Coogee bay pavilion
Maricar Limjoco

Businesses are saving up to 50 per cent on electricity bills by locking in renewable energy supply via power purchase agreements.

A “perfect storm” of energy-impacting measures in Australia – including the rapid closures of two coal-fired power plants, an increase in the price of Large-scale Generation Certificates (LGCs), and shifts in electricity prices due to over-exported liquefied natural gas – have caused wholesale electricity prices throughout the National Electricity Market to surge.

Capricious politics have also created a trickle-down effect of uncertainty in the market that has led to a delay in investment decisions and questions about grid reliability. This has left companies struggling to manage their energy budgets and looking for alternatives.

Globally, companies are finding economic relief and price stability in wind and solar power purchase agreements (PPAs), which are driving corporate engagement on renewables in Australia, the US, Mexico, India and parts of Europe. As of Q1 2018, nearly 20 gigawatts of PPAs have been executed by corporations globally since 2008, including upwards of over 600 megawatts of deals in Australia alone. Development of new renewable energy generation is expected to peak in Australia over the next several years.

Corporate PPA volume by region, source: BNEF

The market context

Australia has sophisticated, market-based mechanisms for wholesale electricity pricing that cover the majority of the country’s load centres. A variety of financial products have been developed to facilitate risk management for generators, retailers, and other market participants. There are also annually increasing mandatory Renewable Energy Targets that are backed by the tradeable LGC scheme that is regulated by a government-controlled certificate registry.

Dramatically falling renewables costs driven by technology advances and increasing demand are fuelling the corporate renewables rush. In Australia, traditional, centralised generation capacity is being withdrawn from the markets as renewable, decentralised generation becomes more cost effective. As a result, both “behind the meter” and offsite renewable energy PPAs are being implemented by large Australian consumers.

The corporate PPA opportunity

Offsite PPAs offer buyers an immediate reprieve from energy market prices and volatility. As renewable energy generation relies on technology rather than fuel, the cost to operate is very low once a project is installed. By working directly with project developers, companies can contract for clean energy supply, locking in a low, fixed price for electricity over the life of the agreement. In the Australian market, the savings are front-loaded, providing instant relief from the financial burden of the increased power prices so many companies have faced.

PPAs are a contract between a renewable electricity generator (the seller) and a buyer (the offtaker). They have been in use for years between developers and utilities who – until recently – were the largest contractors for renewable energy supply.

The PPA defines commercial terms for the sale of electricity between the two parties. There are two primary ways that an offsite, or utility-scale, PPA can be structured:

  • Retail-sleeved, where the PPA is embedded into a retailer agreement and influences the price offered by the retailer
  • Virtual(or stand-alone), where the PPA acts as a financial hedge against volatile power prices delivered by retailers providing market-based offers

Globally, economically favourable financial and contracting terms have led companies to use PPAs to directly source wholesale renewable energy. This has allowed many of the largest companies in the world to lock in a fixed price for power over a specific duration, providing energy budget stability and potentially saving money over conventional energy supply.

In Australia, PPAs have been saving companies between 10-50 per cent on their electricity and LGC costs depending on the size and location of the PPA. The clean generation also allows companies to realise their renewable energy procurement or carbon reduction goals.

Source: BNEF

PPAs are complex financial transactions that require the engagement of multiple departments within an organisation, ranging from energy to treasury, and are generally approved at the executive level. Long-term contracts also carry some risk exposure that companies pursuing PPAs must navigate to protect themselves. A third-party advisor can provide independent assurance that a project is at the best price and lowest risk prior to contracting.

PPAs also typically require companies to be creditworthy, as they are effectively a guarantee to offtake renewable generation from a project over a long duration. This guarantee is used by project developers to secure financing, and so companies contracting for PPAs must demonstrate (with a letter of credit or even cash) that they can enter a long-term financial agreement.

Organisations with less credit, or a lower appetite for long-term contracting or risk, still have renewable and cleantech options. For instance, onsite solar generation is a popular solution given the abundance of solar resources in Australia and the cost effectiveness of decentralised generation. Energy storage technologies are also on the rise and are expected to exploit the arbitrage between low and high price periods which will help mitigate electricity price volatility as their penetration increases.

Now is the opportune time for companies with Australian energy load to explore renewable energy and cleantech options in the Australian market. The current cost savings available – particularly when combined with forecasts for additional coal-fired retirement and inevitable pressure to achieve renewable energy or carbon reduction goals – make instruments like PPAs one of the most attractive energy investments in the Australian market.

Jamie Catt is manager sustainability services at Schneider Electric.

Leave a comment

Your email address will not be published.