The Blog - Wind energy market analysis

Posted 21/02/2018

Alice Jones

   

Can small- and medium-sized businesses sign wind PPAs too?

Tech giants and multinational manufacturers keep signing power purchase agreements to buy electricity from wind farms, but can these deals work for smaller businesses too? Alice Jones goes through what you need to know. 

wind business PPAs

 

In February 2018, US telecoms giant AT&T announced it has signed power purchase agreements with NextEra Energy Resources to buy electricity from two wind farms, totalling 520MW, in Texas and Oklahoma. When combined, these deals represent one of the largest corporate power purchase announcements so far.

 Mike Sullivan, senior vice president of development at NextEra Energy Resources, said renewable energy “presents a tremendous opportunity to power America’s companies with clean, affordable electricity” and could also support job and economic growth in the rural communities. And Scott Mair, president at AT&T Operations, said:

“As one of the world’s largest companies, we know how we source our energy is important.”

AT&T is one of the latest business giants to jump on the corporate PPA bandwagon. Some of the other well-known names include Amazon, General Motors, Google, InBev and Mars.

And it’s easy to see why they’re doing so. Signing renewable energy PPAs – which guarantee both buyer and seller fixed price energy transactions, typically for between 10 and 20 years – is a way for large corporations to reduce their electricity costs, minimise grid dependency and achieve their corporate social responsibility goals. It’s good business sense and good PR.

How popular have PPAs become?

Statistics from the American Wind Energy Association reflect this growth. AWEA reported that, in the US, just 16MW of corporate PPAs were signed in 2012, but that this rocketed to 2.5GW in 2015. This figure was around 2.2GW in 2017, with corporates accounting for about 40% of total wind PPAs signed – with the other 60% being utilities and public bodies. 

But what about smaller businesses?

They also see the “tremendous opportunity” identified by NextEra’s Sullivan. Can they access the benefits of corporate PPAs too?

In short: absolutely. While the headlines focus on multinationals and their large deals, we are seeing a growing number of smaller PPAs – which we define as under 50MW – being signed too. Jack Daniel’s maker Brown-Forman toasted a 30MW PPA this month, for example.

For small companies, the benefits offered by a PPA are much the same as for larger ones: energy stability, protection from electricity price fluctuations, and a ‘greener’ image.

In addition, smaller PPAs are becoming increasingly important for wind farm developers: regulated utilities in the US are increasingly choosing to own their own schemes instead of signing PPAs with third parties, and the wind-down of the production tax credit threatens to make large PPAs look less attractive to corporates. Finding a way to leverage small PPAs can help give developers the extra financial certainty they need to start building wind schemes, safe in the knowledge that they can be confident about their long-term revenue stream.

For most developers, PPAs with regulated utilities would still be preferable because they are state-backed – how often does the government go bust and leave its creditors high and dry? – but PPAs with businesses are a decent option too.

What are the obstacles?

The challenges are not just on the developer side. Smaller companies must contend with greater obstacles than their larger counterparts when deciding to go down the PPA route. One of these is a lack of energy-specific knowledge and a dedicated team: for example, we know that Google has a team of professionals dedicated to procuring renewable energy.

In contrast, energy sourcing in smaller firms is likely to be handled by people who are not experts in the field and are likely to be completing the project alongside their regular work.

 

Types of PPAs

The complexities of tailoring a bespoke, smaller PPA can therefore deter some companies from taking the plunge. The decisions about which structure of PPA to opt for, and the complexities of signing a contract spanning up to 20 years, are certainly daunting.

For example, companies have the choice between three main structures of PPA: physical PPAs, virtual PPAs, and what are often referred to as ‘sleeved’ PPAs.

Physical PPAs

In a physical PPA, energy is directly transmitted from the independent power purchaser (the seller) to the power purchaser (the buyer), which means that the site of generation must be physically close to the site where the electricity will be used.

Virtual PPAs

Virtual PPAs, on the other hand, are used when there is some geographic distance between the buyer and seller. In this structure, which is more akin to a financial hedge mechanism than a direct transfer of energy, both parties operate through the wholesale market, with an agreement between them ensuring price-dependent compensation. If wholesale electricity prices rise above an agreed amount, the seller compensates the buyer; and vice versa.

Sleeved PPAs

Finally, ‘Sleeved’ PPAs are something of a compromise between the above structures. In this agreement, an intermediary will ‘sleeve’, or divert, the electricity from seller to buyer. This third party – often an electricity supplier – will ‘top up’ the electricity provided, should it fall below the amount required by the corporate buyer, as well as performing a stabilising role in the transaction.

As complicated as this decision may be, however, there is no reason why – with access to the resources and support – small- and medium-sized companies shouldn’t be able to access the same benefits as their multinational peers.

In January 2018, for example, a company called LevelTen Energy set up an online marketplace that it said would put wind farm owners in touch with customers that wanted to sign PPAs. The developers said this would cost the cost, complexity and risk of renewable energy PPAs. We cannot vouch for that. However, we can say that platforms like this could help to open up the sub-50MW PPA market to greater standardisation, and support smaller businesses.

 

Useful resources

Resources such as the 24-page ‘Renewable Energy PPA Guidebook for Corporate & Industrial Purchasers’ can help too. This handbook, the product of a partnership between Apex Clean Energy and the American Council on Renewable Energy (ACORE), offers in-depth information and counsel on the practicalities, risks, and rewards of corporate PPAs.

And another option for small businesses looking to make the transition to clean energy could be to team up with one another. These so-called ‘aggregated PPAs’ could help give businesses greater purchasing power, increasing their combined clout in the negotiating process – as well as offering the chance to benefit from economies of scale.

As Melissa Peterson, director of business development at Apex Clean Energy, told us in a special report published in association with A Word About Wind in 2017, companies would need to choose their partners carefully. However, large organisations and a team of smaller PPA buyers could come to a mutually beneficial agreement, in which the smaller companies profit from the larger partner’s dedicated time and knowledge; and the larger organisation can increase the combined amount of power for which it was negotiating.

This larger organisation doesn’t necessarily need to be a large corporate either. It could be a non-profit such as ACORE or the World Wildlife Fund – although we haven’t seen this in practice.

However, partnering with others is not the only way. For smaller companies that prefer to go it alone, many wind farm owners would offer flexibility on their PPA contracts. After all, signing small PPAs is also beneficial for developers, who often rely on the revenue certainty they provide to secure support from investors, enabling projects to go ahead.

Not only is it possible for small businesses to sign PPAs, but sub-50MW contracts are likely to represent an increasing share of corporate PPAs in the coming years, as small businesses see ways to enhance their ‘green’ credentials, and wind farm owners increasingly recognise the value of small PPAs in ensuring long-term revenue and securing investor buy-in.

Small PPAs could be more vital than ever after 2020, when the PTC is finally cut, meaning independent power producers would no longer be able to rely on state-funded financial support for their projects. Ultimately, though, they are important now for energy buyers and project owners – and if someone wants to buy wind power, we’re sure there will be wind farm operators out there who are ready to help.

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