Renewables for Everyone: Moving Beyond the Fortune 500
This blog post is part of a series from RMI’s Business Renewables Center (BRC), which streamlines and accelerates corporate purchasing of off-site, large-scale renewable energy.
Over the past four years, corporate America has emerged as a powerful champion of renewable energy. While many companies have installed on-site generation such as rooftop solar, corporate contracts with large-scale, off-site renewable energy projects have been the principal driver in scaling renewable energy. Since 2015, companies have signed contracts for over 10 GW of off-site renewable energy in the US, and 2018 is on track to be a record-setting year. This impact has been enabled, in large part, by:
- The adoption of renewable energy targets—large companies are increasingly setting ambitious carbon reduction and/or renewable energy targets through groups such as RE100
- Reductions in the cost of solar and wind energy—wind and solar are now among the cheapest forms of new generation (even without subsidies), according to the latest levelized cost analysis from investment bank Lazard
- Innovations in contract structures—the introduction of “virtual” power purchase agreements (VPPAs) and green tariffs has made it easier for large companies to purchase renewable energy at a large scale
However, while VPPAs and green tariffs have allowed large companies to make significant progress over the past four years, these options have generally not been as well suited for smaller organizations such as small and medium businesses, universities, hospitals, and city governments. Fortunately, a number of innovative structures and approaches are emerging that address some of the key obstacles faced by smaller organizations. In particular, these new structures:
- Reduce transaction sizes to levels more appropriate for smaller organizations
- Mitigate financial risks for organizations that are unable to manage them
- Allow organizations to directly support their local communities
Reducing Transaction Size
Utility-scale wind and solar facilities reduce costs through economies of scale. While this reduced cost can improve a project’s economics, the size of these projects can also create challenges for smaller buyers. For context, utility-scale projects frequently produce more electricity than any one off-taker wants to purchase, which forces the developer to negotiate separate PPAs with multiple buyers. These negotiations are both complex and expensive, which incentivizes developers to minimize the number of PPAs by maximizing the size of each deal. Since small organizations like universities and hospitals may only be able to use a small percentage of a large utility-scale project’s output, it’s usually not profitable for a developer to negotiate contracts with these smaller users. Similarly, many green tariffs are offered exclusively to customers that meet a minimum power usage threshold.
In order to offer off-site renewable contracts to smaller organizations, market participants have devised a variety of solutions:
- Developer Flexibility: In specific situations, developers have been able to offer smaller PPAs below typical thresholds. Although the majority of corporate PPAs to date have been at least 20 MW or more, Akamai signed a PPA for 7 MW in 2017, and this past March Adobe signed a 10 MW PPA. In this second case, Adobe negotiated a contract that was integrated with a larger PPA executed by Facebook. Specifically, after 10 years, the production of Adobe’s 10 MW will be transferred to Facebook to supply its growing data center energy needs.
- Buyer Aggregation: Another approach to minimizing negotiation costs is for a group of smaller buyers to collectively agree to standard contract terms with a project developer. Examples of this approach include the 50 MW solar PPA signed by American University, George Washington University, and George Washington University Hospital, as well as a 60 MW PPA signed by MIT, Boston Medical Center, and Post Office Square Redevelopment Corporation. And, earlier this month, a group of large US cities joined an initiative led by Boston Mayor Marty Walsh to collectively explore renewable energy. In addition to reducing negotiation and transaction costs, buyer aggregation groups provide each member organization with valuable peer support throughout the transaction process, greatly alleviating the difficulties that many deal champions face in obtaining internal approval. However, these benefits must be balanced with the added challenge of aligning all of the buyers on both contract terms and project selection.
- Intermediation: A third option is for an intermediary to sign a utility-scale PPA and then resell that power to a broad set of end users. At a large scale, Citi acted in this capacity for a QTS Realty Trust data center in Texas, but the same structure can also be applied to allow smaller organizations to purchase renewables. Retail electricity providers such as Constellation and Vattenfall now offer programs that allow retail customers to purchase energy from existing wind farms in amounts as small as 1 MW, while innovative green tariffs like Puget Sound Energy’s Green Direct tariff go one step further by allowing existing customers to directly support the construction of new wind or solar generation.
Mitigating Financial Risk
Although VPPAs have afforded corporate buyers a great deal of flexibility and new options over the past few years, these structures remain too complex and financially risky for many smaller organizations. In particular, VPPAs require buyers to take financial positions in wholesale electricity markets, and understanding and managing the associated risks and opportunities requires expensive electricity-market expertise. (For a more in-depth overview of VPPA financial risks, BRC members can view the Risk Allocation Primer and the BRC Academy video series on PPA risks.)
Fortunately, just as intermediaries can reduce transactions to manageable sizes, they are also capable of managing the financial risks associated with PPAs for their customers. One way this can be implemented is for these providers to contractually deliver electricity from off-site renewable energy projects to customers’ facilities, essentially replacing customers’ normal electricity service with renewable energy from a particular wind or solar farm. While intermediaries can and should charge customers for these services, that doesn’t mean renewables have to come at a cost premium; for example, MGM was able to work with a retail electricity provider to double its supply of renewable energy in Nevada and also save significantly on its monthly energy bill. Moreover, this solution isn’t restricted to large corporations. Already organizations like the City of Houston, the US Army base Fort Hood, and King County, Oregon, have negotiated for renewable energy to be delivered to their facilities.
Supporting Local Communities
While national and multinational companies may be able to site renewable energy projects in a wide variety of locations, organizations like cities, hospitals, and universities typically have strong incentives to ensure that their projects are sited in or near their local community. Community-scale solar (CSS), which is the focus of RMI’s Shine™ team, is an increasingly viable option for organizations that want to use their renewable energy purchase to also support a local community. While community-scale projects are typically smaller than utility-scale projects, they are usually still able to capitalize on significant economies of scale while also providing a number of local benefits (e.g., construction jobs, local tax revenue, and improved air quality). Locally sited projects can also help reduce local utility rates, as demonstrated by Consolidated Edison’s Brooklyn-Queens Neighborhood Program, which allowed the utility to defer a $1.2 billion infrastructure investment.
Contracts with CSS facilities can be structured in a couple of different ways:
- Virtual Net Metering and Community Solar: While net metering policies are designed to compensate electricity consumers who install solar photovoltaics (PV) on their rooftops, virtual net metering and community solar policies allow businesses and residents to capture these same benefits even if the solar installation is not on their property. Virtual net metering has been introduced in at least 16 states, and has been used in Bloomberg’s 1.5 MW installation at JFK airport and by the City of Cambridge, Massachusetts, to purchase 4.56 MW of solar PV. For smaller buyers, community-solar programs like Xcel Energy’s Renewable*Connect allow a virtually-net-metered project to be shared among a large number of local businesses and residents.
- Community Choice Aggregators: Community choice aggregators (CCAs) are organizations set up by a community to supply electricity or natural gas to local businesses and residents. While most prevalent in California, CCAs are legal in several states across the US and offer local communities the chance to directly control where and how their electricity is generated. Many existing CCAs have chosen to include local generation within their portfolio; for example, MCE Energy in Marin County and San Francisco’s CleanPowerSF have both made a point to purchase electricity from local solar projects.
Where We Go from Here
The above deal structure innovations are already providing options for organizations outside the Fortune 500 to purchase renewable energy, and this process is just getting started. Future innovations could further simplify the procurement process by reducing the required length of these contracts (most PPAs are 10 years or more) and providing options for institutions with lower credit scores. As highlighted above, intermediaries such as electric utilities and retail energy providers can play a key role in broadening the availability of these solutions and driving innovation in the market. Renewable energy is already cost effective and scaling rapidly, but it’s up to the energy industry and entrepreneurs to make it easily accessible for everyone.
Image courtesy of iStock.