Energy Edge is publishing a four-part series that will explore the decisions that need to be made before entering into a renewable energy purchase. Check out our blog each week for the next article.
You have been asked by your CEO to prepare an energy strategy that will lead your organization to being 50% renewable by 2020. Where do you start?
- What am I going to do with the renewable energy I purchase?
- How much renewable energy should I buy?
- How do I determine whether I should buy wind or solar power?
- How do I economically evaluate rooftop solar or other behind the meter renewable generation?
- What are the major risks I should consider?
- Who should I solicit renewable energy proposals from?
This article will explore questions 5 & 6 listed above.
Question 5: What are the major risks I should consider?
While all aspects of a PPA are important, there are some that can have a larger impact on the financial performance of the PPA than others. While we will not revisit the discussion in Part II of this series related to a physical vs. a virtual PPA, this is one of the biggest risk elements that needs to be considered and thought through before contracting. Part II of this series took an in depth look at this issue.
Below is a list and brief description of some meaningful risk items that should be considered during the procurement evaluation:
- “As Generated” vs. Energy Production Commitments
These two terms refer to whether the buyer or seller will wear the intermittency risk associated with the energy being produced by the renewable asset.
As generated energy means the buyer will receive the energy actually produced by the renewable asset. If an unusually cloudy day causes the solar asset to produce less than expected, the buyer receives less energy.
If the seller guarantees the energy production from the asset, they are guaranteeing to deliver a fixed or minimum volume of energy to the buyer. If the solar asset produces less than expected, then it is the seller’s obligation to find and pay for replacement power. The fixed or minimum quantities could be guaranteed in periods as short as 15 minutes up to commitments made on annual deliveries without regard to timing of delivery over the year. This guarantee generally comes with a price premium to “as generated” power.
- Market Hub vs. Busbar Delivery
A seller can deliver power to a buyer at various locations on the grid. In most PPAs, the buyer pays a fixed price to the seller for all energy delivered and receives the revenue derived from selling the renewable energy into the market where the generation asset is located. The delivery point will determine the price the buyer receives.
A busbar is the point of interconnection between the generation asset and the transmission system. The price of energy that a seller receives when power is sold at the busbar is based on the market value of power at the specific geographic location of the generating asset.
If power demand at this location is high, then the market price is also high. Conversely, if the demand for power at that location is low, then the market price will also be low. Multiple factors can and will drive the market price of power at a busbar over time. While these factors are best discussed in another article, the most important take away is that the value can and will change over time.
In all markets, there is a point on the grid deemed to be the market Hub. This generally represents the most liquid trading point on a particular electricity grid. The value of power at this delivery point is a representation of the value of power at all the busbars within that hub assuming there are no limitations in the transmission system to move power around the grid.
Unlike the busbar, the market price at the Hub is influenced less by specific geographical supply, demand, and transmission constraint fundamentals and more by regional fundamentals. This delivery point diversifies the price risk for the buyer. However, Hub delivery generally comes at a premium price to a busbar delivered PPA.
- Development Term and Delivery Term Security
Usually when a buyer enters into a PPA, especially for a buyer seeking additionality, the generation asset is still under development and commercial operation is months or even years away. During the period prior to commercial operation, commonly referred to as the development term, a number of things can cause the project to either be delayed or ultimately not be constructed. Development term security is the collateral a developer posts, and ultimately pays to the buyer, if the project does not get constructed or is delayed unduly. Development term security is typically returned to the developer once commercial operation is achieved.
Delivery term security is the collateral a seller posts after commercial operation is achieved and continues through the term of the PPA. This is paid to a buyer if the seller defaults during the delivery term.
Question 6: Who should I solicit renewable energy proposals from?
There are two primary sellers of renewable energy, project developers and retail energy providers. Project developers are the entities who are responsible for the development and construction of the generation asset. Many of these entities have affiliates who will own and operate the asset over time, or they may sell a completed project and the executed PPA to a third party who will own and operate the asset. Regardless of the above, a developer is generally selling the energy from the asset and associated renewable attributes. The buyer often has to provide all the other services needed to integrate the energy into their broader retail power needs. These include:
- Providing scheduling services with the ISO;
- Securing market-based rate authority from FERC, depending on the market where the generation is located;
- Identifying a retail energy provider who is willing and capable of structuring a retail power contract that can accommodate the renewable energy;
- Developing a strategy to address how additional power will be purchased to serve the retail load needs that will not be physically met by the renewable energy;
While there are a significant number of items that need to be addressed by the buyer when buying from a developer, this structure provides the most transparency and control for the buyer. However, this approach is mostly pursued by large buyers who have the internal resources to address the items listed above.
Retail energy providers, however, are beginning to offer a different solution set. More and more retail energy providers are entering into PPAs directly with developers and then reselling the renewable energy in various amounts to end consumers. In this type of transaction, commonly called a retail sleeve, the retail supplier provides all the additional services listed above. Meaning, this type of transaction is much easier for organizations who do not want to “unbundle” and self-provide all aspects of serving their own load.
Overall, the options available to buyers and the cost of renewable energy have never been more attractive than they are today. But with options comes complexity, and endeavoring to answer the questions we’ve explored here prior to beginning the process of purchasing renewable energy will help ensure a smooth, successful transaction.
To see the complete series on purchasing renewable energy and explore other topics like this, please check out our blog.