In 2010, Google signed its first renewable power purchase agreement (PPA), procuring 114MW of wind energy from the Story County II wind farm in Iowa. Over the next four years, this revolutionary sustainability strategy grew 10-fold.
In 2014, tech and retail giants including IKEA, Walmart, Microsoft, Yahoo and Google combined to procure 1.18GW of renewable energy — and industrial giant Mars corporation entered the fold by signing a 201MW PPA with the Mesquite Creek wind development in Texas.
Industry and renewables may still feel a bit like strange bedfellows. After all, industrial companies are some of the biggest consumers of energy, and as such, are typically afforded electricity rates well below commercial, transport and other sectors.
But this is no anomaly. In 2015, the amount of renewable energy contracted under corporate PPAs and Virtual PPAs skyrocketed to 3.23GW, according to the Business Renewables Center. And the logos that you’ll find currently supporting renewable energy through purchase agreements include some of the nation’s biggest industrials, such as Corning, Dow Chemical, and P&G.
Facing mounting pressure (by consumers, investors, and employees alike) to address climate change, an increasing number of U.S. industrials are setting sustainability goals. But it is important to note that making a commitment to sustainability and energy efficiency does not mean making financial sacrifices. As Andrew Winston, an expert on corporate environmental practices and co-author of the recently released brief on enterprise energy strategy with EnerNOC and PwC, explained in his recent Harvard Business Review article, “Almost every company that I talk to, regardless of sector, is finding [renewable] deals at or below their current energy prices.”
“Execs at industrial companies often believe that they can’t find renewables cheaper than their rock-bottom power rates,” Winston added. “They’re wrong — and they’re losing money because of it.”
Need proof? Just see how Mars’ Global Sustainability Director Kevin Rabinovitch explained the financial case for the 201MW wind-power PPA the company signed in 2014.
“Wind in the US, and particularly in Texas, has tremendous economics,” Rabinovitch said in an interview with Windpower Monthly at the time. “With cost parity to the fossil fuel alternative it makes sense, not just environmentally.”
Sustainability and price parity are only two of the factors driving industrials toward renewable PPAs. Another important motivator is risk management.
Looking at the U.S. Energy Information Administration’s Annual Energy Outlook for 2016, it’s easy to see why. Forward prices and projections only show rates for the next five years. After that, electricity prices become little more than modeling outputs dependent upon highly volatile variables like oil prices and worldwide economic growth. Assuring a fixed cost for a sizeable portion of production costs makes sense as a long-term strategy for energy-intensive companies like industrials.
PPA and Virtual PPA Procurement Tips
First things first, let’s go over the differences between PPAs and Virtual PPAs. Instead of investing your own capital and resources to install renewable technology, you can buy power via a PPA from a company that will handle all aspects of getting the project up and running, including the financing. In a PPA, the “seller” builds or installs the technology (e.g., a solar array or a wind farm) and the “buyer” buys the power on a per kWh basis.
In a Virtual PPA, the company developing the renewable project sells the power to the grid when the project is complete. In order to get financing, the developer enters into a Virtual PPA with a third party, guaranteeing the owner of the renewable project a certain fixed price for the electricity it sells to the grid. If the electricity sells for less than the guaranteed amount, the third party will pay the difference; if the electricity sells to the grid for more than the fixed price, the third party will actually make money.
Research Other Businesses
There are a number of tips Winston laid out for industrial organizations as they embark on their efforts to capture the unique advantages of renewable PPAs and Virtual PPAs. Researching successful practices of other businesses is an incredibly helpful way to learn what’s worked for other companies and what hasn’t. Meet with as many as you can to get a better handle on the nuances of PPAs and Virtual PPAs that could be overlooked or unforeseen by first time buyers.
Another important tip is to make sure all the necessary departments are fully involved. I can’t stress enough how important it is for energy procurement to be a priority for all departments. As Winston recommends, get legal, energy, accounting, procurement and sustainability all involved. Although these large deals are going to take time to complete — it’s just the nature of the beast — ensuring every department is involved from the get-go has two-fold benefits. First, it positions your energy needs as a top priority item, and second, it expedites the process when everyone is on the same page from day one.
Third Party Insights
Finally, seek third-party insight into the accounting and financials. I’ve listed all the benefits to signing PPAs above, but that doesn’t change the fact that signing a 15 to 20 year agreement is quite a long commitment. Feeling a little nervous about it? Ask for a third party to look at everything and provide their feedback.
How Purchasing Renewables Impacts The Rest Of Your Strategy
While all of Winston’s recommendations are salient steps for success, I’d add one more critical factor to the list — figure out how purchasing renewables impacts the rest of your energy procurement strategy. If you take commit to a long term PPA or Virtual PPA contract, the agreement will alter other parts of your energy procurement, especially in risk management. Look at the longer term horizon of your purchase, and understand new market risks, as time of production matters (especially if you purchase 100 percent of your energy in a PPA or Virtual PPA). In doing so you will paint a complete picture of your energy procurement needs, and can be confident in the methods you select to purchase.
Sarah McAuley is Vice President of Marketing at Enernoc.