Big business is a big energy user. If Australia wants to wean itself off coal, which still fuels more than 70% of its electricity generation, it makes obvious sense to introduce big business to the owners of large-scale wind and solar plants across the country – and to the risk-taking investors who are willing to build even more capacity in the renewable energy sector.
Rising energy costs are the bane of business managers everywhere, but the pain is most acutely felt when contracts with electricity retailers are renegotiated and a big step-up in expenses cuts straight into profits.
Volatility in operating costs is one of those things you have to get used to in this world, but the rise of renewable energy is showing a couple of ways out of a tough predicament.
First, you can install a solar system and make your own electricity. That’s if you have the space. A second option is to buy it from someone who has already built or plans to build a clean energy plant, using a power purchase agreement (PPA) where some simple terms – capacity, price and term – are spelled out in advance.
Other than owning their own wind and solar plants, PPAs are the next best way out of the tight spot that is rising energy bills.
Business comes clean
Around the world about 13.4GW of clean energy contracts were signed by 121 corporations in 21 countries in 2018, according to Bloomberg New Energy Finance, about double the 2017 tally. “Corporations have signed contracts to purchase over 32GW of clean power since 2008, an amount comparable to the generation capacity of the Netherlands, with 86% of this activity coming since 2015 and more than 40% in 2018 alone,” says BNEF head of corporate sustainability Jonas Rooze.
Australian business is catching on fast, with PPA volumes starting around 200MW in 2016 and rising nearly tenfold by 2018, on estimates from Energetics.
Corporates that have signed up for PPAs are still tied to retailers, but they rely on them to a far lesser extent. For them, an agreement to purchase clean energy at defined price becomes a hedge against volatility in the wholesale spot price.
In NSW, for instance, consultancy Energetics estimates large energy users could save between 15-47% on the energy component of a typical electricity bill in 2020 by using a PPA, according to research it released in October last year.
The fine print
With a tenfold increase in deals by capacity over two years the PPA market is charging ahead. However, corporate PPAs are not the types of arrangements that are drawn up overnight and energy users will need to consult experts. Likewise, developers of solar and wind projects will need to understand corporate energy needs if they want to attract direct investment.
One group hoping to fill the knowledge gap between supplier and buyer is Business Renewables Centre Australia (BRC-A), a matchmaking platform that is hoping to attract energy users, renewables project developers, electricity retailers, project financiers and transaction intermediaries as members.
The BRC-A’s goal is to help industry deliver 1GW of new renewable energy in Australia by 2022 and 5GW by 2030 (or about 20% of NSW energy load) by building awareness of PPAs among buyers and developers.
“There is scope for many large corporates that haven’t undertaken this so far and also for products to emerge to make it more accessible to smaller customers as well,” says Jonathan Prendergast, a technical director at the Business Renewables Centre Australia and researcher at the Institute of Sustainable Futures at the University of Technology Sydney.
Where offtake agreements were once the realm of energy retailers, corporate PPAs have diversified funding sources and made the renewables sector a more resilient and long-term prospect for investors. A direct arrangement with a developer will require confidence in contracting energy use of at least 40GWh a year, Prendergast says, “to make a meaningful impact to a project, where they can achieve project finance”. Plants that are already operational may be prepared to deal directly with smaller customers.
Deals typically last 10-15 years, and it is possible to match the tenor of PPAs to project finance so that initial investors in an energy project can cover all their debts and attained 100% ownership when an agreement lapses. By that stage, they may be more accepting of taking their chance in the merchant market. “Projects then become tradable assets,” Prendergast says, “or it can be owned by a fund that is seeking more certain long-term returns at a lower expectation on capital return and yield.” Owners of paid-off assets may also choose to generate only at high-price times – such is the freedom of freehold ownership.
Energy users have also carved out savings by grouping together to negotiate combined-load PPAs with developers, such as the City of Melbourne Renewable Energy Project which included Southern Sydney Region Councils and their contract with Origin and the Moree Solar Farm. Telstra has also corralled Coca-Cola, University of Melbourne and ANZ to facilitate a PPA with the developers of the 229MW Murra Warra Wind Farm in Victoria.
“These corporate PPAs are creating new generation and bringing new supply to the market,” Prendergast says.
The real power in corporate PPAs is providing wholesale connectivity to customers to provide access to market signals that traditional retail models did not provide, says Flow Power renewables product manager Stephen Au. “That means getting them to be on a wholesale platform to deliver them direct savings otherwise not available through fixed-price contracts.”
Wholesale electricity retailer Flow Power is building its PPA portfolio and recently signed a 10-year offtake agreement to purchase 20MW from the Karadoc solar farm and 28MW from the Yatpool solar farm, both in Victoria, to supply its corporate clients.
Flow Power has facilitated PPA deals for clients including Olam Orchards, ANCA Machines, Australian Vintage and Pernod Ricard. The retailer delivered its first corporate PPA in 2017, matching clients with 70MW from Ararat Wind Farm. It used the platform from that first deal to secure wind and solar in South Australia, Victoria, NSW and Queensland.
Au says wind and solar can cover about 60-80% of his clients’ consumption. “[A PPA] delivers a very nice and complementary hedge product for that spot market access,” he says.
The “first level” of hedge, he says, is the often complementary generating profile of solar and wind, where the sun and wind are usually doing their thing at different times. Further hedging can be accessed through futures, options and ceiling prices.
Developers of solar and wind plants are looking for offtake agreements to underpin their investments, so from an asset-owner perspective the evolving market for PPAs is as relevant as equity and debt markets. “Those investors, debt or equity, require a level of hedged revenues, which is why they look to parties such as us,” Au says.
The option of selling into the merchant market depends on an owner’s appetite for risk and their beliefs about the long-term trend in prices.
A busy pipeline of projects is seeing Flow Power taking inquiries from developers. There is a lot of activity in the renewables sector and part of Au’s role involves due diligence of new projects. “It’s a bit of a mix,” he says. “Are we open to new relationships with new developers coming in with new opportunities? Absolutely we are – but they need to fit our customer strategy.”
The sector has cooled to an extent, he says, with the collapse of RCR Tomlinson late last year sending ripples through clean energy industry. “The silver lining in all this is that potentially the developers and EPC contractors are more realistic about what they can deliver, especially given some of the risks they don’t control, such as grid-connection and AEMO conditions,” Au says.
It’s not just epic-scale projects that are in the market to make deals as a supplier to corporate PPAs. Flow Power’s Market Small Generation Aggregator service can take generation from sub-5MW plants and find a market for them as the responsible market participant to settle payments with AEMO.
“This is an emerging market,” Au says. “There are a lot of developers playing in that space.” Smaller plants are quick to build and the capacity suits customers with needs ranging between 500kW and 5MW.
Yes, some business owners may be a bit wary about the intermittency of renewables, but Au says the main challenge in nutting out a PPA is how to change business managers’ mindset to convince them there is a better way to procure their energy compared with traditional fixed-price, fixed-term markets.
If those businesses are looking at installing their own solar plants, all the better. Flow has in-house engineers to help clients with energy management and even advises them on integrating other forms of energy management, including generation. “We don’t see on-site [solar] as a threat; we welcome that discussion,” he says. “Our job is to find the right energy solution for customers.”