Robust green power deals crucial to energy transition

With climate change at the forefront of the great societal challenges, companies are facing increasing scrutiny from customers and investors to push for more ambitious and tangible corporate sustainability targets.

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However, a 2018 PwC survey discovered that while 72% of companies mention the UN’s Sustainable Development Goals in their annual reporting, only 27% include them in their business strategy, despite the fact that sustainability is proven to make not only reputational but also commercial sense.

On the one hand, the cost of energy from renewables has become competitive over the past years but on the other hand, sustainability has entered the consciousness of today’s consumer.

According to Nielsen, a leading measurement and data company, 81% of respondents of their global survey on “The evolution of the sustainability mindset” felt strongly that companies should help to improve the environment, and 30% said that they would pay a premium for sustainable brands. In fact, these consumers are projected to be spending USD 150 billion on sustainable goods by 2021.

This has brought the topic of renewable procurement not only back to the top of the sustainability agenda but also made it part of business strategy of a growing number of companies. In short, companies want to reduce energy costs, limit their exposure to price volatility and reduce carbon emissions. As a whole, the global private sector consumed about 465 TWh of renewable electricity in 2017, which – to put this in perspective – equals the electricity demand of France. Out of the 450 TWh, a quarter were procured through Power Purchase Agreements (PPAs), long-term contracts that are directly agreed between the private sector and the energy generator, while the rest was split between unbundled certificates, direct investments and green tariffs from utilities.

In fact, the procurement options are rather limited if you take into account the growing importance of additionality claims, and that not all companies can or want to invest in renewable assets.What makes PPAs one of the most economically attractive propositions for both existing projects and new builds in a post-subsidy world, is that they offer strong revenue stability for the generators, and price predictability for the corporate buyers over the long term.

We believe that a successful energy transition won’t be possible without the share of PPAs in global sourcing growing considerably. However, in 2018 only 8% of all newly installed capacity used a corporate PPA. That’s clearly not enough.

So what hampers the solid growth and diversification of the PPA market? To get a full picture of the challenges, we conducted extensive interviews with both, corporate energy buyers and suppliers. Most pressingly, buyers attested to the complexity of switching from annual to multi-year contracts, and both sides confirmed the considerable amount of time, costs and manpower it takes to get a PPA off the ground in a highly fluctuating energy market.

Let’s dive a bit deeper: Buyers need to obtain and maintain a broad overview of the growing PPA market in order to procure the best suitable renewable projects for their needs. Once sourced, they have to assess a developers’ track record and understand the actual development status of projects and structuring options to get a thorough understanding of all the risks involved. This requires strong sector expertise, which is what many corporates are lacking.

On the seller side, getting a renewable energy project started is tied to a high level of risk as it requires the juggling of several dependencies in parallel. To secure project financing, the demonstration of long-term revenue generation is paramount. At the same time as looking for financing, developers also need to increase their exposure vis-à-vis corporate offtakers and negotiate adequate deals. And the stark reality is that the success rate for RFPs is less than 50%, which increases the volatility of renewable energy projects even further.

All parties agreed that a sound PPA market is crucial to not only meet the rapidly growing demand but to ensure that the sector diversifies in a manner that is healthy and more importantly scalable, and that solutions are needed that address particularly the issues around transparency and liquidity.

At DNV, we believe that the private sector plays a crucial role in achieving the Paris climate targets, and that corporate PPAs are the best instrument for companies to contribute to the point we need it to. Based on more than 150-years-experience in technical assurance and risk management, including electricity and renewable energy, we set out to find a solution that would usher the PPA market towards standardization and scalability.

7/10/2019 9:00:00 AM