Weighing the co-benefits of renewable energy power purchase agreements

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Corporate, industrial, and institutional (C&I) buyers are choosing renewable energy power purchase agreements (PPAs) for three primary reasons.  As they stand today, federal subsidies and technology improvements make both wind and solar PPAs financially attractive.  PPAs also help companies manage risks associated with carbon, climate change, and a short position on energy. Finally, PPAs are a meaningful way for companies to achieve their environmental goals.

However, these are not the only benefits of renewable PPAs.  These other criteria—referred to as co-benefits—tell a compelling story about the value of renewable energy beyond cost and carbon mitigation.

The many co-benefits of renewable energy power purchase agreements include:

  • Reduced water consumption. Water use and conventional energy production are intimately linked.  Water is used to obtain fossil fuels, to generate steam to power turbines, to extract pollutants from exhaust, and to cool production facilities.  Renewable energy, on the other hand, uses a fraction of the water needed for the conventional generation process, only .001 gallon/kWh for wind and .030 gallon/kWh for solar, compared to coal at .49 gallon/kWh and oil at .43 gallon/kWh.
  • Reduced pollution and improved air quality. Conventional electricity generation doesn’t only produce harmful carbon dioxide as a byproduct; it also produces other greenhouse gases like methane, nitrogen oxide, and sulfur dioxide, alongside particulate matter, mercury, carbon monoxide, and the hydrocarbons that create ozone.  These byproducts lead to smog, acid rain, and many human health impacts including chronic respiratory illness (like asthma and bronchitis), headaches, cancer, and even premature death. Contrast this with the estimated $7.3B in public health savings in 2015 attributable to wind power.
  • Job creation and economic stimulus. Globally, the renewable energy industry is responsible for more than 8 million jobs with steady, continuous growth.  Wind turbine technicians and solar PV installers are among the Bureau of Labor Statistics fastest growing jobs in the U.S., with wind turbine technician jobs expected to grow more than any other job category–more than 100% by 2024.  However, job creation isn’t the only source of economic stimulus provided by the renewable industry.  Landowners who support wind and solar farms and biomass production can secure a long-term source of revenue.  For instance, wind developers in the U.S. commonly pay $2,000-$5,000 per turbine to the landowner.  These projects are commonly located in rural regions of the American Midwest and provide a crucial source of financial revenue to these landowners.  Similar incentives are available in other global regions as well, like India.
  • Domestic energy security. The U.S. Pentagon has identified climate change to be a national security risk, one that exacerbates global instability and makes existing threats worse.  Renewable energy can help mitigate this risk by reducing the emissions associated with climate change.  Domestic renewable energy production also reduces national dependence on foreign energy interests.

Both retail (direct) and financial (virtual) PPA contracting structures deliver these co-benefits, and C&I buyers can choose either structure depending on their goals.  In a retail PPA, the buyer takes physical delivery of the electricity produced via a shared regional grid.  This type of PPA can net more favorable accounting treatments (particularly under IFRS international accounting guidelines) and ensure a project is in the same grid region as a company’s load. A retail structure should also lead to better correlation and hedge value of the PPA contract vs. energy spend.  However, direct retail PPAs are constrained by the fact that they must be located in the same grid region as the offtaker’s load, are restricted to deregulated retail markets, and will be sized according to total offtaker load.

Buyers are constrained in their ability to execute retail renewable energy power purchase agreements depending on their location.  Regulatory restrictions and state-mandated Renewable Portfolio Standards (RPS) may limit a company’s retail renewable energy opportunities.  However, in some cases, these regulations aren’t slowing businesses down.  Take MGM Resorts International, for instance.  The state of Nevada’s largest employer paid $89M to leave the regulated state’s utility in order to directly use renewable energy in its Las Vegas operations.  It is then, perhaps, unsurprising that earlier this year, the citizens of Nevada overwhelmingly chose to deregulate their electrical grid.U.S. PPA Markets Graphic

Buyers that face the regulatory hurdles present in a retail PPA can instead choose a virtual, or financial, PPA.  This PPA structure provides greater flexibility around the size and location of a deal. Virtual PPAs can be located in any deregulated wholesale market and are not mandated to share the same grid as the offtaker.  These types of PPAs can be a great fit for companies whose primary motivators are environmental and economic rather than fixed-price-power, and for companies who have load in regulated utility territories like the Southeast or West.

Regardless of contracting type, buyers can take claim to the environmental and social benefits of renewable energy power purchase agreements.  The choice between retail or financial structure depends solely on the buyer’s key decision drivers.

Schneider Electric has extensive experience with both retail and virtual PPA contracting structures and we’ve advised our corporate clients on more than 2.5 GW of new wind and solar projects. Contact us today to see how we can help you achieve your corporate responsibility goals.

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