Verne Global

Power | Sustainability |

22 February 2018

How can energy intensive industries plan for energy markets increasingly dominated by renewables?

Written by Peter Kelly-Detwiler (Guest)

Peter is co-founder of NorthBridge Energy Partners and has more than 25 years experience in the international energy industry. You can follow Peter at: @PKayDee

The costs of renewable energy continue to fall at a remarkable rate in markets across the globe. This opens up new buying opportunities for energy intensive companies that want to meet sustainability goals or – in an increasing number of instances – simply lock in cost effective power prices through long term energy contracts.

The trend of corporate renewable purchases is accelerating. In just the last week of January and the first week of February 2018 for example, the following corporate procurement announcements were made: Data center company Switch announced construction of a 1,000 MW solar portfolio in Nevada – projected to produce the cheapest solar power in the world; AT&T trumpeted a power purchase agreement (PPA) for 520 MW of wind power in Texas and Oklahoma; Mexico’s bakery giant Grupo Bimbo highlighted its energy self-sufficiency initiative, with 3.7 MW of on-site generation (in addition to its 2012 pioneering wind power purchase agreement of 90 MW); Budweiser declared its commitment to sustainable brewing, with a 300 MW wind purchase in Oklahoma; and T-Mobile (not to be outshone by AT&T) stated it was committed to 100% renewables by 2021, supported by a contract to buy 160 MW of windpower in Kansas, following an earlier similar project in Oklahoma.

Renewable energy purchases are not limited to North America. As early as 2013, IKEA physically bought a 7.65 MW wind farm (not just the output) in Ireland, and the global trend has grown dramatically in the ensuing years. In fact, Bloomberg New Energy Finance reports that 43 corporations from 10 nations purchased 5,400 MW of renewable energy in 2017, an increase from 4,300 MW the prior year. In fact, 76% of the total 19,000 MW of existing green power contracts have been inked in the past three years.

Falling costs of renewables create new opportunities

A strong tailwind to this phenomenon is the steadily falling cost of both wind and solar energy. The price tag for utility-scale solar projects in North America for example, has fallen by half between 2012 and 2017. Similarly, long-term wind contracts have declined in cost from about $70/MWh in 2009 to approximately $20/MWh in 2016.

The result is that companies that once made commitments to purchase renewables entirely for sustainability reasons - and generally paid a premium to do so - are now eying renewables as an economically attractive financial strategy. Long-term PPAs often create an opportunity to lock in lengthy contracts at attractive, known, prices in electricity markets marked by volatility.

In fact, the CEO of T-Mobile commented with respect to its recent commitment that “it’s not just the right thing to do – it’s smart business! We expect to cut T-Mobile’s energy costs by around $100 million in the next 15 years thanks to this move.”

Additionality? Yes. Is the facility being physically supplied by renewables? Sometimes…

This corporate commitment to renewable energy is a welcome trend in addressing the critical need to decarbonise global energy systems. PPAs drive new financial resources to the renewables space, increasing the overall amount of investment and creating what is known as ‘additionality,’ that is, the creation of new generating resources on the margin. Undoubtedly, without the PPAs, many of these renewable resources would not have been built.

At the same time, though, fixed price PPAs do not mean that facilities are receiving their electrons solely from the contracted resources. These PPAs can take one of two general forms; 1) direct delivery of electricity into the same power pool in which the energy-consuming facilities are located, or 2) ‘Virtual’ PPAs involving contracts for differences which are financial contracts but do not involve any physical delivery.

The latter ‘virtual PPA’ predominates, as corporations often look to support offsetting resources in markets or regions where costs of renewables are lower. In many cases, these involve projects in wind-rich states such as Oklahoma, Kansas, or Texas or sun-drenched areas such as Arizona or Nevada.

In such instances, the buying entity can legitimately claim that it has offset its energy consumption with renewable energy. However, buyers cannot claim that their facilities are being physically supplied by these resources.

Even with direct delivery, carbon-based generation is still required

In the case of direct delivery, the megawatt-hours delivered by the renewable resource are set to be equal to the amount consumed. However, since the renewable resource is by definition intermittent, it cannot ‘follow’ the load consumed by the purchasing entity. At some times of the day, the output of the intermittent renewable asset(s) exceeds the amount consumed by the purchaser, with the surplus being delivered into the grid for consumption by others. At other times, consumption will exceed output, so other generating resources are required in the mix to supply the customer load.

Since most power grids support well less than 30% renewables, with fossil generation (mostly coal and gas) ‘firming up' the system when the renewables are not available, there are times when the electricity consumed by the facility is physically generated by fossil plants.

The only way to ensure one-for-one deliver of clean energy is with a 100% renewable grid

Facilities located in power grids supported by 100% renewables, such as Iceland or Quebec, do not face this dynamic. In such instances, production from a designated plant and the consumption from a given facility may not match one-for-one during every hour, but the energy consumed will by definition always be from renewable resources. However, in such grids, the mechanism of a PPA is unnecessary in the first place, unless the customer desires to lock in a lengthy contract (in Iceland, contracts exceeding 12-15 years are available to large energy users).


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