A business which forges strong connections with suppliers insures itself against cruel surprises. When it comes to one major cost item, however, there has generally been little opportunity to negotiate a middle ground. With electricity suppliers, you often have to take it or leave it.
That worked fine for the business community when energy was cheap, but those days are gone. To make matters more complex, consumers and investors are pushing for evidence of corporate sustainability. And so the electricity market has become frisky, as buyers look around for cheaper, greener options.
Sourcing clean energy on reliable terms isn’t back-of-the-envelope stuff, though, especially if you require vast amounts of the stuff. Corporate power purchase agreements, or PPAs, seem to fit the bill, but it’s not as simple as picking up the phone.
The PPA market in Australia has torn ahead since 2016, with big deals negotiated with clients such as Commonwealth Bank, University of NSW, Sydney Airport and the Victorian government. In 2017, nearly 1.5GW of clean energy capacity was enabled by PPAs, on data from Energetics. By 2018 the total neared 2GW (see first chart).
This demand for clean energy at contracted prices marries well with wind and solar developers’ requirements for financial certainty and investors’ expectations of returns. If ever there was a snowball on the start of its journey, the PPA market is it, and a platform launched in March to match buyers with suppliers has already attracted 7GW of interest from developers of new projects, including solar, wind, bioenergy and hybrids – some with storage – and retail participants.
“A real driver is large organisations seeking to decarbonise,” says Business Renewables Centre – Australia project director Jackie McKeon. “Corporates are really leading the way in this, here and internationally.”
Join the club
The BRC-A platform lists 67 projects between 5MW and 400MW in various stages of development across Australia and retailers who offer an aggregation service to smaller users. McKeon says it takes about a 5GWh annual load to qualify for a serious look in. “We want to be able to cater for the SME part of town eventually; at the moment it is larger corporates but also a middle ground,” she says. “If you are going into an aggregation there is potential for much smaller loads. Developers need to find bankability for projects.”
Decision-makers in industry might struggle with the concept of negotiating a contract for up to 20 years’ of electricity from a plant that isn’t even built yet, and the list of “resources” on the platform includes a primer on how to pitch to a CFO who may fear the unknown, “which is what we are trying to break down,” McKeon says.
In other cases energy managers will be scrambling to source clean supply after a board has committed to RE100 – a growing club of companies that rely only on clean energy – or a science-based target initiative, she says. “That’s where interest is driven from the top.” The other route is a sustainability team or procurement team bringing PPAs to the attention of the board.
The platform includes a step-by-step guide to a corporate PPA, guides for accounting, demand management, aggregation and economic analysis, and an NPV tool to test a PPA against BAU. You can even test the merits of onsite generation, for those who have the roof space.
One primer explains the financial structure of a project and the needs of the developer in seeking finance, so buyers of energy “can understand the needs of their potential partner,” McKeon says.
The bill, please
In theory, a PPA is a hedge because a contracted price for some of your load will level out the ups and downs in costs paid to your regular retailer. Contracts can be lengthy, however, and PPAs may be at risk of looking expensive if spot prices fall in the years ahead. There is also the possibility projects will be delayed or a developer or the contractors it employs go broke. All of that will be covered in a decent contract, of course.
“It all comes down to the terms and conditions you negotiate,” McKeon says. “There isn’t much standardisation at the moment in the industry … which is one of the goals of the BRC, to provide a little bit of standardisation.”
An energy user can sign up to the platform and research the 30-odd PPAs that have been negotiated over the past few years, but not every detail is made public. “Each of the developers will have a different approach; it really depends on your organisation and understanding what it is willing to do, and that will affect price.”
It’s a simple equation. A buyer who tries to push all the risk back onto a developer will only push the price up for themselves. “It’s an inverse relationship,” she says. “It’s reaching that negotiated position on price and risk.”
Developers do not list existing contract prices on the platform, or even a rough range. “The purpose is: here’s the information, now go and negotiate.”
McKeon pulls up the “marketplace” page which appears in “buyer view” and shows EcoGeneration the 67 projects, along with columns for technology, capacity, what’s available for purchase, range for contract tenor, location, commencement, planning approval status, network connection status and project contact details.
Developers don’t see the marketplace list; only their own projects. The platform is free for corporate buyers and fees will be introduced from October for developers and service providers.
“We encourage organisations to look at all the options and to understand their energy and sustainability goals right from the start,” McKeon says. “You want to contract for the right amount and meet your organisation’s risk profile. You’ve got to understand those risks, and understand whether your organisation is happy to take them on.”
The BRC-A project evolved out of the Renewable Energy Buyers Forum, a WWF initiative that helped organisations figure out how to slash carbon emissions by switching to renewable energy and setting “science-based targets”. The WWF saw it had a community of corporate organisations on its hands looking to procure renewable energy, so it refined its focus and about 18 months ago looked to adapt a model used by the Business Renewables Center – United States, a project of not-for-profit organisation the Rocky Mountain Institute.
The PPA market in the US is a couple of years ahead of ours and has had its ups and downs: capacity more than doubled year-on-year to 3GW in 2015, then slumped to 1.7GW in 2016 and leapt again to 6.5GW by 2018 (see chart below).
The Americans were doing something right, whereas in Australia the Renewable Energy Buyers Forum had relied on the case study model, where those who have a PPA under their belt share the knowledge with those who are thinking about it. “Just the lessons learned and how they overcame the various challenges that are involved, such as accounting challenges and internal buy-in challenges,” McKeon says.
These quarterly forum events took a different tone, she says, when developers were invited along to talk about the challenge of finding buyers for energy. Sparks started to fly, so the forum morphed into BRC-A, which is operated in partnership with Climate KIC and the Institute of Sustainable Futures, part of University of technology Sydney, and has received funding from ARENA and the NSW and Victorian governments.
Training events and boot camps are in the works, McKeon says, along with smaller sessions of one to two days for buyers to hear from organisations who have lived through the PPA process, including scenario-based learning sessions and explanations of how pricing works.
“Those are much more detailed sessions. If price were to come up and that faculty member was happy to talk about their price, then great … but that’s not the purpose of BRC.”