Accelerate Your Energy Strategy WITH POWER PURCHASE AGREEMENTS

Accelerate Your Energy Strategy WITH POWER PURCHASE AGREEMENTS

There is a paradigm shift underway in renewable energy. After generations of renewables being more expensive than fossil fuel-based electricity, the cost of utility-scale solar and wind projects has now reached grid-parity, bringing the overall price of renewable energy in many markets significantly below industrial rates for power. This means an opportunity for forward-thinking companies to save money on their power costs, or to even make money as a seller of clean energy while meeting or exceeding corporate sustainability goals.

A DYNAMIC RENEWABLE ENERGY MARKET Renewable energy has experienced dramatic growth in the past decade, and shows no signs of slowing down as sensitivity to climate change and extreme weather events, long-term energy interests, and energy market volatility grow. Both wind and solar have increased their capacity exponentially: in 1998, for example, total wind power capacity in the U.S. was less than one total gigawatt (GW); in 2015, annual U.S. wind capacity was closer to 74 GW. Solar power has grown more than 600 times since 2008, when it made up 0% of the grid. In 2015, U.S. solar generation literally doubled, bringing the solar total to 25 GWs, or about 1% of the nation s total. The primary catalyst of this change is the falling cost of wind and solar power development. Advances in technology, economies of scale, and financial incentives are driving enormous drops in the cost of renewable energy projects. New plants are producing power with cheaper and cheaper costs. These cost drops, along with favorable public policy and federal tax incentives, have led to these large increases in development. Another driving factor for renewable energy adoption is extreme energy market volatility. In the U.S., electricity markets are largely correlated with natural gas prices, as natural gas is the most readily dispatchable resource. In the past decade, natural gas has experienced dramatic price swings. However, the recent boom in natural gas production has reduced the spot market to record lows yet lack of liquidity in the forward price curve makes it nearly impossible to buy a natural gas hedge more than a few years in the future. Renewable energy, on the other hand, is remarkably stable in price. Since there are no fuel costs for renewables, the price is the cost to develop a project, amortized over the life of the project. A locked-in price for renewable energy can be purchased today for use over decades into the future, something that is impossible in the volatile fossil fuel market. A final reason renewable energy is undergoing such a dramatic paradigm shift is that developers currently have large pipelines of potential projects they wish to develop, but limited ability to bring these projects to market, as they need credit-worthy buyers for the electricity and an investor for the tax equity generated by the project. This need creates a dynamic that utility companies and financial institutions have benefitted from for years; by joining them through the establishment of a power purchase agreement, companies have the opportunity to take control of their energy costs while concurrently supporting the growth of U.S. renewable energy.

THE VALUE OF POWER PURCHASE AGREEMENTS A power purchase agreement (PPA) is a reciprocal, financial relationship between an electricity generator (the seller), who owns the project, and a dedicated purchaser of the electricity (the buyer). PPAs play a key role in financing and developing electricity projects and are most commonly struck between large-scale projects and utility companies. However, new PPA models, including onsite (or distributed) generation, physical (or direct) PPAs, and synthetic (or virtual) PPAs, are becoming an increasingly competitive and progressive way for non-utility organizations to purchase renewable energy while simultaneously hedging fossil fuel costs. These PPAs can have a variety of benefits for the buying organization, including: An established, long-term energy price, with the potential to save on energy costs over time No operations and maintenance responsibilities Minimal risk Revenue potential for the sale of excess electricity and/or renewable energy credits Environmental attributes that help meet sustainability goals Financial support for projects that would not be built without the PPA (aka additionality) Onsite PPAs The most common type of onsite PPA is solar. Solar s rapid expansion is creating new opportunities for companies to install photovoltaic onsite (there are currently more than 1,110 commercial solar systems in operations in the U.S. and the average price of a completed commercial solar project has dropped more than 45% since 2012). While organizations can realize long-term cost savings by installing their own solar system, the upfront capital costs can be a barrier. New innovations in solar, including 3rd party PPAs and leasing models, put the burden of the performance risk on the leasing agent or financier. In a solar PPA, the developer owns, operates, and maintains the solar system while the buyer agrees to host the system on its building or property while also purchasing the electricity from the system over a pre-determined period. This symbiotic relationship allows the buyer to receive stable, renewable energy while the developer receives a valuable source of income and tax credits. This solar services model allows buyers to avoid many barriers to adoption including the initial capital required to install the system, equipment performance risk, and complicated permitting processes. Direct PPAs In a direct PPA, a contract is established between a company and a power producing facility to purchase the electricity generated by that facility. Companies with a large energy footprint in a single state or narrow geographic region are good candidates for this type of PPA as the clean power is directly delivered via the grid to the facility purchasing that energy. Under some state provisions, companies can buy power directly as a wholesale market participant. In this arrangement, the individual buying organization is responsible for firming and shaping the intermittently generated wind or solar electricity to fit actual operational demands. As a result, this can be a complicated option. Another, and easier, direct PPA model is to work with an alternative supplier in a deregulated market. In this situation, a company contracts for the power delivery and the supplier takes on the burden of shaping and firming the power for a price. Companies can also choose to work directly with local utilities to create a special tariff allowing the organization to purchase a contracted volume of power. While this model makes the PPA arrangement relatively easy, it is dependent upon individual state regulations, utilities, and the relationships that a company has established with those utility providers. In practice, these utility pass-through arrangements rarely produce the same level of costsavings as working directly with a wind or solar developer.

Direct PPAs provide companies with many choices. Under this model, power can be purchased from a new or existing project. Progressive organizations can choose to sign on with a project that has not yet been built and wouldn t be built without the organizations financial support; in these cases, companies may find that they can receive a highly competitive energy price, while also making a considerable environmental impact with a great story to tell for marketing purposes. Signing on with a project that has recently been built may allow for a shorter term contract and is a good choice for organizations feeling their way into the PPA opportunity. Virtual PPAs Also called a contract for differences, synthetic PPA, or a fixed-for-floating swap, virtual PPAs allow companies to contract directly with renewable energy projects, bypassing the utility provider. These arrangements were pioneered by Google, along with several large universities, and an increasing number of corporations including Amazon, Philips, and Mars have followed suit by developing their own virtual PPA projects. In a virtual PPA, the buying organization does not take physical delivery of the renewable electricity being generated. Instead, the company contracts with the generating facility for the power and then re-sells that electricity to the market for the spot market price. As a result, these projects can be located anywhere in the country while the buying organization still receives the financial and environmental benefits. Virtual PPAs have opened the market for renewable energy contracts to a much larger and hungrier group of buyers. By divorcing the source of renewable energy from an organization s operational facilities, companies have their choice of projects from developers across the U.S., allowing them to compete for the best projects at the best price. In addition, virtual PPAs allow organizations to pool their electricity demand from all operational facilities nationwide, giving the purchasing organization greater buying power and leverage, as well as more competitive pricing. While the long-term hedge value may be less than with a direct PPA, companies stand to save millions of dollars a year in energy expense by signing a virtual PPA.

MARKET LEADERS ARE USING PPAS An increasing number of corporations have made considerable and public commitments to renewable energy generation via PPAs. Brief case studies on three Google, Walmart, and Microsoft are below. Google Microsoft Walmart Google s goal is to achieve carbon neutrality, a challenge for the data center giant, who has facilities located throughout the U.S. and Europe. When it became apparent that the installation of onsite solar and the purchase of carbon offsets could only take them so far, Google decided to explore PPA options. Google s approach has been to purchase renewable energy directly from a project located on the same grid as its own facilities, suffusing that grid with green power while simultaneously supporting the local communities in which they operate. After purchasing the power, Google sells it back to the grid at the local, wholesale price. At the same time, the company takes possession of the renewable energy credits generated by the green power which are then applied to offset total electricity use at the data centers. By financing renewable energy projects where they operate, Google provides much-needed capital to these projects and provides them with a long-term income stream. This guaranteed income also supports project developers in receiving bank financing, a critical piece of the puzzle to bringing a renewable energy project on line. The company also heavily invests in the development of grid-wide renewables as part of their effort to increase green power additionality, even when Google facilities do not directly benefit. Since 2012, Microsoft has been working toward a long-term goal of carbon neutrality in all operations, using a strategy that includes their innovative internal carbon fee program, placing a price on carbon emissions that each business unit is responsible for paying into a sustainability investment fund. The fee is used to incent business groups to reduce emissions and is charged for the carbon emitted as a result of operational electricity consumption and air travel. Microsoft is focused on transforming the energy supply chain for cloud services from the power plant to the chip. Long term commitments like PPAs help ensure a cleaner grid to supply energy to our datacenters, says Microsoft s Brian Janous. Microsoft used partial proceeds from the carbon fee to enter into a 20-year PPA for wind energy in Texas at the end of 2013. The company will purchase all energy from the Keechi Wind project, a new 110 MW wind farm that is on the same grid that powers Microsoft s San Antonio data center. In 2014, Microsoft announced that it had entered a second PPA to purchase 175 MW of wind from the Pilot Hill Wind Project in Illinois. Walmart has moved into renewables over the past five years, with a strategy that utilizes clean energy in a variety of ways. The company has onsite solar, fuel cell, and wind turbine installations and has also engaged in large-scale PPAs, with a goal to achieve over seven billion kilowatts of renewable energy development and 100% renewable supply. The retail giant isn t simply after a smaller environmental impact and a more sustainable company: through their PPA efforts, Walmart projects to be saving $1B a year in energy costs by the end of 2020. Walmart s strategy has been to partner with suppliers of utilityscale, offsite renewable energy, driving the production of large wind, micro-hydro, and geothermal projects. The company is currently contracted with a 67 megawatt (MW) wind farm that supplies clean power to 348 stores in Mexico and a 120 MW project in Texas. The retailer is also making considerable inroads in onsite installation by utilizing rooftops, parking lots, and store property for solar, wind, and fuel cells, driving down technology costs for the market with the intention to make renewable energy more affordable for all. We take a comprehensive approach to acquiring renewable energy for our operations. We ll continue working directly with utility providers, collaborating with industry regulators, and pursuing creative agreements like PPAs. Google blog

WHAT TO CONSIDER There are a number of considerations for companies interested in pursuing PPA options: Purchase size can vary depending on project. Direct or virtual PPA projects generally require no initial cash outlay whereas an onsite installation may necessitate considerable initial capital investment as well as ongoing maintenance costs. Nearly all PPAs have the potential of long-term cost savings, but the level and speed at which those savings are realized is determined on a deal-by-deal basis. Contract length can vary considerably and is a significant decision point for many companies. Organizations looking for a shorter-term commitment of less than 10 years can pursue an existing PPA or competitive power project. Companies willing to make a longer-term commitment can take advantage of the compelling economics of a new direct or virtual PPA or onsite generation. Finding the right project can be challenging. There are many options for companies to choose from, and each buyer and seller must work within existing regulations and policy. Working with Renewable Choice Energy can help you narrow your selection and support your decision-making processes. Conclusion While a PPA is a complex decision with long-term implications for any organization, there has never been a better time for progressive companies to pursue utility-scale renewable energy for their electricity demands. As models like Google, Walmart, and Microsoft demonstrate, the opportunity to integrate renewables into any corporate energy strategy with the potential to realize significant cost-savings over time, and often in the first year has become a viable, competitive market choice. As a leader in the industry since 2001, the expert staff at Renewable Choice provides organizations with credible solutions to energy needs. We work closely with our corporate and project development partners to identify synchronous prospects, while simultaneously identifying all the opportunities and challenges associated with a long-term energy strategy. Contact us today for more information. 4775 WALNUT STREET, STE. 230 BOULDER, continued CO 80301» 877.810.8670 WWW.RENEWABLECHOICE.COM