The Center on Global Energy Policy at Columbia University SIPA has published a report in March 2021 titled, “The Role of Corporate Renewable Power Purchase Agreements in Supporting US Wind and Solar Deployment”. The report has been authored by James Kobus, Ali Ibrahim Nasrallah and Jim Guidera. The report covers the corporate renewable power purchase agreements (PPAs) in detail. The article provides an extract of the report and covers the growth drivers, constraints and policy implications in the US corporate renewable PPA market.
Growth Drivers in the Corporate Renewables PPA Market through 2030
- A vast and largely untapped US C&I power demand pool
The nascent corporate renewable PPA market is about 10 years old. Corporate demand accelerated rapidly from 2013 onward, and unprecedented growth took place in 2018 and 2019, as shown in Figure 2. According to publicly available BNEF data, at the end of 2019, the cumulative PPA capacity contracted from renewable energy sources (excluding green tariffs) was approximately 27.2 GW, with higher penetration of wind energy in comparison to solar. The 11.2 GW of additional PPAs signed in 2019 alone represents more than 40 percent of the total corporate-contracted capacity since 2009.
Assuming average capacity factors for solar and wind of 27 per cent and 37 per cent, respectively, these corporate PPAs would produce close to 80 TWh of electricity per year. Given that total US commercial and industrial electricity demand was about 2,300 TWh in 2019, corporate renewable energy PPAs would represent only about 3.3 percent of US C&I electricity demand (Table 1). While the realistic total addressable market for corporate renewable PPAs is materially smaller than total C&I electricity demand it is clear that there is still significant room for corporate renewables PPA penetration to increase.
2. An increased focus on the sustainability profiles of US corporations
A broad survey recently completed by RE100 compiled a variety of self-reported reasons that corporations are committing to 100 per cent renewable electricity targets. Some of the explanations, such as cost savings and risk management, can directly enhance the bottom line of these businesses. Other cited reasons, however, may benefit these corporations more indirectly, such as by improving customer or employee retention. As more consumers incorporate broader societal concerns into their purchasing decisions, for example, it could make economic sense for a business to incur additional costs for sustainability initiatives in order to increase its sales. Moreover, employees are also increasingly seeking to work at businesses that emphasize sustainable values. Corporations seeking to attract highly skilled employees may gain an advantage by crafting an image as a sustainable brand.
Additionally, companies are facing increasing pressure from institutional investors to improve their sustainability performance, with 76 per cent of RE100’s respondents indicating that shareholder requests are an important driver for their efforts to source renewable electricity. Overall, the Global Sustainable Investment Alliance estimates that “sustainable” investing assets under management totaled $30.7 trillion at the start of 2018, representing a 34 per cent increase over the preceding two years. This total is widely anticipated to grow further. As sustainability factors are increasingly incorporated into investing decision criteria, companies that perform poorly on these metrics may face a cost of capital disadvantage. This provides another economic, self-interested incentive for corporations’ to improve their sustainability profiles.
A number of other new platforms and alliances support corporate commitments to “green” their operations, with a significant focus on renewable electricity. Examples include the Carbon Disclosure Project, Corporate Renewable Buyers’ Principles at the World Resources Institute, Renewable Energy Buyers Alliance (REBA), and the Business Renewables Center at the Rocky Mountain Institute.
Finally, as more companies commit to sourcing their electricity from renewables, the pressure is likely to rise for other players in their sector to follow suit. If there are cost savings for renewable procurement, companies that do not procure renewable electricity may be at a disadvantage. Further, as discussed, maintaining a corporate image of sustainability is becoming increasingly important for customer and employee retention. These reinforcing pressures may drive a positive feedback loop: as more companies become sustainable, those who lag behind could be put at a competitive disadvantage. This effect could push companies in the US to be more aware of their relative sustainability portfolios and pursue renewable electricity procurement.
3. Rapid growth in technology-sector power demand
Information technology companies tend to have large and growing electricity loads, and many of these businesses already exceed 1 TWh of annual demand. For example, Google’s power usage doubled from around 5 TWh in 2014 to 10 TWh in 2018. Facebook’s total electricity usage nearly doubled from 1.8 TWh to 3.4 TWh between 2016 and 2018. Microsoft saw its electricity usage more than double from 2014 to 2018, rising from 3.5 TWh to 7.6 TWh.
This growth in electricity usage has largely been driven by data centers, which consume 10–50 times the amount of electricity per unit of floor space of a typical commercial office building. Collectively, these data centers account for approximately 2 per cent of the total US electricity use, and this total is expected to grow. This large electricity demand growth from the big tech players is already driving renewables deployment as these companies work to meet not only increasing demand but also to work toward their sustainability commitments. Based on these trends, electricity demand growth from these data centers in the US could drive continued renewable PPA demand, even from the existing players in the market. While recent 30 per cent-plus annual growth rates might not be indicative of long-term trends, strong growth in this arena is still considered likely.
A small number of technology companies have dominated the US corporate renewables PPA market to date. According to data from REBA, in 2019 seven companies (including Facebook, Google, AT&T, Microsoft, T-Mobile, Walmart, and Amazon) accounted for over 60 per cent of total reported renewable energy purchases tracked by the organization. This figure illustrates how the procurement decisions of a small number of large electricity consumers can significantly impact the market.
Alphabet Inc.’s subsidiary Google has been a particularly visible and significant leader in driving the deployment of new renewable energy generation sources and pushing the conversation of what it means to claim that a company’s operations are powered with renewable electricity. In 2012, the company announced its goal of matching its annual power load with 100 per cent renewable electricity procured. The company achieved this objective in 2017 through a combination of virtual power purchase agreements (VPPAs), physical PPAs, and green tariffs. In many cases, Google actively collaborated with its local utilities to establish the green tariff program that it utilizes.
Since 2017 the company has articulated a more ambitious goal of more closely matching its load with carbon-free supplies on an hourly basis. In this regard, the company has been measuring and reporting on its progress toward the “24 × 7” carbon-free energy goal, taking into account both the renewable electricity that it has procured through PPAs and green tariffs and also from carbon-free electricity drawn from the local electricity generation mix. Furthermore, the company has signaled that it considers the availability of such sources in locating new facilities. Google has pledged to support R&D into innovative technologies, along with policies and market reforms that enable access to carbon-free infrastructure. For example, Google has recently announced a new green tariff arrangement with Nevada Power that would enable the utility to provide new solar power combined with a battery storage hybrid project, which it claimed to be the biggest of its kind for a corporate customer when announced, to power a new Google data center.
Amazon, for example, recently revised its 100 per cent renewable energy procurement commitment to be achieved by 2025, five years ahead of the previous schedule, and committed to a goal to be net-zero carbon by 2040. To achieve these goals, the company has announced that it will procure 100,000 fully electric delivery vehicles worldwide, the largest order of electric delivery vehicles to date. Of these vehicles, 10,000 will start operations in 2021 with the full rollout being achieved by 2030.
At the same time, the rollout of 5G equipment is expected to materially increase telecommunications companies’ electricity demand. It has been estimated that between 2020 and 2030 the global electricity consumption from mobile networks will increase from 98 TWh to 316 TWh. This growth could drive further demand for renewable electricity contracting. Depending on how aggressive the industry pursues sustainability initiatives, and PPA projects specifically, this industry could drive an additional 4–15 GW of renewable electricity procurement in the US alone.
Companies with smaller, less concentrated loads are also finding ways to participate in corporate renewable PPAs. Aggregations can expand the universe of practically eligible corporate counterparts to companies with regional loads of less than 100 GWh, enabling renewables projects in the range of 50–100 MWs. These types of transactions have the potential to expand the VPPA market to engage with smaller corporations, moving beyond the large-load players that have dominated this market to date.
As one example, Starbucks has committed to 100 per cent renewable energy by joining the RE100 group and already achieved that goal for its operations in the US and Canada. In 2019, Starbucks announced that it had entered into VPPAs with three projects, including 50 MW of wind in Oklahoma, 50 MW of solar in Texas, and 46 MW of solar in North Carolina. In this arrangement, Starbucks contracted for a sufficient portion of the annual production of these three projects to match the annual loads of 3,000 Starbucks stores. The remaining production was marketed to other buyers.
Another shared transaction from 2019 included a group of five corporations—Bloomberg, Cox Enterprises, Gap, Salesforce, and Workday—with an aggregated 42.5 MW annual electricity load. This group of corporations utilized a single shared legal counsel and jointly signed a single VPPA, pooling their risk and reducing transaction costs.
The scalability and replicability of these aggregation deals are still unclear. On one hand, technological platforms and legal framework innovations that help to aggregate interested buyers can help corporations with smaller loads to achieve economies of scale in VPPAs. On the other hand, these aggregations might prove themselves to be problematic and risky for the companies involved. For example, the risk of default by individual parties could shrink the pool of possible partners, leading corporations to only partner with well-established companies with high trustworthiness of continued operations and financial health.
4. Continued cost declines for wind and solar
Growth in renewable energy deployment among corporate players has been largely preceded by drops in both wind and solar system costs. Utility-scale wind energy costs fell by 70 per cent, while solar energy costs fell by 89 per cent during the time period between 2009 and 2019, according to Lazard.
According to IRENA, the global levelized cost of electricity (LCOE) of utility-scale solar PV is projected to drop further, from $0.055–$0.22 per kWh in 2018 to $0.02–$0.08 per kWh in 2030. As for wind, IRENA projects that the global LCOE for onshore systems will drop from $0.045–$0.10 per kWh in 2018 to $0.03–$0.05 per kWh in 2030. During the same period, IRENA envisions global offshore wind LCOE decreasing from $0.10–$0.195 to $0.05–$0.09 per kWh.
Meanwhile, the potential benefits from further cost reductions will, based on current law, be offset to some degree by the phase-out of key federal tax credits in the US. Historically, the federal investment tax credit (ITC) and production tax credit (PTC) have been key enablers of renewable energy economics. The ITC has historically equated a tax credit equal to 30 per cent of the capital costs of solar energy assets. The PTC provides an escalating $23 per MWh tax credit for the first 10 years of electricity generated by wind energy assets. These benefits are meaningful and have allowed wind and solar projects to offer lower VPPA prices than would have been possible in absence of these credits. The final verdict on the degree to which the loss of tax credits will offset projected cost declines is still unclear. NextEra Energy, the world’s largest private developer of wind and solar energy, forecasts that cost declines will fully offset the lost tax credits for solar energy but not for wind energy. The company projects that the roughly $20 per MWh levelized benefit of the PTC will be partially offset by about $10 per MWh of efficiency gains by 2024. For solar, the company estimates the approximately $13 per MWh levelized impact from the ITC phasedown to be more than offset by about $15 per MWh of efficiency gains.
Constraints on the Corporate Renewables PPA Market Size
- Regulation that limits the feasibility of PPAs in some regional markets
Within the US, power generators, utilities, and transmission owners in some regions have formed independent system operators (ISOs). These ISOs are nonprofit organizations that self-regulate and share transmission responsibilities for the region. Regional ISOs oversee the commodity market for electricity in their respective jurisdictions by dispatching generation, managing power transmission and distribution, and ensuring that the region maintains sufficient generation capacity to reliably meet demand.
In the wholesale electricity markets that are managed by ISOs, the price for electricity is determined by power price bids from generators on a day-ahead basis and in real time throughout the day. These bids refer to delivery hubs and are published as market indices so that market participants can see how the power price evolves. These market indices are commonly specified in VPPAs as the reference for variable market prices to compare with the fixed price in the determination of settlement payments.
While roughly two-thirds of the US is organized into wholesale markets operated by a regional ISO, large regions in the Southeast and the western US still operate under a traditional, vertically integrated model, where the local utility has a monopoly on both generation and distribution of electricity. It is significantly more challenging to enter into VPPAs with renewables sources in these regions, as visible RTO-published index for calculating hedge settlements would be lacking. Renewable generators would also need the local utility monopolies to cooperate in bilateral transactions absent from an open wholesale market for their output.
2. The need for renewable PPA prices to be competitive with wholesale power prices
A PPA guarantees a revenue stream to the renewable electricity generator while also hedging a portion of the variable energy component of corporate buyer’s power consumption costs for a specified amount of electricity on a long-term basis. Thus, it is reasonable to believe that corporate buyers would compare (1) the fixed PPA price and (2) the outlook for wholesale power prices they would expect to drive their variable energy costs in the absence of the PPA over the life of the contract. Setting aside sustainability priorities, it would be reasonable for businesses to tend to sign PPAs only when they offer fixed power prices that are competitive with the outlook for wholesale prices intended to be hedged. Some companies may also be willing to pay a premium for the general risk reduction that stems from locking in a fixed price for its electricity. Nevertheless, the need for VPPA fixed-price offer prices to be reasonably competitive with the outlook for variable market prices would be a limiting factor for corporations signing a long-term contract.
Corporations may be willing to purchase voluntary RECs or pay a higher price for electricity from renewable sources given the benefits derived from enhancing a business’s sustainability profile. This is sometimes referred to as a “green premium.” The green premiums incurred by corporations to meet publicized sustainability goals do not necessarily deviate from “market behavior”; these costs have a brand-enhancing business rationale as discussed in a previous section, similar to advertising expenses or charitable sponsorships.
There are, however, limits to this sustainability-driven behavior. Public relations budgets have limits. Publicly traded companies answer to their boards of directors and ultimately their shareholders. It is unlikely a corporation would voluntarily pay an excessive premium relative to the outlook for its electricity costs.
3. Scale and creditworthiness requirements
Historically, the PPA market has been dominated by corporations that have large enough power loads to serve as either the sole or anchor offtaker for a utility-scale wind or solar facility. The report estimates that based on historical project sizes a corporation needs to have at least 75–100 GWh of geographically concentrated power load to enable a renewable energy facility of meaningful size. According to data from the US Energy Information Administration (EIA), however, the average retail C&I customer consumes just about 0.110 GWh each year. While this figure is a bit larger for wholesale C&I customers, at about 0.22 GWh annually, it is clear that a large portion of C&I customers do not have enough electricity demand to make signing a corporate PPA practically achievable.
The commercial banks that finance renewable energy projects generally require that buyers have investment-grade credit ratings unless some stronger guaranty or security is involved. Government-sponsored green banks may depart from this orthodoxy, and some commercial banks may also provide debt finance at reduced amounts if the buyers are not all considered to be investment grade. Nevertheless, the share of corporate demand coming from companies that have investment-grade credit ratings is a practical limit on the potential size of the PPA market.
4. Financial risks and alternative emissions reduction mechanisms
Entering into long-term energy contracts brings financial complexities for corporate offtakers. This is because long-term PPAs with renewables are imperfect hedging mechanisms due to a range of risks and issues, including resource and operational risk, covariance risk, locational basis risk, derivative accounting, and a general reluctance to lock in 100 per cent of power costs for extended periods of time.
Conclusion and policy implications
These results from the report demonstrate that relying on private-sector actors to voluntarily address un-priced greenhouse gas externalities would be a speculative decarbonization strategy. Instead, if US policy makers wish to achieve the rapid renewable energy growth necessary to transform the country’s power sector, more comprehensive policy frameworks are needed. New policies could drive greater growth from the traditional utility sources of renewable energy demand and make emissions reduction initiatives a more straightforward business decision for US companies.
The report has explored policy tools available to the federal government, including but not limited to a federal carbon pricing policy. Increased R&D spending, green infrastructure investment, and the extension of federal tax credits may also be considered. Policy tools at the state level include initiatives to firm REC values and the expansion of green tariff offerings to corporate customers.
The full report can be accessed by clicking here