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Achieving Sustainability Goals Through Additionality

For renewable energy buyers looking to demonstrate leadership by increasing the effectiveness of their sustainability projects, understanding the importance of additionality is critical.

What Is Additionality?

Additionality is a term adopted by the renewable energy industry to describe when an organization’s power purchase agreement (PPA) has the direct effect of adding new renewable energy generation to the grid; i.e.without the organization’s involvement (via the PPA) the clean energy project would not have happened.

Additionality in the carbon offset and renewable energy markets

The concept of additionality originated in the carbon offset markets where it described projects that resulted in verifiable emissions reduction or avoidance. Today, additionality is often used in a similar way in the renewable energy credit market.

How to claim RECs while realizing additionality

Achieving additionality requires entering into a long term power purchase agreement (typically either a Sleeved PPA or Virtual PPA) with a new renewable energy facility and retiring the RECs. It is this long term commitment to buy the project’s energy and RECs that provides the new renewable project the contracted revenue necessary to finance and construct the project. RECs bundled with energy via a Sleeved or Virtual Power Purchase Agreement allows your organization to make the claim that, without your organization’s investment, the renewable energy project would not have been built.

The purchase of unbundled RECs (meaning RECs purchased separately from the original energy production) makes claims of additionality challenging. Due to the success of the renewable energy market, RECs are oversupplied which has yielded extremely low prices, hence they are providing little to no financial impact on the facilities they come from. Unbundled RECs purchased in the marketplace, are not limited by geography and can be generated by a variety of resources including wind, biomass, even trash incineration in some markets. If you do plan on purchasing unbundled RECs to offset your electricity usage, it is important to work with your broker or developer partner to ensure clarity on where the RECs are being generated.

If You’re In the Renewable Energy Market, You Should Care About Additionality

Companies are being increasingly pressured to become more sustainable by both internal and external stakeholders. Being able to claim additionality is a huge indicator to customers, investors, and employees that your organization is leading the charge on the sustainability front by clearly driving the construction of new renewable energy projects. Leading companies such as Bloomberg, General Motors, Iron Mountain and The Home Depot have embraced the importance of impacting the electricity grid by ensuring their market participation adds incremental renewables to the grid. As of October 2018, 78 companies have signed on to the WWF/WRI Corporate Renewable Energy Buyers Principles, the fourth principle of which states the signatories’ desire to have “access to new projects that reduce emissions beyond business as usual … we would like our efforts to result in new renewable power generation.” Claiming additionality through a PPA or Virtual PPA is tangible proof that your company is actively working to make a difference in the environment by achieving its sustainability goals.

Additionality from Renewable Energy Is Finally Achievable For Most Organizations

Aside from the mounting pressure to do more, companies are now looking for ways to achieve additionality because they’re increasingly able to do so in a cost-effective and cost-competitive way. Corporations like Microsoft, Google, and Facebook were able to achieve additionality early on, but because of cost barriers, many smaller and mid-size organizations weren’t able to invest money into renewable energy projects. Now, because of Power Purchase Agreements, that’s no longer the case. Any organization can sign onto a PPA and purchase a large amount of RECs in a way that makes financial sense. Companies can even partner with other organizations to finance large projects, by signing onto a PPA together.

How To Achieve Additionality

In the renewable energy industry, there are two ways to achieve additionality. The first is to enter into a Power Purchase Agreement with a clean energy project that includes bundled RECs. The PPA/VPPA ensures the financing and therefore the construction of the project, and the RECs provide the environmental attributes. Another less advertised strategy for ensuring additionality in your renewable energy venture is through the direct investment in a clean energy project and the subsequent purchase of the RECs.

The structure, location, and price of a Power Purchase Agreement do not affect additionality claims, and additionality from renewable energy can be shared amongst multiple buyers (investors).

The Future of Corporate Renewable Energy Procurement

Even now, some organizations are starting to think beyond whether their actions are resulting in additionality, and more towards whether they’re offsetting as much greenhouse gas as they possibly can. For example, companies are beginning to seek clean energy projects in regions with higher levels of dirty power sources. These projects will have the largest potential impact of displacing fossil fuel use or GHG emissions reductions. In addition, we predict that there will be a shift towards investing in project portfolios that include multiple renewable sources and locations, that, together, can deliver carbon-free renewable energy to match a company’s load 24 hours a day, 7 days a week in real-time.

If you’d like to talk about how your organization can meet its sustainability goals and achieve additionality through renewable energy procurement, contact Urban Grid today.

Quick Guide to Virtual Power Purchase Agreements

A Virtual Power Purchase Agreement (VPPA), also known as a Synthetic PPA, or Contract for Differences, is a popular type of renewable energy contracting structure that provides a financial hedge against future energy fluctuations. The VPPA structure supports bringing new, clean renewable energy onto the grid on behalf of the offtaker, and opens the door for meeting an organization’s sustainability goals as well as additional marketing opportunities. While the Virtual PPA can be a complicated undertaking, working with a partner like Urban Grid will help ensure your organization achieves their renewable energy goals, while limiting exposure to unnecessary risks.

What is A Virtual PPA?

A Virtual PPA is a contract structure in which a power buyer (or offtaker) agrees to purchase a project’s renewable energy for a pre-agreed price. In this agreement, the utility-scale solar project receives the market price at the time the energy is sold.

If the market price is greater than the fixed VPPA price, the offtaker/buyer receives the difference.

If the market price is less than the fixed VPPA price, the offtaker/buyer pays the project to make up the difference.

In this way, a Synthetic PPA acts as a financial hedge against volatile electricity prices. Typically, the buyer receives the project’s Renewable Attributes, or Renewable Energy Certificates (RECs). Because there is no physical delivery of power, the VPPA is a great option for large electricity consumers with a fragmented/distributed electric load to support the development of new renewable energy resources.

Is a VPPA a Contract to Buy Energy?

With a Synthetic PPA, there is no physical delivery of power to the buyer’s load centers. In fact, the buyer will continue to pay their utility bills as they always do. A Virtual PPA is a purely financial agreement that acts as a hedge on electricity prices. Additionally, the buyer receives the Renewable Energy Credits (RECs) as part of the VPPA, which allows the buyer to make claims regarding their greenhouse gas reductions and renewable energy purchase. Those with a financial background will recognize this structure as a Contract for Differences (CFD) or financial fixed-for-floating swap.

It is important to note here that VPPAs require market liquidity – where the project is permitted to sell its power directly into the grid for the prevailing wholesale market price. This is typically only possible in organized markets such as a regional transmission organization (RTO) or an independent system operator (ISO), which serve as third-party independent operators of the transmission system. Also, because VPPA economics rely on the difference between the floating market price and the VPPA price, it is important to have the transparency of an RTO/ISO market.

Benefits of a Synthetic PPA

Additionality

A Synthetic PPA guarantees the project a fixed price for its output, which is critical for developers that are looking to finance new projects. The energy and bundled RECs acquired through a VPPA are directly attributable to new “additional” renewable energy facility which is adding new clean energy to the grid and displacing fossil fuels. The project would not happen “but for” the VPPA and it is thus truly “additional” and impactful. As corporate renewable energy procurement and reporting on energy use and emissions faces increasing scrutiny, procuring bundled RECs will be the best practice for meeting corporate renewable energy goals.

Impact

Organizations exploring the VPPA structure are typically focused on sustainable business practices, reducing carbon footprint, and investing in renewable energy. Just as with any investment, the impact of these “green” initiatives is important in evaluating their true return of investment. For example, purchasing unbundled RECs is a low impact solution for achieving renewable energy goals. These RECs are easily attainable, may come from new or existing resources anywhere in the county, from any “renewable” energy resource. Signing a Synthetic PPA with a new solar project is substantially more impactful as the long-term contractual commitment to buy the project’s energy enables the development of the project and the inclusion of the Bundled RECs recognizes the clean power production. This enables organizations to claim that their renewable energy purchase has a direct and meaningful impact on the addition of a new renewable energy project. This impact translates to significant marketing and branding opportunities and organizations are certainly jumping on board.

Positive Net Present Value

Unlike a traditional Unbundled REC purchase, which always costs money, the VPPA swap provides RECs at a price determined by the net difference between the fixed VPPA Price and the wholesale market price. A positive difference between the market price and the fixed VPPA price can lead to significant positive cash flows. In many earlier VPPAs, the fixed VPPA price was at or above the market price, and the buyer had to look to price forecasts to determine if the project would eventually provide a positive NPV. Now, there are markets and projects where it is possible to secure a fixed VPPA price which is below the current market price, meaning that the Virtual PPA will generate positive cash flow beginning day one.

Ability to Offset Dispersed Load

VPPAs are flexible and can help companies aggregate their load to a single renewable energy project under a single PPA, regardless of where their individual facilities are located. The VPPA is a separate financial contract that, in fact, does not affect the traditional electricity supply for an organization directly. The organization continues to purchase electricity from the utility, in addition, enters the VPPA for renewable energy.

Hedge

By entering a long term Synthetic PPA, the buyer is locking in a price for Bundled RECs based on the wholesale market price of electricity. If wholesale prices rise, then the buyer’s conventional energy supply costs will also likely rise. The buyer will likely make money on the VPPA deal and the profits made can offset higher conventional energy costs. Conversely, if the VPPA price is greater than the wholesale market price, the buyer will be paying the net difference to the project to provide their required fixed revenue stream, but they will also likely realize lower conventional energy costs. In this regard, the VPPA acts as a hedge against rising conventional energy costs.

Learn More About VPPAs

VPPA Structure: Legal, Accounting and Regulatory

Power purchase agreements, especially VPPAs, can raise internal accounting issues. While we cannot provide accounting advice in this blog, there have been numerous VPPA’s structured and executed by all types of organizations. We recommend discussing the accounting impacts with your accountant early on to ensure proper internal accounting treatment.

Another important regulatory consideration to ensure you understand when evaluating a VPPA is the impact of the Dodd-Frank Act. Because a VPPA is a fixed for floating swap, it is subject to Dodd-Frank, which requires registration and reporting of the transactions. In most cases, the renewable energy project owner will perform these tasks on your behalf, but it is important to confirm this in the negotiation of the VPPA. If you are a financial services firm, you may be subject to additional obligations for filing under Dodd-Frank. Again, we recommend involving your internal legal and accounting team early in the process to answer these questions. A good VPPA partner can help with understanding the contract structure and how it’s unique terms may impact your organization.

Advancing Renewable Energy Is Good Business Leadership

If your company is looking for impactful ways to reduce your collective carbon footprint, that also includes financial and marketing benefits, the Virtual PPA may be a workable option for a growing number of companies.

Interested in learning more about how your company can make a difference with renewable energy? Contact Urban Grid Solar.

Types of Power Purchase Agreements For Offsite Renewable Energy Projects

The increased attention to carbon footprints and the adoption of sustainability commitments have led to major increases in demand for renewables among commercial, industrial, and institutional customers. Innovations in the structuring of renewable energy power purchase agreements have drastically increased the accessibility of renewable energy projects to corporate energy buyers. The main advancement in corporate renewable energy procurement has been the creation of new and creative structures known as Power Purchase Agreements (PPAs), that allow for renewable energy purchases from large, off-site projects. This article focuses on describing the most common types of power purchase agreements —the Virtual PPA (Synthetic PPA), the Retail PPA, and the Utility Sleeved PPA.

What Are Renewable Energy Power Purchase Agreements?

A Power Purchase Agreement (PPA) is a long-term contract between a renewable energy project and a power buyer, in which the buyer agrees to purchase the project’s energy for a fixed price during the contract tenor. Earlier renewable energy PPAs had terms of 20 years, but tenors have declined to 15, 12 and even 10 years to meet buyer demands.

How do PPAs Work?

Under the PPA structure, a third party provides the upfront investment to pay for the project and in return, receives a contracted long-term revenue stream from the energy buyer as well as all other available incentives. The corporate energy buyer receives a fixed rate for energy, usually at a discount to what they are already paying, without having to put up capital to build the project.

Types of Power Purchase Agreements for Offsite Renewable Energy Projects

There are a few different types of power purchase agreements to be aware of; Virtual PPAs, Retail PPAs, and the Utility Green Tariff Program.

What is a Virtual PPA (Synthetic PPA)?

The Virtual Power Purchase Agreement (VPPA), also known as a synthetic PPA) is a contract structure under which a buyer (or offtaker) agrees to purchase the project’s renewable energy for a fixed price, while the project receives the floating market price. If the fixed VPPA price is greater than the actual market price, then the project pays the difference to the offtaker. If the market price is greater than the VPPA price, then the project company keeps the difference. In this way, a VPPA is a financial hedge against volatile electricity prices. In a Virtual PPA, the buyer typically receives the project’s Renewable Attributes but does not take physical delivery of the energy. The buyer/offtaker continues to purchase its electricity through their local utility. A utility-scale solar VPPA enables large electricity consumers with fragmented/distributed electric loads to realize the benefits of renewable energy.

What is a Retail/Direct/Sleeved Power Purchase Agreement?

Another offsite power purchase agreement structure in use today is the Retail PPA. Also called a “Direct PPA” or “Sleeved PPA” this structure is suitable in de-regulated electricity markets where customers have retail choices, such as Maryland. Under this structure, the buyer enters a power purchase agreement with its retail electricity supplier and takes both the delivery and title to a project’s energy. The benefit of this structure is that the retail electric supplier takes on the market risks associated with wholesale electricity, and the customer gets a fixed price for the energy. Unfortunately, because these contracts are only available to customers in deregulated markets, the amount of renewable energy procurement is restricted to the buyer’s total load within those markets.

What is a Utility Green Tariff Program?

A utility green tariff program is another form of a Sleeved PPA that has been gaining momentum over the last year in regulated electricity markets. Typically, PPA sleeving programs are set up through a regulated utility’s rate structure. The utility, with approval from the state public utility commission, offers customers renewable energy through a “Green Tariff”. Like the Retail PPA, with a Sleeve PPA, the utility wears the whole market pricing risk and delivers renewable energy and in many cases the Renewable Energy Credits (RECs), to the customer for a fixed rate. Often the greatest downside to this structure is that customers will pay a premium for renewable energy in exchange for the utility taking on the market risk.

Which PPA is Right For Your Renewable Energy Goals?

Today, PPA’s are a key driver in the widespread deployment of utility-scale solar projects in the United States. While there are trade-offs and varying risks among the types of power purchase agreements, a solar PPA requires no capital investment, carries no maintenance costs, and locks in energy prices for up to 25 years. Renewable energy PPAs put clean energy into the electric grid, and the offtaker owns all the environmental benefits associated with its portion of the project. This is great news in a volatile energy market and for buyers looking to meet renewable energy and sustainability goals.

If you’d like to discuss how a utility-scale solar PPA could help you meet your corporate renewable energy goals, call us at (866) 256-0912 .

Understanding the Solar Project Development Process Steps

The development of utility-scale solar projects is a long and complex process, requiring extensive expertise. Urban Grid provides fully integrated solutions to bring a utility-scale solar project from conception to construction which involves six key steps discussed below.

Key Steps of the Utility-Scale Solar Project Development Process

When discussing the utility-scale solar project process, there are seven key steps to be aware of:

Identify Optimal Site: The foundation of the successful development of a utility-scale solar power project is identifying a site suitable for hosting a project. Key characteristics of a feasible site include:

Access to electric utility infrastructure
Land that is flat and cleared of trees
No wetland or floodplain impacts
No impact on protected ecosystems and organisms
No impact on cultural or archaeological resources, and

Locations where utility-scale solar development will provide net gains to the local community. The majority of this work is done as a “desktop analysis” using the best available mapping tools.
Land Acquisition: Once a site is deemed to be a quality location for a utility-scale solar project, we will enter into an Option to Purchase or Option to Lease Agreement to secure the land. The “Option” portion of the agreement allows the utility-scale solar developer to complete their studies and approvals without the fear of losing the property in the meantime. It is during the Option Period, that the solar project development process occurs. This process, which can take around 3-4 years, involves significant investment from the developer. It is, therefore, important to maintain a solid partnership between the landowner and the developer. The landowner can continue to use their land as they wish during the Option Period, and the solar project developer compensates the landowner for the Option on the land.
Interconnection Design and Application: The next step in the solar project development process involves managing interconnection to the electric grid. Proper interconnection with the electric grid is crucial to a successful solar project. Once a site is under Option, our experienced team of interconnection engineers assesses interconnection at the target location and develops necessary applications. Interconnection is one of the most critical, difficult and costly aspects of project development and as solar project development continues to expand, grids will become more congested leading to increased difficulties.
Site Environmental and Cultural Assessment: Even with an extensive desktop environmental review, utility-scale solar projects require extensive studies to be completed to ensure the project has no negative impact on existing ecosystems, threatened and endangered species, and cultural and archaeological resources. As a solar developer, we dedicate resources to evaluating our project sites to ensure that a solar project will not negatively impact the existing environment. Further, the soil conditions and topography are evaluated to ensure the project can be constructed efficiently.
Local and State Permits and Approvals: One of the most challenging aspects of the utility-scale solar development process is achieving all required state and local approvals. At the local level, a significant amount of time is spent either progressing a project through an existing process for zoning approvals, or in some cases, working closely with the local government to develop and implement new zoning ordinances to address utility-scale solar. Additionally, most states require projects to complete state-level approval. Urban Grid prides itself on quality solar project development while being a good neighbor, which requires working closely with local stakeholders to ensure their concerns are addressed. More and more, the success of a utility-scale solar project hinges on a developers’ ability to navigate the local permitting process which requires a strong relationship with local government, as well as community business interests and residents.
Project Construction: From ground-breaking to final deliverable of the completed, operational plant, a solar project developer must deploy a stellar construction management crew to assemble and direct skilled tradespeople for efficient and expedited plant construction. The team should complete the project within 6-12 months, depending on project size.

Ongoing Operation & Maintenance: Once a utility-scale solar project is placed in service, it requires very little in terms of operations and maintenance to continue efficiently producing clean, renewable energy. In most cases, a separate operations and maintenance provider is hired to monitor, perform ongoing maintenance, troubleshoot and correct problems, and even maintain the grounds. Compared to other generation sources, the total cost and time invested in operations are very low, making solar one of the most efficient energy generation resources available.

When it’s time to realize your dream of green business operations with clean energy, partner with the leader in utility-scale solar project development. Contact Urban Grid today.