The Economic
Case for
Renewable Energy
WHY COMPANIES ARE CHOOSING POWER
PURCHASE AGREEMENTS
In 2006, Whole Foods Market made history when
it became the first large-scale, U.S.-based
corporation to make a commitment to purchase
100% renewable energy for its North American
retail operations. At the time, there were only a few
early adopters of clean energy in the commercial,
industrial, and institutional (C&I) space, making the
Whole Foods commitment noteworthy. To achieve
its goal, Whole Foods relied on renewable energy
certificates (RECs), which remain the way that green
power is tracked and traded today. The company was
willing to buy those RECs at a premium price because
doing so aligned with its environmental goals.
Fast forward a decade.
Today, thousands of companies throughout the
world are using green power in their operations.
Many still do so because of their environmental
commitments. But, in more than 30 countries,
renewable energy has reached price parity with fossil
fuels,1 a game-changing turn of events. For instance,
in December, Bloomberg reported that prices in some
developing markets, such as the Middle East, now
make solar the cheapest available source of energy.2
1 From http://www.independent.co.uk/environment/solar-and-wind-power-cheaperthan-fossil-fuels-for-the-first-time-a7509251.html. Retrieved 1/5/17.
2 From https://www.bloomberg.com/news/articles/2016-12-15/world-energy-hits-aturning-point-solar-that-s-cheaper-than-wind. Retrieved 12/30/16.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Table of Contents
Understanding Power Purchase Agreements . . . . . . . . . . . . . .4
The Advantageous Economics of PPAs . . . . . . . . . . . . . . . . . . . . . .5
Bottom Line Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Short Position Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Renewables Are No Longer Just
About Doing the Right Thing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
This guide is for informational
purposes only and not for the
purpose of providing legal
advice. Although we go to
great lengths to make sure
our information is accurate
and useful, we recommend
you consult a lawyer if
you want legal advice.
© 2017 Renewable Choice Energy,
www.renewablechoice.com
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Understanding Power Purchase Agreements
Between 2010 and 2016, C&I buyers executed more than 7,000 MW of wind and
solar PPAs in the U.S., helping to drive the dramatic increase in that market.
These buyers are also expanding the reach of their energy management
programs, signing offsite and onsite PPA deals in regions including Mexico,
Sweden, the Netherlands, China, Chile, Ireland, Norway, Scotland, and India.
3300
AGGREGATE PPA DEALS IN THE C&I SECTOR BY ENERGY TYPE*
3000
3226 MW
Google
Amazon
Wind (MW)
Bloomberg
Corning
Apple
Solar (MW)
Geothermal
Kaiser
2700
Switch
Cisco
Bloomberg
GM
Walmart
Salesforce
Kaiser
2400
2100
DE AL SIZE (MW)
In this paper, we
will explore the
economic case for
renewable energy
and discuss the
primary reasons
that companies
ranging from
Google to Kaiser
Permanente are
using a contracting
mechanism called
a power purchase
agreement
(PPA) to not only
achieve their
environmental
goals—but to
also reach their
economic goals.
PPAs are nothing new. They’ve been in use for years between developers and
utilities who, until recently, were typically the largest contractors for renewable
energy supply. However, beginning in 2008, private sector institutions began
considering PPAs as a means to work directly with renewable energy developers
in order to address their own energy needs. In 2010, Google signed the first of
their PPAs. To date, the company has executed more than 20 global clean energy
projects, allowing them to operate on 100% green power in 2017 as the world’s
largest corporate purchaser of renewable energy.3
Philips
P&G
Dow
Chemical
1800
Facebook
1500
Apple
Apple
Yahoo!
1200
1493.5 MW
Equinix
GWU
Owens
Corning
Walmart
US GSA
900
600
Becton Dickinson
U Oklahoma
25 MW
114 MW
Google
Harvard
0
2008
2009
100.8 MW
Google
98 MW
Google
Amazon
Avery Denison
Salesforce
Steelcase
Target
GM
US Army
Iron Mountain
Digital Realty
3M
Google
Google
IKEA
Microsoft
Apple
Microsoft
Facebook
101.2 MW
Walmart
Dow
Chemical
Mars
559 MW
Ithaca College
US Army
Lockheed Martin
MIT
University of CA
US
Department
of Defense
J&J
Amazon
Microsoft
300
2168.2 MW
HP
Amazon
Google
Google
Ohio State
2010
2011
2012
YE ARS
2013
*Based on publicly announced C&I PPAs (direct, synthetic, green tariff, and tax equity) in the United States. Excludes onsite PPAs. Last updated 12.10.16.
2014
2015
2016
© Renewable Choice Energy
In certain markets, PPAs are the way a buyer can contract direction with a
power generation for their electricity. PPAs can take two forms: retail PPAs,
where the power is delivered and accounted for on the buyer’s electricity bill,
and financial PPAs, structured as a contract for differences. The buyer—in this
case, an organization—contracts directly with the supplier—a wind or solar
farm—at a fixed-price for power. At regular intervals, the difference between
the contracted fixed-price and the market price for power is calculated. If the
contracted price falls below the market price, the buyer receives the difference.
If the fixed price is higher than the market price, the buyer pays the difference to
the developer.
In the U.S., PPA projects can be located in any deregulated, wholesale energy
market. Buyers can be located in the same grid region as the project for a retail
PPA or in a completely separate location for a financial PPA.4
3 From https://blog.google/topics/environment/100-percent-renewable-energy/.
Retrieved 12/30/16.
4 Learn more about the difference between financial and retail PPAs in our blog.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Financial (Virtual) PPA
Projects must be located in:
Facilities may be located anywhere
in the contiguous U.S.
Retail (Direct) PPA
Projects must be located in:
Facilities must be located in:
* Specific regional grid restrictions may exist.
Please refer to Renewable Choice for clarification.
© Renewable Choice Energy
Outside the U.S., nuances apply to individual countries, as well as regions
within a country where projects are located. In India, for example, there are
state-specific incentives that make PPAs more attractive in regions such as
Bangalore, Tamil Nadu, and Karnataka.
Once an organization becomes the “off-taker” of a project, or piece of a project,
it can use that purchase to help it achieve a variety of goals. Typically, PPAs
have been used to meet environmental commitments, either towards carbon
reduction or renewable energy acquisition. In recent years, economics have
become a primary driver behind the C&I appetite for PPAs, which makes these
contracts broadly appealing for a buying audience that reaches far beyond the
likes of Google.
The Advantageous Economics of PPAs
There are three primary ways that PPAs can financially bolster an organization:
1) bottom-line impact, 2) short position exposure, and 3) financial risk management.
Bottom Line Impact
Worldwide, the cost of generating renewable energy continues to decline,5
with the most notable reductions in the price of new solar, which reached
historic lows in 2016 and is now the cheapest form of electricity in some
areas. Prices for U.S. wind and solar are particularly attractive thanks to the
Production Tax Credit (PTC) and Investment Tax Credit (ITC), federal subsidies
that have further reduced the cost of these technologies. Other global regions,
such as India, are also offering subsidies to drive renewable energy adoption.
Power generation that is dependent upon technology, and not on the
fluctuating price of fuel, allows wind and solar developers to lock in a fixedprice for their power. Historically, to achieve the dual goals of using renewable
energy and fixing a price of power for the long-term, an off-taker would have
5 From https://www.lazard.com/perspective/levelized-cost-of-energy-analysis-100/.
Retrieved 1/2/17.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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HISTORICAL COST OF U.S. PPA’S
150
Wind (MW)
Solar (MW)
$/MWH
120
90
60
30
1800
2010
2011
2012
2013
2014
2015
YE ARS
expected to pay a premium. The rapid adoption of long-term renewable energy
of late has coincided with a paradigm shift: it is now possible to lock in longterm renewable energy at a discount—rather than as a premium to brown
power—in many markets.
The fixed price agreed to in the PPA includes a very low cost escalator over the
12 – 20 years of the contract, whereas the spot market for electricity—which
includes power generated from a variety of sources—is subject to rapid
oscillation. Indeed, electricity is one of the most volatile commodities in the
world.6 Electricity prices are dependent on the supply of energy, as well as the
demand, and tend to have seasonal peaks. This instability in the market benefits
the PPA off-taker, who receives a dividend whenever the spot price for power
rises above the fixed PPA price.
CASE STUDY: NET PRESENT VALUE (NPV) OF A U.S. PPA
CASE
STUDY: NET PRESENT VALUE (NPV) OF A U.S. PPA
PROJECTED SAVINGS
N O M I N A L N E T VA L U E = $ 1 0 7. 4 M
:
BULL
D IS CO U N T R AT E = 9. 5%
NPV = $55.8 M
PROJECT
BEING
DEVELOPED
$60
$/MWH
$60
MID:
$45
REFER
ENCE
$120
//
HIGH
S C
$ 6E
0
CAS
IGH GAS
BULL: H
CASE
W
BEAR: LO
$45
GA
$120
//
E
AS
$45
GAS
CASE
MID:
REFE
RENC
E
WIND PPA PRIC
$30
$60
E
E CAS
$30
$45
W GAS CASE
BTEHAORR :I NLFOL A T I O N
VERY BEAR: NO PRICE GROW
HISTORICAL MARKET PRICE
2011A
2012A
2013A
2014A
2015A
2016A
$30
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
27E
8E P R
2 0I2 C
9E E
D P 2P0 2 A
W 2I0N
$30
YE ARS
HISTORICAL MARKET PRICE
2011A
2017E
2012A
2013A
2014A
2015A
$/MWH
//
$/MWH
PROJECTED SAVINGS
N O M I N A L N E T VA L U E = $ 1 0 7. 4 M
D IS CO U N T R AT E = 9. 5%
NPV = $55.8 M
WIND
PROJECT
BEING
WIND
DEVELOPED
//
$/MWH
$120
$120
V E RY B E A R : N O P R I C E G ROW T H O R INF L AT I O N
2017 is a particularly strategic year to take advantage of the low price of wind
PPAs
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YE ARS by the end of 2016. The American Wind Energy
start construction on projects
Association (AWEA) reported in the 3rd quarter of 2016 that over 20,000 MW
of new projects were either under construction or in advanced development.7
These projects will now have four years to reach commercial operation in order
to receive the full PTC incentive, and they need off-takers to secure financing.
With a finite number of projects, now is an opportune time for C&I buyers to look
at wind PPAs with outstanding financial terms.
2016A
2029A
6 From http://www.solomonenergy.com/blog/wp-content/uploads/2015/08/2015-08-13Why-are-Electricity-Prices-so-Volatile.pdf. Retrieved 1/2/17.
7 From http://www.awea.org/Resources/Content.aspx?ItemNumber=9488.
Retrieved 1/2/17.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Short Position Exposure
Another key economic driver behind PPAs is the natural electricity short position
that nearly all companies find themselves in. In most markets it is impossible
to purchase electricity more than 2-3 years into the future, which subjects
organizations that intend to operate over the long-term to unpredictable market
price fluctuations. Fossil fuel generated electricity prices are expected to
increase over time as the demand for coal and natural gas outpace supply, and
as extraction costs—related to reserve development and the transportation
of coal/gas—go up. In this short position, the fixed price of power behind a longterm renewable energy PPA serves to mitigate an organization’s exposure to the
volatile market price.
Due to their relative stability, renewable energy PPAs are also useful to
multinational organizations that operate in regions outside the U.S. By relying
on technology, construction, and financing that is predictable and fixed, PPAs
create a steady source of generation in areas such as Mexico and India, where
grid reliability fluctuates. This stability provides additional value for C&I buyers
looking to reduce their market risk and short position exposure in these regions.
Financial Risk Management 8
For many C&I buyers, the primary motivation to execute a PPA is to manage a
myriad of risks that have potential to materially impact operations. These risks
include an energy short position, as described above, alongside environmental
risks, like the impact of carbon emissions on climate change, and regulatory
risks, like carbon pricing.
Carbon risk, and the need for companies to take action, has dominated the
agenda of several NGOs—including WRI, CDP, and BSR—over the past year.
Though many governments have set aggressive carbon reduction goals
under the Paris Agreement, a gap exists between the recommended warming
threshold of 2 degrees and our present warming trajectory.9 Avoiding the
worst impacts of global warming is dependent upon private industry adopting
voluntary, science-based carbon reduction targets.
For the C&I sector, these impacts pose a very real threat to business-as-usual.
Future carbon regulation, such as an imposed carbon tax, could economically
hinder organizations to a dramatic degree. Natural disasters related to climate
change—such as flooding and drought—are already wreaking havoc on the
availability and price of raw goods and water all over the world. In 2011, extreme
weather events accounted for 8 of the 10 most costly expensive natural
catastrophes of the year, resulting in nearly US$150B in losses.10
8 To learn more about how PPAs can help mitigate risks, download our white paper.
9 From http://sciencebasedtargets.org/. Retrieved 1/3/17.
10 From https://thinkprogress.org/top-10-global-weather-events-of-2011-a6964439680f#.
ol55b72qx. Retrieved 1/3/17.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Carbon risk comes with a human cost, as well. Climate change is predicted to
reduce global incomes 23% by 2100,11 with areas that are facing warmer than
average temperatures—such as the production hubs of Southeast Asia—to
experience the greatest losses in economic activity. Warming temperatures also
lead to increases in infectious disease, human displacement, and warfare.
PPAs directly address carbon risk by lowering the C&I buyer’s footprint.
Not only does this action help to mitigate the impacts of climate change
on a large scale, but buyers also gain access to the various co-benefits of
PPAs, including pollution reduction, water savings, increased energy security,
and economic stimulation via job creation.12 Consider, for instance, AWEA’s
estimation that U.S. wind power led to a US$7.3B savings in public health
expenditures in 2015 alone.13
Renewables Are No Longer Simply About Doing
the Right Thing
For nearly a decade, C&I buyers were encouraged to purchase renewable energy
at a premium because it was the right thing to do. It was—and remains—a
competitive advantage in an increasingly conscious world.
Today’s institutional buyer does not have to sacrifice economics for environmental
responsibility. Favorable structures like PPAs allow C&I buyers the ability to meet
both goals simultaneously, while taking advantage of numerous co-benefits in the
process.
To learn more about how renewable energy can economically favor your
organization, we invite you to visit www.renewablechoice.com.
11 From http://time.com/4082328/climate-change-economic-impact/. Retrieved 1/3/17.
12 Learn more about the co-benefits of renewable energy in our blog.
13 From http://www.awea.org/MediaCenter/pressrelease.aspx?ItemNumber=8634.
Retrieved 1/5/17.
For 15 years, the team of experts at Renewable Choice Energy has been
connecting consumers to clean energy and carbon-reducing products and
services. Recognized as a market-leading supplier by the Environmental
Protection Agency and Sustainable Purchasing Leadership Council,
Renewable Choice is the exclusive 2016 North American partner to CDP
on offsite renewables.
Renewable Choice works to help its commercial, industrial, and institutional
buyers set and achieve strategic emissions reduction targets through the
purchase of EACs, VERs, and PPAs. Together, Renewable Choice and its clients
have—to date—added more than 1,000 MW of new wind and solar to the U.S.
grid. The company works throughout North America, the E.U., and Asia. To learn
more visit www.renewablechoice.com.
47 7 5 W A L N U T S T R E E T, S T E . 2 3 0 • B O U L D E R , C O 8 0 3 0 1
8 7 7. 8 1 0 . 8 6 7 0 • W W W. R E N E W A B L E C H O I C E . C O M
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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Contributors
John Powers VP OF STRATEGIC RENEWABLES
303.551.7582 • [email protected]
John Powers is the VP of Strategic Renewables for Renewable Choice Energy.
Mr. Powers has served Renewable Choice in a variety of leadership roles including
top salesperson, manager of the consumer business, and head of the Environmental
Commodities division. Mr. Powers currently manages the PPA division and oversees
all corporate and institutional PPA processes. Mr. Powers is recognized as a trusted
leader who brings considerable technical and market expertise to every partnership.
Considered a foremost authority on renewable energy buying in the C&I sector, he is a
frequent presenter at industry events. Mr. Powers is a LEED Accredited Professional with
a BSE in Mechanical Engineering from Duke University.
Amy Haddon VP OF COMMUNICATIONS & ENGAGEMENT
303.551.7584 • [email protected]
Amy Haddon is responsible for driving communications, marketing, and sustainability
strategy for Renewable Choice Energy. Amy also works closely with Renewable Choice
clients to design and execute communications strategies and content that highlight their
commitment to clean energy and sustainability. Concurrent to her role at Renewable
Choice, Amy served for five years as the marketing manager and a sustainability
consultant for Renewable Choice’s former subsidiary, Mosaic Sustainability, where she
led consulting engagements with several top international brands. She is a frequent
contributor to the conversations on renewable energy, sustainability, and responsible
business. Amy received her M.Ed. from Colorado State University.
The Economic Case for Renewable Energy: Why Companies are Choosing Power Purchase Agreements | JAN. 2017 | renewablechoice.com
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