The Growth of Corporate Renewable Energy Procurement
More and more companies around the world are voluntarily and actively procuring renewable energy through power purchase agreements. This trend is set to continue in the coming decade, as companies will need to continue to purchase significant amounts of renewable energy to achieve their often ambitious renewable energy procurement targets. These deals are part of a trend in which companies across all industries are taking a greater role in controlling their energy supply Motivations vary by company as do procurement methods, but the development of the Power Purchase Agreement (PPA) in the mid-2000s has prompted significant growth in renewable energy and made it easier to meet long-term sustainability goals.
PPAs Lead to Cost Effective Corporate 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 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?
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) 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 structures available to procure renewable energy, organizations are able now more than ever before to maximize the benefits from their renewable energy purchases, both so-called “green” benefits and economic benefits.
Green Benefits with a Virtual Power Purchase Agreement (VPPA)
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 proved to be both a boost to employee pride and moral; a key driver in talent recruitment. Morgan Stanley1 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 Nielsen 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.
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.
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.
Financial Benefits of Power Purchase Agreements
Renewable energy costs have dropped dramatically to a point now where a VPPA 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.2 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 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.
1 Morgan Stanley Institute for Sustainable In vesting, Sustainable Signals: The Individual Investor Perspective, October 2015
2 State and trends of carbon pricing 2017. Washington, DC: World Bank Group