Technical advances in – and lower cost of – renewable energy brings new possibilities for organizations and their energy savings and sustainability programs but leads to even more renewable energy questions. Nearly half of Fortune 500 companies have committed to sustainability or renewable energy targets. Renewable energy procurement is also fraught with complexity and questions.
Last month our renewable energy experts hosted a webinar on the topic of renewables, Renewable Energy: Understanding and Evaluating Your Options. We polled a subset of our clients to ask about challenges of renewable energy: what were barriers to adoption? Three stood out: challenges of gaining executive buy-in, lack of understanding of off-site options, and lack of energy data to guide decision-making.
So, we set out to structure the conversation around these topics and fielded some great questions. Here we have decided to share some of the more complex question-and-answers, which we hope will be beneficial. And of course, if you weren’t able to join the live webinar, a full recording is available here.
Q: Do you see companies that flinch on renewable energy opting for any other alternative technologies, such as stationary natural gas base load engines, or natural gas turbines?
Brian: We see many of our clients evaluating their options for alternative energy in order to reduce costs and improve environmental performance, but we have yet to see any client abandon consideration of renewable energy over other natural gas solutions.
If your company is ‘flinching’ on the renewable energy question, you may need to take a couple of steps back and conduct some more foundational research before risking capital on a project you’re not completely sold on.
Some questions to ask yourself when determining if you are ready for renewables are:
- Have you evaluated your data and optimized your demand-side activities?
- Can you uncover billing errors or waste that can be corrected first?
- Have you explored the ‘low hanging fruit’ of energy efficiency, such as simple lighting retrofits or behavioral changes?
Reducing your demand for energy can drive cost reductions first, without contract and capital risk of renewable solutions. Then, when you’re ready to again explore renewable energy for additional savings or sustainability goals, you can leverage your data to select the alternative that will truly be the right option for your company.
Q: We have a Board of Directors-mandated risk profile to not enter into hedging agreements. How do we take advantage of renewables with that type of constraint?
Brian: This question takes us back to the largest barrier most companies face: gaining leadership support and buy-in. In this case, it sounds like your organization is trying to determine what renewable energy solutions have terms and conditions that might be acceptable under current guidance.
For anyone who is facing this hurdle, a great first step is to review the key criteria that your organization may care about regarding renewable solutions, which are important to assess because the terms and conditions or timing and availability of products are different.
Reason 1: Sourcing Renewable Energy in Lieu of Traditional Energy to Manage Expenses
If this is your understanding of not hedging, renewable energy can then be reviewed as a pricing decision.
There are places and products where you can source your energy from a renewable solution for less than your alternatives with traditional suppliers.
Furthermore, the contract terms for some of these products (which were once 10+ year commitments) are now in the one- to three-year commitment range, closer to traditional supply contracts.
With that said, choosing between renewable or traditional strategies is simply a question of whether your organization’s leadership views any supply agreement of a fixed duration as a ‘hedge’ – and the answer is probably no.
Reason 2: We Want to Market Our Effort to Source Renewable Energy
If you have goals about marketing your effort to source renewable energy, any renewable energy solutions you pursue would be for the purpose of making those claims and not necessarily about managing energy expenses.
In fact, you can pursue strategies that contribute to renewable sourcing, and the environmental benefits of renewable generation, without actually sourcing the electricity itself.
Q: What type of financial mechanism could we consider beyond Power Purchase Agreements (PPAs)?
Shy: All renewable energy solutions are financial strategies, with some involving deployment of capital expense, lease expense or operating expense.
Those solutions can be self-financed, clients can leverage structures that treat renewable solutions expense like a property tax assessment, or they can even be entirely financed by third-party developers.
The choice of financing instruments to utilize across different markets, counter parties and contract structures will vary.
They should be based on your organization’s goals, the timing of your goals, how you assess the financial return of those solutions, and your risk tolerance.
For reference, in 2017, companies sourced 465 TWh of renewable energy globally, and here’s a breakdown of the different financial mechanisms that were employed:
Corporate Sourcing of Renewables: Market and Industry trends, IRENA (International Renewable Energy Agency) 2018
Q: What are the key considerations when evaluating a virtual PPA (VPPA) versus a physical PPA?
Shy: The key consideration to whether an organization should go with a physical PPA vs. a virtual PPA primarily depends a lot on the attribute of locationality of the power procured. I’ll explain what that means.
- An organization looking for a physical PPA must be located in a deregulated state and in the same ISO region as the renewable energy project is located.
- The virtual PPA has no such limitations of ISO regions, so an organization can source it from pretty much any part of the country.
That said, there are some advantages to procuring even VPPAs in the same region, because the energy prices at the project location and the location where it is procured are better co-related.
This is ideal for organizations that do not have an appetite for the volatility that comes with procuring VPPAs from a different ISO region.
Our experience working with clients who have multiple sites spread across multiple markets and multiple ISO regions has shown that VPPAs seem to be the right financial mechanism to procure renewables given their geographical footprint.
Q: What is the best way to procure renewables in regulated markets?
Brian: While regulated markets have fewer options to procure renewables, companies can still source renewable energy through utility programs, or even VPPAs as described above.
Since you are more or less bound to your utility, you can use indirect physical or financial contract structures to enter into a VPPA with an offsite project located outside your region. Your company can then claim the benefits of this renewable energy because you will maintain ownership of the renewable energy certificates (RECs).
Your existing grid power supply arrangement will stay in place, while your company is meeting your renewable energy goals and commitments.
With renewable energy and procurement becoming more attractive for organizations, identifying the best mix for your portfolio of sites can feel like a challenge but asking the right renewable energy questions is the first step.
Here at ENGIE Insight our renewable energy experts can help guide you through the barriers and complexities of renewables. With a full range of off-site renewable solutions, ENGIE is uniquely positioned to build the right sustainable solution for your business – one that that delivers the value you’re looking to achieve at the speed, risks, and terms you’re willing to accept.