New Approaches to Power Purchase Agreements Open the Renewable Energy Market to More Businesses
As costs have declined and new contracting options have emerged, renewable energy purchasing has become less of a risk for businesses. Through aggregation and virtual power purchase agreements (VPPAs), customers can enjoy new flexibility when procuring utility-scale renewable energy.
The cost of utility-scale solar power fell nearly 30% in 2017 alone, and has decreased nearly 80% since 2010, according to the National Renewable Energy Laboratory (NREL). Similarly, the International Renewable Energy Agency (IRENA) has reported that costs for on-shore wind power have fallen 45% since 2010. Plummeting renewable generation costs have made utility-scale renewable energy more competitive—and in many cases less expensive than electricity generated from nuclear, coal, and natural gas resources.
Until very recently, however, the favorable economics behind utility-scale renewables had only been available to organizations that use 50,000 MWh annually and can tolerate 15- or 20-year commitments. The companies that have made utility-scale renewable energy purchases over the past five years, for example, is limited to about 50 of the Fortune 500.
We expect that dynamic to change.
Today, there are a number of ways for customers to purchase smaller portions of a larger project for shorter periods. Customers can make commitments for as few as 5, 8, or 10 years and for as little as 2MW, 5MW, or 10MW, while still capturing the price advantages that come from projects that are up to and above 50MW. Through aggregation, utility-scale renewable energy is now available for the mid-market.
Where are the Biggest Opportunities for Aggregated PPAs?
Community Choice Aggregation (CCA) has been around since Cape Cod and Martha’s Vineyard formed the Cape Light Compact in Massachusetts in 1997. Nearly 20 years later, however, community aggregation reached a second milestone in 2016 when the Massachusetts Institute of Technology, Boston Medical Center, and a parking facility owned by Post Office Square Redevelopment Corporation collaborated on the first multi-party, aggregated PPA.
Community choice aggregation is now available in seven US states, including California, Illinois, Ohio, New York, New Jersey, and Rhode Island. We are also seeing significant CCA momentum in Delaware, Virginia, Minnesota, Utah, Oregon, Nevada, and Washington.
Moreover, through virtual power purchase agreements—financial agreements that do not involve any exchange of physical energy—customers can participate in a variety of new aggregated purchasing options to achieve their budgetary and sustainability objectives regardless of state or local energy laws.
Though the market for renewable aggregation market is still nascent, the Rocky Mountain Institute has said that they “anticipate that more schools, hospitals, and small to mid-size businesses will be able to collaborate within their communities to complete mutually beneficial transactions in the renewables market” based on the success of the agreement between MIT, Boston Medical Center, and Post Office Square.
In its article responding to that deal, RMI breaks down the four types of organizations that are developing these aggregated agreements. Here is our perspective on where the biggest opportunities are emerging in this market and how they affect customers:
1. Developer Aggregation
Many organizations have renewable energy ambitions that outpace their available on-site capacity. In these instances, wholesale renewable energy developers can act as intermediaries by developing utility-scale projects and distributing both the generation and environmental attributes across a collection of off-takers.
2. Investor Aggregation
In addition to developer-supported aggregation, we are seeing significant momentum behind investor-facilitated aggregation. Investor banks and power traders have historically been the most active renewable aggregators in this model, but we are seeing more and more private companies act as renewable intermediaries. By financing utility-scale renewable projects, these organizations are able to break out the generation and environmental attributes into smaller blocks with custom term lengths for multiple off-takers.
3. Buy-Side Aggregation
As seen in the MIT, Boston Medical Center, and Post Office Square example, off-takers can work together in a multi-lateral negotiation. In this example, the off-takers networked through A Better City, a member organization committed to economic, sustainability, and quality of life issues.
As the demand for renewable energy outpaces the current supply, renewable energy developers are looking for innovative ways to lower barriers to entry. Through aggregation, we are seeing a paradigm shift in the way renewable energy is marketed. Buyers are now able to contract for portions of utility-scale projects for customizable amounts and tenors.
If you are interested in learning more about these new renewable energy options, or are looking to participate in renewable energy aggregation, contact us today.