Corporate power purchase agreements are rapidly growing
Energize Weekly, August 2, 2017
Corporate power purchase agreements, initially the domain of high-visibility, multi-billion-dollar enterprises, are increasingly being used by smaller companies, as well as municipalities and non-profit institutions.
The use of the agreements, or PPAs, has soared in the last two years and is on pace for another robust year, according to the Rocky Mountain Institute’s Business Renewables Center (BRC) Deal Tracker.
To be sure, there are some financial and operational risks with PPAs, but they haven’t deterred the growth of the market, which is composed largely of companies seeking to meet sustainability or renewable energy targets or cut greenhouse gas emissions.
PPAs have long been used by utilities to purchase power on long-term contracts from independent generators. Selling clean power to companies with renewable energy or sustainability goals began around 2008.
Among the first high-profile corporate PPAs were those signed by Apple, Google and Microsoft. In the last two years, old-line manufactures such as 3M, Dow Chemical and General Motors have signed agreements.
Last Friday, JPMorgan Chase & Co. announced it is seeking to be 100 percent reliant on renewable energy by 2020 through a series of initiatives, including installing onsite renewable energy facilities, improving energy efficiency and PPAs.
JPMorgan signed its first PPA in 2016, a 20-year agreement with NRG Energy for a 100-megawatt (MW) wind farm in Texas. In its announcement, the bank said it plans to sign more PPAs.
“In the corporate market, the first movers were very energy-intensive businesses, like ones with a lot of data centers,” said Ali Rotatori, a BRC associate. “Now we are seeing a more varied market and smaller companies as the transactions become more numerous and transparent.
“You can size a PPA for a residential customer, a town or city, or a business,” Rotatori said. “It can cover a very small unit on the roof of a house or a school or large 200-MW unit.”
Some companies and institutions are also partnering on PPAs. “The market is broadening to more customers,” said Jenny Heeter, a senior analyst with the federal National Renewable Energy Laboratory in Golden, Colo. “We’ve even seen a couple of PPAs that are aggregated.”
For example, in 2016, the Massachusetts Institute of Technology (MIT) joined with the Boston Medical Center and Post Office Square Redevelopment Corp. on a 25-year PPA with Virginia-based Dominion Energy, enabling the utility to build a 60-MW solar farm.
Since 2013, there have been more than 7 gigawatts of renewable PPAs, according to Renewable Choice Energy, a Boulder-based consultant advising companies on green energy plans.
“There is a lot more acceptance of purchasing a PPA,” said John Powers, Renewable Choice’s vice president for strategic renewables. “We are past the earlier adopter phase into the fast follower phase. . . . There is momentum.”
There are three market drivers, Powers said. Some companies are seeking to meet corporate environmental or sustainability targets. Some want the fixed price of power as a hedge against volatile energy prices.
“What has really driven it in the last two years has been the economic driver” as renewable energy has beaten other generation on price, Powers said.
The price for a solar PPA has dropped 75 percent over the last seven years to about $50 per megawatt-hour, according to an International Energy Agency analysis. Wind PPAs dropped 64 percent to $20 a megawatt-hour between 2009 and 2015.
“If renewable costs hadn’t come down, you wouldn’t see deployment at the levels we are seeing now,” Heeter said.
Between 2008 and 2012, there were a total of 385 corporate PPAs, according to BRC’s Deal Tracker. There were an average of 537 deals a year over the next two years.
In 2015, the number of agreements soared to 2,919, as companies rush to lock in deals before wind and solar federal tax credits expired at the end of the year. The credits were extended, with the wind Production Tax Credit (PTC) now set to expire in 2019, and the solar Investment Tax Credit to sunset in 2021.
Still, in 2016, there were 1,304 PPAs. So far this year, there have been 435. Since many of the agreements land in the fourth quarter, Rotatori said it looks like 2017 will surpass last year.
“In the U.S., 2018 will be big [for PPAs] and 19, the last year of the PTC, even bigger,” said Powers.
Changes in the structure of PPAs have also helped expand the market.
“Traditionally, PPAs were used by utilities to procure their generation needs,” Heeter said. “There has been an evolution in PPAs. First it was power physically delivered to utilities, then power physically delivered to a corporate customer, now there is the virtual PPA.”
In a “virtual PPA,” the corporate customer agrees to pay a set price for each megawatt-hour a renewable generating facility puts on the grid, even though it doesn’t go directly to that company.
The long-term PPA contract—corporate agreements range from 10 to 20 years—enables the developer to get financing to build the wind or solar facility, adding more renewables to the overall generating profile. For example, while MIT is in Cambridge, Mass., and Dominion is based Richmond, Va., the solar array the contract created is in North Carolina.
The virtual PPA structure definitely helped to open up the market,” said Powers.
Virtual PPAs can only be used in regions with deregulated, wholesale electricity markets. These cover about 60 percent of the country. In the other areas—primarily the West and Southeast—with vertically integrated utilities, such deals cannot be made.
In these areas, utilities are starting to offer long-term contracts for renewable energy through so-called green tariffs, Heeter said. Xcel Energy, for example, is going to offer customers the opportunity to buy power from new solar arrays.
“Utilities are seeing that they need to respond to this corporate demand for renewables,” Heeter said.
The PPA is not without risks, as well as rewards. If the wholesale market price is above the contract price, the corporate customer gets the difference—a bonus—but if the wholesale price drops below the contract price, the contract is out of the money.
Agreements that were struck in 2013 and 2014, when electricity prices were higher than now, look less attractive, Powers said. Still, over time, electric prices are projected to rise.
“As power prices recover, they could be back in the money,” Powers said. “It is a long view.”
Rotatori said that “a virtual PPA is more of a hedge. You are limiting volatility in the wholesale market. It won’t always be economical.”
Where the renewable facility is built can be another risk. Ideally, a corporate buyer, also called an off-taker, would like to have the facility in the same wholesale power market in which they buy the power, Heeter said.
“The risk for the off-taker is how closely will the market where they have load and the market prices where their renewable generation be,” she said.
The location of the renewable energy project is another risk since the amount of megawatt-hours it produces can be affected by the quality of the local wind or solar resource. Similarly, if the facility is located in an area subject to transmission line congestion that can impair its performance.
There are also potential risks in the building and operation of a project.
“These are all risks that have to be managed,” said Powers.
Renewable Choice has helped clients negotiate 3,000 MW of PPAs I the last three years, Powers said. “It is a constantly evolving market,” he said.
Heeter said, “Corporate off-takers are very price sensitive so they are pushing for the lowest cost PPA. They want to pay as little as they can, but they want to move this market forward.”
For more on PPAs, check out EUCI’s Renewable Energy PPAs course taking place October 16-17, 2017 in Denver, CO.