Companies with renewable energy targets want ready solutions to achieve their goals. They want realistic options with credible claims. They want competitive pricing and to avoid paying a premium over existing electricity costs. They want to celebrate their renewable energy progress with assurance. And they need products that work within the parameters of their physical power budget without assuming undue risk.
But with market maturation comes new complexities. New providers, new products and new opportunities mean that while the choices for corporate renewables are more abundant than ever, there’s a corresponding increase in potential risk—even for experienced buyers.
Market parity drives opportunity
10 years ago, organizations had no choice but to buy renewable energy at a premium. No longer. As the price for renewable electricity continues to fall, it is increasingly cheaper to source renewable than non-renewable energy. As such, a new trend is emerging: the market convergence of green and brown power. Now, price parity of renewables and conventional power is pushing companies to evaluate these sources on a level economic playing field. This convergence is transforming renewable energy from what was once a nice-to-have to an essential consideration for any corporate energy buying strategy.
At the same time, electricity suppliers that have traditionally only sold brown power now find themselves entering the green power market. This activity is driving increased interest in direct renewable energy procurement. In a direct arrangement, renewable electricity is physically delivered to a corporation’s facilities and paid for via traditional utility or supply invoices.
Many load-serving entities, including both regulated utilities and retail electric suppliers, are now approaching corporates with these simplified solutions. Buying renewable energy from an existing supplier may be attractive for those looking to streamline and simplify their overall power procurement process.
Increased choice for energy buyers is good for the market, and direct-from-supplier green power programs can be enticing. But it’s important for any organization considering this option to be aware of all its terms and conditions, including hidden risks that could adversely impact energy budgets for years to come. As with any significant purchasing decision, corporate buyers must take an active approach to assessing supplier green power programs alongside other available mechanisms, and appropriately assess the costs, benefits and risks.
The potential price of simplicity
Supplier green power programs are often sold as a less complex and less risky alternative to other renewable purchasing methods, such as energy attribute certificates (EACs) or power purchase agreements (PPAs) executed directly with developers. While supplier green power programs may appear a simpler way to achieve renewable goals, they warrant close examination to ensure their simplicity does not compromise their overall competitiveness and benefits to the buyer.
For example, many long-term programs—which typically require a buyer to commit to an 8-15-year agreement with the retailer or utility—lack adequate price and risk transparency. Retail suppliers often only provide a short-form contract. These contracts look like a traditional retail energy contract but may put substantially more financial risk on the buyer when compared to other solutions. Typically, they are a re-sold, existing PPA that the retailer has with a developer and which passes along PPA risk without passing along the adequate contractual elements needed to protect a buyer in a long-term agreement.
By signing such a deal (without a full investigation and understanding of what is behind it), companies run the risk of agreeing to commercial and legal terms and conditions that are not favorable to them as the offtaker and which may have significant long-term ramifications. Direct renewable energy contracts must be managed carefully. Costs can be incurred at many points along the delivery process, including transmission, distribution, scheduling, balancing, retail adders and other fees, all of which contribute to the retail price. Without transparency and vigilance, corporations can end up taking on too many of these costs.
There’s a reason long-term PPAs with new renewable energy generating assets are 40+ page contracts. While simplicity may save time and money up front, it can leave critical components of the program undefined or opaque, which exposes the corporate buyer to narrowing of profit margin, excessive costs and upward volatility risks. These direct and indirect costs may dwarf any savings achieved by avoiding adequate due diligence up front.
Multi-year purchase agreements should provide the level of detail and scrutiny warranted by the size of the commitment. They require vetting for the risks that the buyer could take on for up to 20 years into the future. A comprehensive contract serves as the primary risk allocation and protection vehicle in the transaction. It provides the buyer with a guarantee of performance, protects both the buyer and seller against risks, and outlines remedy for “what-ifs” for the duration of the agreement.
The direct renewable energy options being promoted in the market today usually do not offer these contractual and risk protections, but still include the same financial risks of a long-term PPA. Further, short-form supplier green power contracts mayappearto be business as usual, but can be risky, out-of-market contracts that lack the protections of an adequately scoped and negotiated power agreement.
Buyer be aware
While it seems obvious that companies would explore all viable options before entering a long-term and binding contract, the explosion of new suppliers and products in the market has created confusion and a sense of urgency that has led some companies to make less informed decisions.
Our recommendations are designed to help companies evaluate their options and find a solution with ideal risk and price protection that also meets sustainability goals. The intention is not to dissuade buyers from adopting a supplier-offered green power product or solution, but to empower companies to understand contract terms, ask questions, seek external advice and carefully evaluate agreements for their appropriateness. Should a supplier green power option end up at the top of the list after taking these steps, it’s clearly a well-designed program worthy of consideration—and good renewable energy contracts are good for the industry and the planet!
Before entering any renewable energy supply agreement:
Become an expert in what’s available in the market and what you are being offered (and how it works), independent of any sales pitch. If you don’t want to do this yourself, engage a 3rdparty expert to evaluate the transaction risks. Gain a complete understanding of the product structure, cost components and levels of risk involved.
Compare your retail supplier’s green power program to other solutions that would allow you to reach your goals. What other retail suppliers have similar programs? Are there alternative green power purchasing structures available in the markets you seek to address?
Proactively build a contract and delivery structure that reduces cost and optimizes every required material aspect of the transaction (generation, congestion, transmission, distribution, grid charges, scheduling fees and all associated seller profit margins). Confirm the approach allows you to make strong and appropriate sustainability claims.
Engage an experienced renewable energy and sustainability advisor, likeSchneider Electric, for guidance, due diligence and negotiation support. Many buyers also find it useful to engage third party legal and/or accounting support to execute a successful deal.