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How to Ensure That Corporate Buying of Renewable Energy Really Makes a Difference

Construction Krammer wind park in the Netherlands financed by Philps, AkzoNobel, DSM, and Google.

Many corporations are eager to contribute to the fight against climate change by sourcing renewable energy. Yet, despite some high-profile power purchase agreements, corporate renewables sourcing is still a small market and its real contribution to the energy transition is doubtful sometimes, writes Malte Gephart, energy policy export at international consultancy Navigant. According to Gephart, this is a missed opportunity. He explains what needs to be done for the market to make a real difference.

There are many ways in which companies can source renewable energy, but they boil down to three options.

First, companies can produce and consume heat or electricity themselves.

Second, they can buy green electricity products in the retail market. The energy provider proves that its energy is green by means of guarantees of origin (GOs), which can come from its own plants or are bought in the market.

Third, companies can sign power purchase agreements (PPAs) with producers of renewable energy sources (RES) to buy power from a specific renewable energy plant. In this case, too, the power is fed into the public grid, and backed by GOs, but there is a direct contractual connection with a production site. This allows the buyer to create a tangible corporate social responsibility (CSR) engagement.

Unfortunately, at this moment PPAs and other forms of RES sourcing, despite the claims often made, do not always make a genuine contribution to the energy transition, in the sense that they trigger additional investment in renewable energy

PPAs are increasingly popular and have several advantages over simply buying green power in the retail market. A deal with a specific RES plant is easier to communicate than the statistically increased RES share in consumption through acquiring green power products or by acquiring unbundled GOs (i.e. GOs not directly related to a specific RES plant).

In addition, with a PPA, energy consumers can limit their exposure to volatile electricity prices. Corporate PPAs also help RES producers: They can mitigate some of their revenue risk.  Stabilising revenues and simplifying the cash flow can improve the bankability of RES projects and decrease the cost of capital.[1] In addition, the improved visibility of projects contracted to large consumers can be a part of the RES producers’ branding strategy.

The state of the market

According to RE100[2], an initiative uniting more than 100 businesses committed to sourcing 100% renewable electricity, in 2015 roughly 14.4 TWh of renewable electricity was sourced in Europe (including all three RES sourcing options described above). This is a start, but represents a mere 1.5% of the total 935 TWh of European RES-E production in 2015.[3]

Out of the total RES volume, 48% was related to unbundled GOs, 47% to green power products and only 3% to corporate PPAs (see figure below).

(Source: Benjamin Munzel/Ecofys, a Navigant company 2016, based on RE100 2017[4])

What is more, corporate RES PPAs in the EU are largely concentrated in the UK (31%), Sweden (22%), the Netherlands (16%), and Norway (14%)[5]. So far, no corporate RES PPAs have been signed in important markets like France, Germany, Spain or Italy.

Barriers to progress and what can be done about them

Several PPAs have received considerable attention in the press.

In late 2016, Philips, AkzoNobel, DSM and Google signed a PPA with two cooperatives in the Dutch province Zeeland (with the Krammer wind farm), thereby “cutting out the middle man” and significantly “contribut[ing] to deliver on the Dutch renewable energy target of 14% in 2020”.[6]

Earlier in 2017, Coca-Cola signed a PPA with EDF and its 5MW PV ground mounted plant 1.5 miles away from its factory in Wakefield and now all of Coca-Cola’s electricity consumption in the UK is based on renewables[7].

It is true that there are various labels and schemes that aim to provide more transparency to the market, but they all suffer from shortcomings

In October 2017, Microsoft signed a 15-year PPA with GE for a 37 MW wind farm in County Kerry, including an agreement with a Dublin-based energy trading company, i.e. cutting out the traditional energy supplier but relying on third parties to make it work. The ICT giant continued its engagement with yet another prominent deal in November in the Netherlands whereby it will consume 100% of the electricity of Vattenfall’s 180-megawatt wind farm in Wieringermeer Polder as of 2019.[8]

These examples show that RES sourcing has great potential. Yet there are several factors hindering a market take-off. First, RES sourcing options are perceived as highly complex and sometimes intransparent. Second, there are regulatory barriers in many markets. Third, with current low wholesale electricity prices, the price advantage of RES sourcing is negligible.

There are several ways in which these barriers could be addressed.

  • To improve transparency, public entities, RES-E producers and energy traders need to develop standardised yet flexible RES sourcing solutions. This requires tailoring green power products to specific demands of different consumer classes, i.e. differentiating between small and medium enterprises (SMEs) and energy intensive industries (each of them having different purchasing power, flexibility options, and preferences for different contractual arrangements, such as tenure). For PPAs this could mean providing a basic set of standardised design options and premade combinations.
  • Policymakers and regulators should remove regulatory barriers such as licensing requirements for those involved in the PPA deal, e.g. the need to be registered as an energy trader, which brings about quite complex and costly responsibilities.
  • A proper reform of the EU emissions trading system (ETS) would increase CO2 prices, which in turn would create a fairer competition between RES and conventional power sources, thereby improving the comparative advantage of RES sourcing (and especially of corporate PPAs) compared to buying electricity at the power exchange.

Why RES sourcing does not always make a real contribution

Unfortunately, at this moment PPAs and other forms of RES sourcing, despite the claims often made, do not always make a genuine contribution to the energy transition, in the sense that they trigger additional investment in renewable energy.

Why is this so?

The current Guarantees of Origin (GO) scheme, if properly used, does avoid “double counting”. However, since demand for GOs is still very small, prices are extremely low.  At several GO trading platforms, they range from 0.03 €ct/kWh to 0.05 €ct/kWh, [9] i.e. virtually nil. This obviously does not help producers financing their projects.

In addition, most RES plants in the EU already receive some kind of public support, e.g. through subsidies or feed-in tariffs. This means that the corporations sourcing RES often do not fully finance the projects.

It is true that there are various labels and schemes that aim to provide more transparency to the market, but they all suffer from shortcomings. The “Gold Standard”, established in 2003, allows corporations to claim they have  “made a contribution to SDG Target 7.2” (referring to the Sustainable Development Goals of the U.N.) by increasing the share of renewables by 2030.[10] However, the standard does not further define “contribution”, and does not specify whether it was the RES sourcing that ultimately made the RES plant feasible or whether it was, for instance, a local support scheme financed by taxpayers.

The Clean Energy Package does not touch upon the concern that there is a lack of transparency about the effects of corporate RES sourcing on the energy transition

There are other labels, such as the EKOenergie label, the “Grüner Strom” (Green Power) label and the “ok power” label, which define quality criteria of RES sourcing.[11] These criteria include that installations should be new (or not older than 6 years for instance) and that the cancelling of GOs should not happen later than a specific time period. They also define that a share of the retail price, between 0.5 and 1€ct./kWh shall be put into sustainable investment funds (e.g. for new RES projects). All these criteria are important, but they still have their limitations:

  • The labels do not include the criterion “fully financed by the RES sourcing option”, i.e. labels do not make transparent to which extent their RES sourcing option has been financed by tax or levy payers.
  • The label market is scattered and for final consumers it is difficult to determine which of the many labels adheres to which standards and what their effects in the energy transition are.
  • Companies usually do not use such labels and do not disclose in detail which RES sourcing solutions they are using to reach their RES shares. They also often do not properly disclose what level of quality these solutions have, especially concerning the replacement of public subsidies, which would be the most tangible contribution.

Transparency on a range of quality criteria, for instance, to which extent corporate RES sourcing has fully financed the RES production, would help to make the corporate RES sourcing market more transparent and related CSR statements more robust. The existing lack of transparency prevents corporate RES sourcing from becoming established as a truly complementary form of RES support.

How the EU is trying to improve the market

In the Clean Energy Package (more specifically, the revised Renewable Energy Directive RED-II), the European Commission has made some proposals related to corporate RES sourcing:

  • With regard to self-consumption, the Commission proposes that “Member States shall ensure that renewable self-consumers are entitled to carry out self-consumption […] without being subject to disproportionate procedures and charges that are not cost-reflective”. This issue is hotly debated. The complexity here is that removing barriers for self-consumption is needed, but self-consumption can have ambiguous effects on the electricity system (in terms of RES integration) and on the distribution of cost for support schemes. The European Parliament favours abolishing all charges related to self-consumption, while some Member States argue that some charges may be necessary to ensure that costs of RES are apportioned fairly.
  • The proposal states that Member States shall remove administrative barriers to implementing corporate PPAs. This is a good first step in supporting the development of this RES sourcing option, but it does not yet specify what the barriers are, how they ought to be removed and how progress will be monitored.
  • The Commission proposes that Member States issue GOs for supported (subsidized) as well as unsupported RES. GOs issued for subsidised RES-E should then be auctioned by the Member States and the revenues used to “offset the cost of renewables support”[12]. The upside of this proposal is that one of the main problems– final consumers financing RES support while the RES-consumption claims are transferred to corporates – is addressed. The downsides are that, first, the revenues from the GO auctions are likely to be minimal as the fundamental oversupply of GOs will not be resolved that way. The revenues from centralized GO auctioning will be much lower than the public subsidies for those plants. Second, many of the existing green sourcing activities currently rely on the cancelling of GOs from specific (yet publicly supported) RES plants. Auctioning GOs through a centralized platform would cut the link between GOs and specific RES plants as the GOs from one plant can then be sold to anyone bidding at the platform. Cutting the link between specific plants that are related to RES consumption of specific consumers through PPAs could be a show stopper for further market development because corporate RES PPA specifically rely on this statistical link established via GOs.

Meanwhile, the proposed package does not touch upon the concern that there is a lack of transparency about the effects of corporate RES sourcing on the energy transition.

How corporations can make a real difference

Here are three ways in which companies can (and already do) make a genuine contribution to the energy transition when engaging in RES sourcing:

  • Option 1: they can undertake corporate RES sourcing related to new RES installations that do not receive subsidies, thereby effectively addressing the revenue gap and – in the case of corporate PPAs – improving project finance. This option provides the most evident contribution to additional RES deployment as it effectively replaces public subsidies for RES deployment.
  • Option 2: they can ensure the continuation of operation of RES installations running out of support after 15 or 20 years (if O&M costs exceed wholesale market revenues or if market revenue risk would make the continuation of operation unfeasible). In this case RES installations would have received subsidies in the past and they would not be new (a quality criterion that some labels and corporates mention), but corporate PPAs would serve to keep capacities online and operational.
  • Option 3: they can support new RES installations receiving public support payment, but improve the bankability of projects in case support schemes come with strong revenue .This would lower the cost of capital and reduce the required subsidy payments.

The key issue is that these different contributions need to be made transparent in order to incentivise that companies increasingly choose option 1 over option 3.

Our recommendations for improving the RES sourcing market

In conclusion, I would like to make several recommendations how the corporate RES sourcing market can be strengthened via regulatory reforms.

  • Removing regulatory barriers to PPAs and reducing the administrative burden is crucial in some Member States to reduce transaction costs and allow a wider range of companies to source RES. The related provision in the proposed revised Renewable Energy Directive (RED-II) needs to be kept and potentially strengthened by naming the barriers explicitly and obliging Member States to report on their removal (e.g. in the National Energy and Climate Plans and subsequent progress reports).
  • Pricing emissions adequately so that corporate RES sourcing can reveal its comparative cost advantage compared to conventional corporate electricity sourcing.
  • Changing the GO provisions in the RED-II so that a direct link can be maintained between specific RES plants and the consumption of their output. In addition, it should be made clear whether GOs are derived from subsidised projects or unsubsidised ones.
  • Creating a public and obligatory label that standardizes the disclosure of specific quality criteria of RES sourcing options and their specific contributions to the energy transition.
  • Creating further transparency by obliging companies to disclose the general mix of their RES sourcing options (self-consumption, green power products, PPAs) and the quality of each of the options according to their contribution to the energy transition.

These efforts could strengthen corporate RES sourcing markets and unlock their potential. Companies would be incentivised to choose their RES sourcing strategy with a view to the actual effects it has on the energy transition.

Editor’s Note

Malte Gephart is an energy policy expert and managing consultant with Ecofys, a Navigant company. He recently summarised the key trends in corporate energy sourcing in a webinar for Leonardo Energy.

[1] Already now intermediates play a role in in some markets in limiting market revenue risks (i.e. PPAs as such are not new to the market), but corporate PPAs are a suitable option to fix prices over longer terms (up to 15 years) and companies are an additional off-taker for RES producers, improving their negotiation position.

[2] RE100 Annual Report 2017, available at: http://media.virbcdn.com/files/a9/55845b630b54f906-RE100AnnualReport2017.pdf

[3] https://www.agora-energiewende.de/fileadmin/Projekte/2017/EU_Jahresauswertung_2016/Agora_State_of_Affairs_EU_2016_WEB.pdf

[4] RE100 Annual Report 2017, available at: http://media.virbcdn.com/files/a9/55845b630b54f906-RE100AnnualReport2017.pdf

[5] BNEF presentation at RE-Source 2017 conference.

[6] Philips press release (2016), https://www.philips.com/a-w/about/news/archive/standard/news/press/2016/20161014-philips-akzonobel-dsm-and-google-join-forces-in-a-long-term-renewable-energy-commitment.html

[7] http://www.coca-cola.co.uk/stories/solar-farms-and-sustainability-our-factories-run-on-100percent-renewable-electricity.

[8] https://news.microsoft.com/2017/11/02/microsoft-announces-one-of-the-largest-wind-deals-in-the-netherlands-with-vattenfall/

[9] http://www.nvalue.ch/home.phphttp://www.stx.online/view/goo-germany/adeb21586104ecbf56351e5b6f0eea9d0b32fd94

[10] https://www.goldstandard.org/articles/gold-standard-renewable-energy-labels

[11] See also: http://www.ekoenergy.org/http://www.gruenerstromlabel.de/en/http://www.ok-power.de/

[12] Art. 16, 2

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