment and the claims that you can publicly make.  To take it a step further, many companies try to procure RECs in the areas or power grids where their facilities are located in order to support even stronger claims of impact. Companies like Amazon and Facebook try to match their renewable energy procurement to the region or grid where they have facilities that are consuming the power. While this is an emerging trend, it is not a widespread practice. 

Promoting REC Purchases Through Sustainability Marketing

Now that you know how purchasing your RECs can make a difference on what you can claim, let’s talk about some of the must-have elements of  green marketing strategies.

Renewable Marketing is All About Knowing Where and How to Publicize

There are plenty of places you can publicize your efforts to support the sustainability movement. To develop a successful green PR strategy, try to get your message out across as many platforms as possible, while keeping it consistent and on-brand. Some of these places include:

  • Company/Corporate Websites
  • Company Social Media Pages (Twitter, FB, LinkedIn, etc.)
  • The RE Project’s Developer Site

You can also join groups that match your goals, and report your efforts to important organizations to gain increased exposure. Some of these groups include:

When it comes to large off-site Renewable Energy projects, there are usually multiple organizations involved in the investment. Leveraging each other’s reach and doing a series of press releases that can be published across all sites is a great way to publicize your renewable energy purchase. Oftentimes, groups involved with an RE project will also go on press tours; speaking on panels and at conferences related to their project. 

Elements of a Green Marketing Mix

Once you’ve narrowed down what you’re going to say, how to frame it, and where to publicize it, it’s time to get creative with your green marketing mix. Contrary to popular belief, a green marketing strategy doesn’t need to be restricted to Press Release type-content. It can be anything; from images to community stories, to an email outreach campaign from the CEO.

When publishing anything on social media especially, your content must stand out to get noticed. Use high-resolution images with short, powerful messaging. The more visual content you release, the better the engagement will be. If you have video content available, leverage that as well. Focus less on the technical aspects of the renewable energy project and more on the direct impact it’s making. Also, whenever possible, use numbers, percentages, and statistics to tell your story and make your green marketing message more tangible.

Example: We’ve committed to offsetting 100% of our energy usage with solar power by 2020, and this new project gets us 80% there!

In the U.S., the FTC has also published a series of “Green Guides” for the use of Environmental Marketing claims. These renewable marketing guides explicitly outline all the rules and restrictions around sustainability marketing claims, so you can avoid greenwashing and remain compliant.

How To Avoid Greenwashing In Your Renewable Marketing Efforts

Greenwashing refers to making exaggerated, deceptive, or false claims about corporate environmental efforts. There are a lot of ways to procure renewable energy and be creative in promoting it, but how your green marketing statements are framed makes a huge difference in how the company is perceived. If anything is framed incorrectly, or is outright dishonest, you can run into serious legal issues. 

A great way to make sure you don’t accidentally engage in greenwashing is to consult industry experts and key stakeholders. Ask them to review your green PR communications and green marketing materials to help ensure that they are accurate and adhere with industry standards and best practices —  including the FTC’s Green Guides. Experts and stakeholders could include individuals from third party certification programs, your legal counsel, or your project developer.

As a utility-scale solar project developer, Urban Grid has the experience needed to make sure your sustainability marketing efforts are truthful and compliant. We can help position your green marketing strategy in a way that conveys the message you’d like to get across, while staying in the confines of what you’re legally allowed to claim. 

The Growth of Corporate Renewable Energy Procurement

Corporate renewable energy procurement is growing rapidly. More and more companies around the world are voluntarily and actively purchasing renewable energy through traditional and virtual power purchase agreements. This trend is set to continue in the coming decade, as companies will need to buy significant amounts of renewable energy to achieve their often ambitious corporate renewable energy goals. These deals are part of a trend in which companies across all industries are taking a greater role in controlling their energy supply. 

What is A Corporate Renewable Energy Procurement Strategy?

Corporate renewable energy procurement is the act of purchasing and promoting renewable energy as part of an organization’s sustainability program. Motivations vary by company as do procurement strategies, but the development of the Power Purchase Agreement (PPA) in the mid-2000s has prompted significant growth in corporate demand for renewable energy and has made it easier for companies to meet long-term sustainability goals. 

PPAs Lead to Cost Effective Corporate Renewable Energy Procurement

Until recently, large organizations and businesses were limited in the strategies available for making significant progress in addressing sustainability and corporate renewable energy goals. Power purchase agreements (PPAs) have become the popular option for commercial, industrial and institutional organizations to procure renewable energy. Bloomberg New Energy Finance recently reported that 2018 saw a record number of PPAs, tripling the number from 2017. US companies led the way, purchasing 8.5GW or 60% of global purchases. Thirty-four of those companies signed their first PPA in 2018, comprising 31% of total US corporate renewable energy procurement. But, the corporate power purchase agreement is not a new structure, so why then are we seeing such a rapid increase in both the number of deals being done and the total MW of renewable energy being procured?

The Virtual Power Purchase Agreement (VPPA)

With limited energy production available from company-owned roof or land space in comparison to total electricity load, companies found that onsite solar provides a limited opportunity for real impact on their corporate renewable energy goals. New contracting structures have opened the door for larger organizations to procure renewable energy from offsite solar installations, offsetting a meaningful amount of the organization’s electricity load. The primary driver of this change has been the Virtual Power Purchase Agreement (VPPA), often called a Synthetic PPA, which has enabled major US corporations and institutions to procure large amounts of renewable energy along with its attributes in a cost-effective manner. 

With new contract structures available for corporate renewable energy procurement, organizations are now able more than ever before to maximize the benefits from their renewable energy purchases, including “green,” financial, and economic benefits.

Corporate Renewable PPAs Provide “Green Benefits”

Organizations today are much more engaged and committed to their impact on the environment than in the past. There is increased pressure, especially on the major corporations in the US, from both internal and external stakeholders pushing for more impactful sustainable business practices. Announcing sustainability efforts and introducing corporate renewable energy goals has proven to be a boost to employee pride and moral; a key driver in talent recruitment. Morgan Stanley found that millennials are up to three times more likely to want to work for (and buy from) companies that share their values and manage environmental issues well. Customer demands and expectations are trending towards more sustainable products and services. A 2015 Neilsen survey found 66% of respondents would pay more for a product or service if the company was committed to positive social and environmental change.

Not surprisingly, this pressure has led over 150 major companies to sign on to the RE100, pledging to use 100% renewable energy. And, 63% of Fortune 100 and 48% of Fortune 500 companies have at least one climate or clean energy target. 

“Green Benefits” to the Community

Companies also have expressed an interest in maximizing the benefit to the communities in which they operate. The 71 signatories of the Corporate Renewable Energy Buyers Principles have indicated that when possible, they will procure renewable energy projects near their facilities. Local projects drive economic investment, job creation, and enhance the resilience and security of the local grid.

Many companies like Mars, Starbucks, and Nestle, realize that climate change is a real threat to the raw materials necessary for them to do business. Reputational risk is also a motivator; A company that does not look to its entire supply chain may still suffer reputational damage if one of its suppliers is a major polluter. This has motivated leading companies such as Apple, IBM and Kellog’s to require suppliers to set and publicize energy and emissions goals. While individual motivations vary, the reality is that companies around the world are deciding to take responsibility in the fight against climate change. 

“Green Benefits” for the Corporate Renewable Energy Buyer

This surge in corporate interest has been a driver of large-scale renewable energy projects. The impact of a new large-scale renewable energy purchase is an important differentiator, where the buyer can champion their renewable energy purchase through renewable energy credits (RECs), and claim additionality. While these green benefits have been a major driver in the growth of large scale renewable energy purchases, there are other key factors at play here. With innovative contracting structures, economies of scale, and reductions in costs, the decision to use green energy is not only good for the environment, but makes financial sense and contributes to long term business success.

The Financial Benefits of Power Purchase Agreements

Another motivator for the growth of corporate renewable energy procurement is that renewable energy costs have dropped dramatically. They have decreased to a point now where a Virtual PPA with a large-scale solar project can provide significant financial upside to the buyer. Lazard’s annual Levelized Cost of Energy report shows that the costs of wind and solar have dropped 88% and 69% respectively since 2009, while coal and nuclear energy costs rose by 9% and 23%. Even without subsidies, Lazard’s report shows that utility-scale wind and solar can be the same or cheaper than traditional fuel generation.

Companies are taking advantage of renewable energy resources to achieve long term energy price stability and to hedge against energy price risk. The electricity markets in the US are inherently volatile, influenced on an hour by hour basis by supply and demand for electricity produced using a variety of generation resources. Traditional energy generation is subject to fluctuations in price and availability of fuel to generate electricity. Weather has had a major impact in recent years as extreme weather events put additional pressure on energy markets leading to price spikes. Companies find that A VPPA can insulate them from this price volatility and potentially provide profit from the project. 

Finally, companies realize that an added benefit to renewables purchases is that it puts them in an advantageous position in regards to future regulation. Overall, 67 jurisdictions, representing about half of the global economy and more than a quarter of global greenhouse gas emissions, are putting a price on carbon. Solar power purchase agreements significantly reduce carbon emissions and put the buyer ahead of the regulatory curve. 

Explore Your Corporate Renewable Energy Procurement Options

With prices for renewable energy in a competitive position against traditional power sources in the United States, there is little reason not to explore your options for large-scale corporate renewable energy procurement. Your organization will be able to reap the extensive and impactful environmental and sustainability benefits of renewable energy while also positively impacting your bottom line. For larger organizations, you need diverse strategies for meeting corporate renewable energy goals across a sometimes scattered footprint, in a way that is both meaningful and smart business. 

Urban Grid can help you navigate the complex and ever-changing marketplace for large-scale solar energy procurement, and make sure your organization finds the solution that is best for your goals. Contact Urban Grid today to get started.

What is a Renewable Portfolio Standard?

A Quick Rundown of Renewable Portfolio Standards 

On Monday, April 8, 2019, on the last day of the Maryland Legislative Session, the Clean Energy Jobs Act was passed in both houses of the Maryland Legislature. The act requires an increase in the state’s Renewable Portfolio Standard (RPS)  to 50% by 2030, including a 14.5% carve-out for in-state solar energy. It’s expected to result in approximately 20,000 new solar jobs and $10 billion dollars in economic value to the state over the next 10 years. With the passing of this most recent RPS legislation, Maryland joins the ranks of D.C. and 29 other states (representing 55% of total U.S. retail electricity sales) who’ve established or expanded their RPS policies to increase the amount of electricity that comes from renewable energy resources. 

So, What Is A Renewable Portfolio Standard (RPS) & Why Does It Matter?

A Renewable Portfolio Standard (RPS) is state legislation (there is no federal Renewable Portfolio Standard as of yet) which requires that a specified percentage of a state’s electricity production be generated by renewable resources.  States are able to use Renewable Portfolio Standards as a way to leverage long-term policy stability to help grow the local renewable energy industry. RPS requirements apply to utilities, and many states also include municipalities and electric cooperatives (Munis and Co-ops). Utilities that are subject to these mandates, but don’t generate enough renewable energy themselves, must buy eligible renewable energy certificates (RECs). One REC represents the environmental benefits of one megawatt-hour of renewable energy generation. The requirement feature in an RPS creates a market mechanism for compliance, i.e. the purchase of RECs.  Like all markets, REC supply and demand set the market price for those attributes. By increasing an RPS, a state is increasing demand for RECs (and thus the price) which incentivizes new renewables deployment.  For a corporate energy buyer, a strong RPS leads to increased availability of projects to meet your specific needs and innovative structures for procuring renewable energy and meeting your goals.

Renewable Portfolio Standards by State

The first RPS was passed by Iowa in 1983, and since then over half the country has followed suit. Twenty-nine states, Washington DC, and three US territories have passed an RPS, while eight states and one US territory have passed non-binding renewable energy goals. However, the details can vary significantly from state to state as shown in this map by DSIRE.  

Most states’ renewable energy targets are between 10 and 45 percent, although Washington, D.C. and seven other states, including Maryland, have requirements of 50 percent or greater. Eligible resources for RPS compliance include wind, solar, biomass, geothermal, and some hydroelectric facilities. Several states also include additional resources such as landfill gas, tidal energy, combined heat and power, trash incineration and even energy efficiency in their Renewable Portfolio Standard. Many RPS’ also include specific “carve-outs” which require a certain percentage of the overall renewable energy requirement to be met with a specific technology, or “multipliers” which award additional RECs for electricity produced by these technologies. The ranking preference for different resource classes is often referred to as different Tiers (Tier 1 RECs).

If you’re buying REC’s in your company’s service footprint, it’s important to know what resources are covered by your state’s RPS. Since some states allow waste-burning and “dirtier” resources to produce Tier 1 RECs, there’s a chance you could be getting renewable energy from a resource that could violate, or taint your sustainability claims. 

The RPS Effect on Renewable Energy Growth

According to Berkeley Lab’s Electricity Markets and Policy Group, RPS’ have been responsible for roughly half of the growth in renewable energy since 2000. However, in recent years RPS policies have played a declining role, accounting for only 34% of all national renewable capacity additions in 2017NB1. This is due in part to declining costs and other pro-renewable energy policies. Nevertheless, RPS policies continue to play a significant role in supporting renewable energy growth in the Northeast, Mid-Atlantic, and West.

As discussed, in most cases, a Renewable Portfolio Standard sets up a market for RECs.  In markets with a strong RPS impact, it makes building renewable energy projects more cost-competitive, so more projects can be built.  

General RPS Trends

Most RPS programs are over 10 years old, but states continue to make revisions. More than half of all states with a Renewable Portfolio Standard have raised their overall RPS target and carve-out percentages due to achieving the target early or policymakers wanting to increase renewable deployments. For example, California increased its RPS requirement to 60% by 2030 and added a goal of 100% zero carbon electricity by 2045. Some states have also refined the eligible resources, with particular attention on hydro and biomass. 

REC Pricing Trends

REC prices vary greatly by state and can be volatile. RECs that are eligible to meet state RPS compliance requirements tend to be relatively expensive compared to RECs in states with voluntary wholesale markets. Even the wholesale values for compliance-eligible RECs can vary greatly depending on the specific policy and current supply-demand dynamics.  For example, in states with a solar RPS carve-out, solar RECs (SRECs) tend to be more expensive. Over time, as RPS goals are reached and demand declines, an oversupply of RECs may result, with a subsequent decline in REC prices. The overall success of renewables has enabled many states, including Texas to meet their RPS requirement early.

Be aware of the market dynamics in the state in which you are looking to procure renewable energy as the value of the additional income from RECs can have a major impact on the deal’s economics.

If you’d like to discuss how solar project development can help you meet your renewable energy goals, or need help understanding the market dynamics of your state, give us a call at (866) 256-0912.

What Is A Sleeved PPA?

As a large organization, a Power Purchase Agreement (PPA) is often the most accessible and effective way for an organization to procure large amounts of renewable energy. The two most common types of PPAs are sleeved PPAs, also called a direct PPA or retail PPA, and Virtual Power Purchase Agreements (VPPAs). According to the Business Renewables Center, about 20% of large-scale corporate renewable energy deals are sleeved PPAs. 

What Is A Sleeved PPA?

In a sleeved PPA, an intermediary utility company handles the transfer of money and energy to and from a renewable energy (RE) project on behalf of the buyer. The utility takes the energy directly from the RE project and “sleeves” it to the buyer at its point of intake, for a fee. If the purchased renewable energy isn’t enough to meet the buyer’s energy needs, the utility is also responsible for supplying the additional power required. 

A Sleeved (Direct) vs. Virtual PPA

If you’ve weighed the risks and benefits of a VPPA for your renewables purchase and are uncomfortable with the level of risk, a sleeved PPA may be a good option to explore. Unlike a VPPA, in a sleeved PPA:

  • The buyer does not need to be intimately familiar with wholesale power market dynamics; and 
  • The buyer is not subject to wholesale power market price fluctuations because the utility bears the market risk

Additionally, a sleeved PPA is the best renewables purchase option available when:

  • The buyer is not set up to be able to purchase balancing power — power that’s needed when renewable energy isn’t available due to weather conditions or time of day

Some very large and sophisticated organizations have set up mini utility models to avoid having to purchase balancing power, but this requires a large investment of both capital and time to gain expertise.

  • The buyer is in a regulated electricity market that does not have a Regional Transmission Organization (RTO) or Independent System Operator (ISO) — like the Southeastern U.S.
  • The buyer is in a deregulated energy market, like Maryland or Pennsylvania,  where the sleeved PPA mirrors an electricity supply contract.

Sleeved PPAs in Regulated vs. Deregulated Markets

Given their nature, sleeved PPAs are much more common in deregulated markets, but they can also exist in regulated wholesale power markets as well. 

How Sleeved PPAs Work in Deregulated Markets

If you operate in a deregulated electricity market, a sleeved PPA — also referred to as a Direct PPA or Retail PPA — is a great tool for purchasing renewable energy to meet corporate sustainability goals. They’re particularly advantageous for organizations with large, fragmented loads or limited onsite opportunities. By sleeving your PPA with a utility supplier, you gain key benefits while reducing your organization’s exposure to market risks: 

  1. The utility assumes the market (price), volume and shaping, and basis  risks
  2. Reliability of power supply – power when the renewable project is not producing
  3. Long term, fixed rate for power
  4. Control over power-pricing relationship vs. paying a tariff set by the utility
  5. Easier verification that energy is procured from a particular renewable source
  6. No upfront costs or capital expenditure requirements
  7. Option to claim additionality — indicating that your organization is driving the construction of new RE projects

Sleeved PPAs generally have few drawbacks, with the most common ones being:

  • The contract involves three parties — Energy Buyer, Utility, RE Project
  • The buyer must pay the utility a fee for management, sometimes called a ‘sleeving fee’

Sleeved PPAs in Regulated Markets

The most common way a buyer can enter into a sleeved PPA within a regulated power market is through a Green Tariff. With a Green Energy Tariff, the utility supplies the customer with up to 100% renewable power from projects controlled by the utility. Green Tariffs come in many forms, so take time to look at a Green Energy Tariff comparison, to familiarize yourself with the differences between each.

The most common type of Green Energy Tariff explained

The most common type of Green Tariff in the utility scale renewables market is the type where the utility passes the terms and structure of a PPA with a RE project through to a customer. In most cases, they avoid shifting costs and risks to non-participating customers. And typically, the customer can purchase Renewable Energy Credits (RECs) and other environmental attributes from the contracted RE projects. Unlike deregulated markets, when entering into a sleeved PPA through a Green Energy Tariff, the buyer gives up much more control to the utility.

Explore Your PPA Sleeving Options

If your company is looking for a risk-averse solution to meeting its sustainability goals, a direct PPA is worth exploring. Learn more about how you can meet your energy needs while simultaneously reducing your collective carbon footprint. Contact Urban Grid Solar today.

Renewable Energy Risk Management: The Benefits and Risks of a VPPA

Virtual Power Purchase Agreements (VPPAs) have become an attractive tool for corporate renewable energy procurement. They provide an opportunity to purchase renewables at a meaningful scale, allowing organizations the chance to make impactful progress towards their sustainability and carbon reduction goals. There are many benefits to Virtual PPAs. However, these contracts have inherent risks that must be identified and understood, in order to engage in responsible renewable energy risk management

Benefits of a VPPA Contract

By entering into a Virtual Power Purchase Agreement contract and locking in a low fixed energy price, organizations can realize significant financial gains over the contract term. With the transfer of Renewable Energy Credits (RECs) as part of the Virtual PPA, organizations are able to make legitimate claims around their use of clean energy and carbon reductions. They even have the chance to claim additionality because VPPAs are typically contracted with new renewable energy projects — meaning additional clean energy is added to the grid as a direct result of the power purchase agreement.

Entering into a Virtual PPA as part of your corporate renewable energy procurement strategy provides your organization with excellent benefits, both from a sustainability and a financial standpoint.

Virtual PPAs Help Meet Sustainability Goals

If a company has a stated sustainability plan geared towards reducing their impact on the environment, a virtual power purchase agreement helps achieve a wide range of those goals. A Virtual PPA contract can help organizations meet greenhouse gas emission reduction targets, even for geographically dispersed facilities, meet RE100 commitments, and make progress towards other corporate renewable energy procurement strategy objectives.

VPPAs Can Increase Your Net Present Value (NPV)

A properly structured VPPA can provide significant positive cash flows. As the price of solar has decreased rapidly in recent years, it is now possible to lock in a VPPA rate that is consistently below the projected wholesale market price for power at the settlement location. Urban Grid uses its extensive experience and expertise to structure Virtual PPAs that provide positive modeled NPV as well as a hedge against future energy prices. When evaluating solar projects under development for a solar VPPA, it is critical to do your due diligence and make sure you’re contracting a Virtual PPA with a project that:

  • Is well developed
  • Has limited development risks
  • Has quality interconnection
  • Is in a location with a stable wholesale power market

Solar Virtual Power Purchase Agreements have the added benefit of producing during periods of higher market prices because solar energy projects operate during the peak price periods in the afternoon. Since wholesale market energy prices are higher during the day, solar projects can sell their energy at a higher market price. With a greater difference between the market energy price and the VPPA fixed price, your positive cash flows increase.

VPPAs Can Be An Effective Energy Hedge

A virtual power purchasing agreement can be very effective at acting as a financial hedge against electricity price volatility. By entering into a Virtual PPA, the buyer is able to lock in a set price for both energy and RECs. A VPPA, if well correlated to your retail electricity spend, provide positive cash flows which offset higher conventional energy costs. A position in a long term VPPA acts as an insurance policy against historically volatile and projected rising electricity prices. 

If you are looking to use a Virtual PPA as a hedge, make sure to align your VPPA with your conventional energy supply, both in amount and location. Also, while it is possible to hedge 100% of your energy usage, that strategy is not advised as events including changes in your usage or in wholesale and retail price correlation can make the hedge less effective.

Learn More About VPPAs

 

VPPA Risk Management

During your evaluation of Virtual PPA contract opportunities, it’s important to fully understand the associated risks and how to manage them. The risks associated with a VPPA transaction include:

Market Price Risk

During Virtual PPA evaluation, one of the primary risks that your organization will be faced with is exposure to wholesale power market prices. The financial success of the VPPA is predicated on the assumption that the wholesale energy prices in the contracted location will remain consistently higher than the VPPA fixed price. There are three risk management tools that can help reduce Market Price Risk:

Price forecasting

It’s important to use a recognized, reputable energy price forecasting models and financial analysis including stress tests using a variety of best and worst-case scenarios is needed to assess the risk of taking a long position on energy prices.

Hourly market price

Compare renewable project production forecasts with the corresponding hourly market price. For example, wind projects typically produce more at night when prices are often lower; while solar projects produce during daylight hours when prices are higher. 

Contract terms

Energy prices can be quite volatile. This volatility can be mitigated through specific contractual deal terms, such as price floors or price collars. In both cases, the VPPA price may be slightly higher to provide this protection.

Operational Risk

All renewable energy projects — whether wind, water, or solar — are impacted by several variables including technology performance and weather variations. Buyers should ensure they are protected against shortfalls in project performance through key Virtual PPA provisions such as performance and production guarantees. Make sure your project developer has performed extensive analysis to understand and determine the project’s expected energy output. This analysis includes the consideration of expected weather conditions as well as technology and equipment degradation. 

Generally speaking, the Virtual PPA buyer typically bears very limited performance risk unless the project severely underperforms. However, the consequences of underperformance can have an impact on the buyer, mainly the loss of potential financial upside and ability to make environmental and sustainability claims. For instance, if a project is underperforming and a certain number of RECs were expected and used in making certain sustainability claims, the buyer may fall short on those claims potentially resulting in legal and reputational issues. It is important to involve internal corporate teams including accounting and legal to understand the Virtual PPA terms. 

Inherent Legal and Regulatory Risks

Virtual PPA’s come with a range of legal and regulatory risks that should be understood and where possible, eliminated through due diligence and contracting. 

Dodd-Frank compliance

A Virtual PPA is a “swap” agreement and thus may trigger reporting requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank compliance requirements are minimal for most buyers — recordkeeping and reporting which is typically contractually handled by the project. However, if you are a buyer who is a financial institution, your Dodd-Frank compliance requirements may be more significant. Consult with your internal legal and accounting teams to determine your Dodd-Frank burden and if it is acceptable. 

Change in law provisions

Many VPPA contracts include “change in law” provisions that are used to protect both the corporate buyer and project developer from the potential impact of regulatory changes. Again, consult with a professional who has prior experience with VPPA contracts to ensure your interests are protected by these provisions. 

Experienced accounting firms

VPPAs accounting implications, including derivative accounting or mark to market requirements, are important risks to consider. While we cannot give accounting advice, we can say that corporate offtakes have successfully structured VPPAs to avoid any potential accounting issues. Again, it is important to involve internal and expert external accounting advisors to help avoid these issues.

Locational Risk

A renewable energy project’s location can dramatically impact the risks and benefits of the virtual power purchase agreement associated with that project. The most common locational risks include:

Basis Risk

Today, most project developers have a good understanding of basis risk and how to overcome it. The challenging part is determining which party bears this risk the buyer or the project developer. Energy is sold into the wholesale power grid at a busbar or node. Each node has its own market price. In each power region, there are also hubs, which are transactional locations which average the pricing of all busbars/nodes in the region. The difference between hub and node prices is the basis. Most VPPAs are hub settled to mitigate basis risk for the buyer. If the buyer does take on the basis risk, they typically can secure a lower Virtual PPA fixed-rate, potentially resulting in greater returns. 

Covariance Risk

Covariance risk is incurred when there’s an oversaturation of wind or solar in a particular area, which can lead to lower wholesale prices in the long-term. If a Virtual PPA is located in a region where wind or solar energy is only a small percentage of the power supply, there will likely be no negative market price effects. However, in areas where wind/solar are a large percentage of supply, market prices can be depressed, resulting in required payments to the project by the buyer. These risks can be mitigated using the same means as for price risk, ie. price minimum price limits and price “collars” whereby the Corporate Buyer secures a higher minimum price in exchange for giving up potential profits if the price of energy goes above an agreed ceiling. 

Execution Risk

Virtual PPAs are subject to execution risk, ie. the project under delivers or is never constructed. Due to the many development and execution risks faced by renewable energy projects, only a small percentage of these projects that begin development actually make it to construction. To limit exposure to this risk, perform comprehensive research and vet potential developers and projects before signing a long-term contract. 

 

Conclusion

When Virtual Power Purchase Agreements are well analyzed, structured, developed and negotiated, they can provide substantial benefits including credible bundled RECs, a substantially positive modeled NPV, as well as a hedge against future energy price increases. However, there are risks inherent in any VPPA that must be identified and managed. These risks can be addressed and mitigated through the creation of a renewable energy risk management strategy. The strategy should include the thoughtful analysis and planning by your internal teams including accounting, legal, finance, sustainability, and energy. Equally important is close coordination with an experienced utility-scale solar developer partner as you work through the process of evaluating Virtual PPA opportunities. Contact Urban Grid today to start assessing your options for a solar VPPA that maximizes benefits and minimizes risks.