As more business owners turn to clean energy using power purchase agreements energy retailers are refining their offerings, writes Chris Briggs.
Businesses around Australia have heard the call of clean energy. Not only is it a good hedge against retail usage costs it also shows commitment to the cause of cutting emissions.
Over 80 organisations have signed renewable power purchase agreements with solar and wind farms in Australia since 2017. Under a renewable PPA, public and private sector organisations agree a fixed price for the supply of the electricity and/or green certificates from a solar or wind farm.
Fixing a price for some or all electricity requirements over a longer-term reduces exposure to a volatile market and renewables PPAs are the quickest way to achieve ambitious sustainability targets. Supporting clean energy and regional development can also enhance reputation amongst staff, customers and communities.
In the early phase of the growth of renewable PPAs, deals were typically made directly between larger electricity users and renewable energy projects. This type of “wholesale PPA” is a financial contract with no connection to the electricity bill. However, one of the features of the Australian market has been the rapid diversification into mid-sized buyers – organisations who are significant electricity consumers but not big enough to underwrite a PPA themselves (generally between 5 and 50GWh a year).
Key to this market diversification has been the development of renewable energy PPAs by retailers. Under a retail PPA, the electricity retailer signs the contract with the project. The buyer’s PPA with the solar or wind farm is integrated into the retail electricity supply agreement. The price for a retail PPA will not be as good as a wholesale PPA but there are a variety of reasons why some buyers prefer them.
Unlike a wholesale PPA, a retail PPA is not a financial derivative – some organisations are not permitted to enter into derivatives while others do not want to do so because of administrative costs or because of the variability it adds to their balance sheet. With a retail PPA, risk can be transferred to a retailer (at a price). Wholesale PPAs are generally for 10 years or longer whereas retail PPAs are available for shorter terms (3, 5 or 7 years). Also, some buyers just don’t feel equipped to negotiate directly with a project.
How a retail PPA works
There are around 8-10 retailers offering renewable PPAs in Australia. This makes for good competition in the market but it can be hard to understand the differences in offers. The Business Renewable Centre-Australia – an independent initiative established with funding from ARENA and the NSW and Victorian governments – has released a guide into retail PPAs and current market offers. Here’s an overview.
The chart at the right shows how pricing under a RE PPA works. The grey line is an illustrative customer demand profile rising through the middle of the day. The orange line shows the generation profile of a solar farm.
There are three elements to the pricing:
- For co-incident load (A), when consumption matches the generation of the solar farm, the buyer pays the fixed price agreed with the solar farm.
- For balancing load (B), when consumption is greater than the generation of the solar farm, the retailer provides balancing power at a different price under the retail supply agreement.
- For excess generation (C), when the generation of solar is greater than consumption, the buyer pays the agreed price to the solar farm and receives either the wholesale price or an agreed price with the retailer.
One of the key differences in retail PPAs is how pricing varies for B and C.
Different models and market offerings
There is a spectrum of models, from fixed-price offers through to exposure to wholesale electricity prices when consumption and generation do not match. Different retailers are taking quite different approaches based on their view of what customers want.
There are four major retail PPA models based on pricing approach.
Option 1: Standard retail contract plus Option 1 combines a standard retail electricity agreement with the purchase of green certificates. This can be done with Green Power, which is a flexible, simple, established method but tends to be higher priced and does not have a link to a single project. The demand among buyers for their purchasing power to be directly supporting a solar or wind farm has led some retailers to provide the option of longer-term agreements for LGCs linked to a single project. This is the simplest method and an attractive option if the priority is, for example, emissions reductions for a NABERS rating. However, there is less scope to manage risk or achieve savings as the buyer is only contracting LGCs and retail pricing is typically re-set every 2-3 years.
Option 2: RE PPA with fixed pricing Option 2 is a RE PPA with fixed pricing, or “full-firming” – in other words, the retailer is providing fixed pricing for the times when the output of the project does not match the load of the buyer. This option tends to come with a higher price because the retailer is incurring cost and risk to manage the exposure to price variability. There are some long-term fully firmed models but a number of retailers only offer firmed prices for the balancing supply for 2-3 years, so there is still exposure to price movements.
Option 3: With partial firming A PPA with partial firming has wholesale price exposure for some of the periods where the buyer’s load doesn’t match with project generation. A buyer might decide they can manage exposure under some circumstances. This can lead to savings but of course means the buyer is also taking on greater risk associated with exposure to variable prices.
Option 4: With wholesale price exposure The fourth option is a RE PPA with wholesale price exposure for times when load does not match generation, either paying wholesale rates where there is a short-fall or selling where the generation is in excess of load. The benefit is the potential for savings because, firstly, the retailer is not providing firming and, secondly, through load-shifting from higher to lower-priced times. The issue is that exposure to variable prices set on a half-hourly basis requires more pro-active energy management. Buyers may choose this option where there is a high match between their load and project generation (some buyers stipulate minimum levels of load matching, say 80%, and combined solar-wind PPAs with different generation profiles are delivering higher load matches, and where there is scope for demand management or on-site generation or storage to manage the exposure.
Financial instruments such as price caps are sometimes also used to manage exposure (the cost of which need to be compared to other firming options).
Which model is better? The answer will depend on the circumstances and preferences of buyers. All things being equal the headline price on the fixed-price models will be higher because the retailer is managing price risk, but that will suit many organisations. For organisations interested in developing more pro-active energy management approaches, these risks can be managed through a combination of onsite generation and energy management technologies to create more value.
The rapid development of the retail market means commercial and public sector organisations now have a menu to choose from when buying off-site renewable energy.
Chris Briggs is a technical director at the Business Renewables Centre-Australia and research principal at the Institute for Sustainable Futures, University of Technology Sydney. The BRC-A is a collaboration between ISF, WWF-Australia and Climate-Kic Australia, an independent not-for-profit organisation funded by ARENA and the Victorian, NSW and Queensland governments to provide advice and support on renewable energy PPAs.
For further information:
- Listen to the BRC-A’s webinar with retailers, buyers and consultants at https://businessrenewables.org.au/renewable-retail-power-purchase-agreements-ppa-are-growing-rapidly-in-the-australian-market-learn-how-your-organisation-can-execute-one/
- Join the BRC-A and read the Retail Renewable Energy Power Purchase Agreements guide (and other resources) at www.businessrenewables.org.au