In this series, we explain the basics of transitioning to renewable energy, from the emerging opportunities, options and impacts, to the process of implementing onsite or offsite solutions.
To recap, corporations and institutions utilize three approaches when trying to reduce their greenhouse gas emissions. These options are the same regardless if the company is targeting its owned and operated facilities or its manufacturing base.
The three methods for reducing emissions include:
In this installment, we’ll cover offsite renewable energy.
Off-site renewable energy is the single most impactful purchase any company can make when trying to minimize its effect on the environment. By purchasing power from large-scale projects, the acting company can effectively cover entire swaths of their operations with clean energy.
Purchasing off-site renewable energy is fundamentally different than energy efficiency measures or installation of onsite clean energy generation. Not simply because of the size, but because of the structure. There are two primary ways to purchase off-site renewable energy: physical Power Purchase Agreements (PPAs) and financial Power Purchase Agreements, commonly known as Virtual PPAs or VPPAs.
As detailed in the on-site renewable energy post, the traditional “physical” PPA is a contract between an energy provider and a third party. This agreement outlines the length of time the two parties will work together (generally 10 - 25 years), and the pricing structure under which their relationship will function. Because physical PPAs are contracts to have renewably generated electrons directly transmitted from the large off-site plant to a facility or facilities, these contracts are generally only penned for large, energy-intensive operations such as groupings of factories or data centers. But few companies have the kind of individual facilities that would consume enough energy to justify a physical PPA. To help cover the rest of the market, the Virtual PPA was developed.
Synthetic or Virtual PPAs (VPPAs) were developed because energy from off-site renewable energy projects is rarely directly routed to the facilities it’s technically powering. Instead, energy from the project enters the grid, mixing with energy of other electricity plants powered by coal or gas, and help serve the demand of the grid as a whole.
VPPAs are typically used by corporations as a vehicle to buy off-site renewable energy directly, for example, from a wind farm. However, it doesn’t require consumption of the actual power generated by an off-site wind farm. Rather, a company can continue to utilize energy from the grid while paying the wind energy generator a “strike price” for each unit of power produced over a set period of time.
Off-site renewable energy projects are high-risk, high-reward. The risks are largely financial. Transacting on large renewable energy projects can be drawn-out and complex, with multiple parties involved throughout the RFP, PPA, commercial structuring, development, and utilization periods.
These parties include the transacting company, the company’s contracted partners, financial institutions, renewable energy developers, project operators, and occasionally foreign governments. All parties will inevitably have their own interests in mind, so it requires careful negotiations. Withdrawal by any single party can send the process back to square one, costing all parties time, effort, and even reputation.
Past the negotiation phase, numerous legal and financial obligations must be fulfilled, and at times unforeseen complications can derail the development process. Because of the complexity of the development process, inexperienced corporate buyers should consider enlisting the help of experienced consultants.
While the risks can be daunting, the rewards are many. The primary benefits include large-scale transaction and significant environmental impact, all for zero upfront cost. If a large company has made a significant promise to the public, such as pledging to run off of 100% renewable energy, there’s no quicker way to achieve that goal than to contract a PPA or VPPA with an offsite renewable energy provider.
Such displays of institutional good will are beneficial for investor relations, employee retention, risk management, and environmental impact.