What are Power Purchase Agreements?
Power purchase agreements (PPAs) are an emerging financing structure for renewable energy projects. In PPAs, green power purchasers buy power from project developers for a fixed period at a set price. While the purchaser gets the physical power and/or environmental attributes [i.e., renewable energy certificates (RECs)] from the green power system, the project developer builds, maintains, and operates the system. The system, most often either solar photovoltaic or wind, can be on or near the purchaser’s property (known as a “physical PPA”), where the electricity is either physically delivered to the purchaser or to the same electric grid (see Figure 1). The system can also be located remotely (known as a “virtual PPA”), where the power is not physically delivered to the purchaser or to the same grid (see Figure 2).
While PPAs vary greatly from contract to contract, it is important to clarify that only purchasers that retain the RECs of the project, or perform a REC arbitrage-where the RECs from the project are sold, but cheaper RECs are purchased in their place-may claim to be using green power. According to EnergySage, most PPAs range from 7 to 20 years, contain performance guarantees (i.e., the system will produce at least a certain amount of electricity per year), and allow customers to purchase the system for a set price during or at the end of the contract term.
PPAs often come as either a fixed-escalator plan, in which the prices customers pay for electricity rise about 2-5% per year, or come as a fixed-price plan, in which customers pay a constant price throughout the term (see SEIA website for related information). As Renewable Choice Energy explains, virtual PPAs can be set up in a way that when the market price of electricity outpaces the fixed PPA rate, the buyer profits, while if the electricity rate goes above the PPA rate, the buyer must pay the developer.
Why Should Companies Pursue Power Purchase Agreements?
Companies are increasingly moving beyond unbundled RECs (unbundled in the sense that they are bought and sold in a secondary market that is separate from the physical electricity that green power systems produce) and towards direct project engagement opportunities like PPAs, buying systems outright, and net metering. There are several advantages that PPAs have over these other green power procurement options.
First, while unbundled RECs may be the cheaper option in the short term, they do not provide any long-term return or opportunity to save money. The right PPA can save companies money on their electricity purchases if the set PPA price drops below the market electricity rate. For example, if a company signs a PPA for a wind project that produces 10,000 megawatt-hours (MWh) a year at a fixed rate of $25/MWh and the market price for electricity is $30/MWh, the company would save $50,000 a year. Multiply that by the full PPA term and the savings can be substantial. Furthermore, PPA prices have never been lower than they are today; according to the Lawrence Berkeley National Lab, the nationwide average wind PPA price dropped 71% from 2009 to 2017 (from $70/MWh to less than $20/MWh per the NREL 2016 Wind Technologies Market Report), while the national average solar PPA price dropped from over 50% in the same period (from $100/MWh to less than $50/MWh per the NREL Utility-Scale Solar 2016 report).
Additionally, PPAs often tell a better story and show more of a commitment to green power than “indirect” options like unbundled RECs. While unbundled REC-purchasers can make claims such as, “we purchase green power to cover 100 percent of our electricity load,” PPA-purchasers can make claims like, “we procure green power from the wind farm near our Washington factory to cover our entire Washington operations.” Many companies also find it beneficial to show pictures of the project for which they’ve signed a PPA to make it more tangible to customers and other stakeholders.
Furthermore, unlike PPAs, unbundled RECs are often purchased on a yearly basis, require very little commitment, and have questionable “additionality” claims (i.e., the ability to claim that your green power purchase is truly adding green power to the grid that would not have been built otherwise). PPAs, on the other hand, give companies undeniable claims of long-term commitment and additionality. Companies that want to avoid activist claims of greenwashing should strongly consider PPAs and other direct project engagement options.
As NREL reports, PPAs are also an attractive option over cash-purchased systems for many reasons: buyers do not need to install and maintain the system, buyers without the appropriate tax liability can take full advantage of available tax credits (through lower PPA prices), buyers do not need to pay for the entire system up-front, buyers can lock in a set electricity rate for a long period of time, and the entire process is generally easier and requires less expertise. Even if the PPA does not save a company money over standard wholesale electricity rates, it may be worthwhile in and of itself by allowing companies to plan for their utility costs in advance instead of relying on volatile wholesale electricity prices.
Many companies are already taking advantage of PPAs because they find that they make good business sense. In September, GreenBiz reported on Kimberly-Clark signing wind PPAs in Texas and Oklahoma for 245 megawatts (MW) of total capacity (about a third of its North American power consumption) and Anheuser-Busch signing a wind PPA in Oklahoma for 153 MW of capacity (about half of its North American power consumption). And the Business Renewables Center shows that in the first 11 months alone in 2017, 17 major corporations in the U.S.-including Apple, Facebook, and Target-signed PPAs representing a capacity of 2.85 gigawatts, which is the equivalent to about 11.4 million average (250-watt) solar panels. By signing PPAs, each of these companies made major strides towards meeting their public renewable electricity goals.
What Are the First Steps to Pursue a Power Purchase Agreement?
Interested companies should first form a committee or hire a consultant to draft a request for proposals (RFP) that includes the size and type of PPA they are seeking, in addition to whether they want to retain or arbitrage the RECs from the project. They also need to determine whether they want a physical or virtual PPA. In states with regulated electricity markets, virtual PPAs are usually the only option because only the utility can sell power. Virtual PPAs can be located anywhere in the country since they do not go through the customer’s utility or physically deliver power to the buyer. Physical PPAs that are on or near the customer’s property, however, can demonstrate to stakeholders a visible commitment to green power in a way that wind farms hundreds of miles away cannot.
After collecting multiple proposals, it is important to weigh and evaluate the bids carefully based on criteria such as qualifications and experience, local knowledge and expertise, and ability to contribute to local economic development (The Solar Foundation provides helpful hints on reviewing proposals). It may be helpful to create a scorecard to evaluate the bids based on how closely they adhere to pre-identified criteria.
Leveraging the Marketing Benefits of a Power Purchase Agreement
Once companies have a PPA in place, they should publicly promote it to their stakeholders through media such as press releases, public events, and annual reports, and also in their stores or offices. Based on the specific arrangement of the PPA, companies should be sure they are making the right environmental claims based on Federal Trade Communications Guidance, which basically recommends that companies be completely transparent about their green power use and what happens to the RECs. Companies might also want to tout the fact that their involvement was necessary for the project to come into existence, which most companies buying unbundled RECs cannot claim about their green power use.
It is also helpful to use equivalencies to make green power use more tangible to the average person (e.g., the annual green power we receive from this PPA is equivalent to the average annual electricity use of 3 million U.S. homes). Lastly, companies with PPAs should consider joining voluntary organizations such as the EPA Green Power Partnership, RE100, and the Business Renewables Center, which can help them expand upon, promote, and market their green power achievements.