External pressure is building from governments and investors for corporates to reduce their carbon emissions. Since the 2015 Paris Agreement, 105 countries have pledged Nationally Determined Contributions (NDC) to reduce carbon emissions. Many of these NDCs include some form of carbon pricing or a target to reduce future emissions to ‘Net Zero’ by absorbing an equivalent amount of emissions from the atmosphere.
Climate change is also being recognized by investors as a significant threat to the long term prospects of a company. Initiatives such as the Climate Action 100+ are increasing pressure on corporates to provide more transparent disclosure of their carbon emissions and set measurable targets to reduce emissions in the future.
Corporates must respond to governments and investors by implementing initiatives to reduce their carbon footprint. Developing an energy sourcing strategy focused on renewables can provide a significant reduction in a company’s carbon footprint by reducing indirect emissions.
Decreasing cost of renewables
Levelized cost of energy (LCOE) is the average cost of electricity generation for an asset over its lifetime. While LCOE does not fully reflect the price to purchase renewable electricity due to factors such as developer returns and differing risk profiles, it can be a useful benchmark for evaluating the competitiveness of renewable energy in a specific market.
LCOE of renewables has been decreasing steadily since 2010 and is expected to decrease further by 2030. As a result, wind and solar technologies are as competitive or cheaper than energy generated from fossil fuels.
The decreasing trend in LCOE is driven by a combination of lower capital and maintenance costs and an increase in efficiency leading to higher output. In the future emerging technological solutions such as improved battery storage and hybridization will continue to result in falling LCOE for renewables.
As the LCOE for renewables declines, subsidies will also decrease. In many regions, these subsidies provide a stable income stream to finance renewable development. Corporates can offer renewable asset developers an alternative to subsidies by entering into long-term Power Purchase Agreement (PPA) contracts with similar risk mitigating characteristics as subsidies (e.g. fixed price or flexible pricing with caps and floors).
This presents an opportunity for corporates to take advantage of the decreasing trend in the LCOE of renewables by sourcing renewable energy at competitive prices.
Volatile wholesale power prices
Wholesale power prices are often impacted by supply and demand shocks leading to price volatility and uncertainty over future electricity costs. On the supply side, price movements in fossil fuels such as natural gas and coal cause fluctuations in the wholesale power price. This is further impacted by carbon pricing regimes that are especially costly for coal generated electricity.
Demand side shocks can result from changes in economic activity or seasonal temperature fluctuations. More recently the combined effect of reduced demand due to COVID-19 and increased supply from the Russia-Saudi Arabia price war have resulted in a sharp decline in wholesale power prices. However, as recently as 2018, wholesale power prices had increased dramatically.
While the impact of geopolitics on wholesale power prices is difficult to predict, carbon tax regimes are expected to bias the trend upwards. Corporates can reduce the volatility of their electricity costs by entering into PPA contracts with renewable developers that have fixed prices or flexible pricing with caps and floors.
Corporate Renewable energy sourcing
Renewable energy sourcing can provide valuable economic, operational, and reputational benefits to your company:
Achieve direct financial benefits — Achieve lower future energy costs, benefiting from decreasing costs of renewable energy — Possibility to stabilize energy costs over a period of time — Utilize tax and financial incentives benefits: unlocking access to incentive mechanisms by investing in renewable energy capacity
Create long-term brand value — Respond to investor and consumer demand related to renewable energy consumption and production, driven by increasing awareness of climate change — Marketing & communications strategy can leverage the renewable energy transition to optimize the perception of investors, consumers, and other stakeholders
Increase resilience to future penalties and outages — Having a robust renewable energy sourcing strategy would help companies minimize the impact of potential carbon taxes under consideration in various jurisdictions — Secure access to decentralized, reliable energy sources by obtaining access to predictable and local supply to reduce dependence on third parties and mitigate geopolitical and grid stability risks (primarily in developing countries)
Common Corporate PPA structures
There are three main corporate PPA structures each having distinct characteristics and risk profiles:
- In an ‘on-site’ or ‘behind-the-meter’ PPA, the renewable asset is built on the premises of the consumer and has a direct wire connection to the facility.
- Renewable assets can be customised to suit the load profile of the consumer, both in terms of facility’s size (surplus power can be fed to the grid) and in daily profile.
- A utility or developer can provide shaping services by supplying residual demand requirements or purchasing surplus power.
Benefits: direct link generation/load with low interconnection costs; potential demand charges reduction; easy to integrate into sourcing portfolio
Considerations: need roof or land space availability and permits; CAPEX burden and (often) no economies of scale; supply limited to one site / location
Physical PPA (off-site)
- Under a Physical PPA, the renewable asset is located off-site, but physical delivery of the power occurs.
- A utility ‘sleeves’ the renewable power to the consumer via the grid.
- Corporates can form a consortium of buyers to contract the electricity from a single renewable asset to improve pricing and reduce legal costs and process burden.
Benefits: hedge against market power price volatility (if fixed price PPA); project optimization due to larger assets (scale effects); potential for multi-site supply
Considerations: requires deregulated retail market / wheeling; project must be located in the same network as load; potential fees for sleeving / wheeling
Virtual PPA (off-site)
- The consumer buys power from a utility at local retail price.
- The consumer also enters into a separate contract with a renewable installation to settle the difference between the wholesale price and a contractual strike price allowing the consumer to (partially) hedge its power purchase price.
- There is no physical transmission of power between the producer and the off taker allowing the PPA to be signed across national or state borders.
Benefits: no location / network limit; no incremental sleeving / wheeling fees; hedge against market power price volatility
Considerations: larger potential for accounting impact; basis risk when reference price differs from retail price; no saving for network charges
A proven approach
Built upon experience from earlier successful renewable sourcing strategy implementations KPMG structures each activity into measurable phases:
Phase 1: strategy
A. Understand and define objectives and key decision criteria for energy sourcing strategy
B. Perform market and opportunity space analysis
C. Prepare a clear roadmap for implementation
Phase 2: preparation
A. Perform data collection and initial market sounding
B. Refine and develop a detailed go-to-market strategy
C. Prepare the data bundle
Phase 3: procurement
A. Initiate procurement process and developer dialogue
B. Evaluate bids received
C. Negotiate closing and complete the RFP process
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