October 15 (Renewables Now) - Small consumers banding together to sign power purchase agreements (PPAs) is a new and important trend on the renewable energy market, opening up new opportunities for both electricity buyers and sellers.
At The Business Booster event in Paris, Renewables Now discussed this topic with Bill Weihl, a renewable energy procurement expert who has helped grow the RE100 initiative and the Renewable Energy Buyers Alliance (REBA). He is the former Director of Sustainability at Facebook, and former Green Energy Czar at Google, and currently a member of the Board of Directors of US environmental nonprofit The Sierra Club Foundation.
Bill gave us an optimistic overview of where the US energy market is going and how far renewables have penetrated it.
Q: Is it getting easier for smaller companies in the US to get access to renewable energy?
A: There has been significant progress in that direction in the last couple of years. REBA has been a big part of making that happen as it now has over 250 companies, many of them big, but a lot of them smaller, working together to help each other buy clean energy, understand what is involved, and get advice on contracts. When it comes to smaller consumers we now see multiple companies banding together as buyers to buy not just 1 MW but maybe 100 MW as a group.
There are two issues that smaller buyers face: 1) they do not have the scale to be essentially the only offtaker for a large project so they cannot sign a contract for the whole thing, and 2) they are nervous about a timeframe as long as 20 years.
What has happened in the last few years is we have seen the timeframe for contracts shorten. Now if a project can get a committed offtake for 10 or 12 years they can get financing. Of course, if you commit for longer you can get a slightly better price, but today 10-12 years would be enough for developers to be confident they are going to make their money and get a good return. However, 12 years is still a long time for a small company.
So we have seen some innovative structures where the bigger buyers sign a contract for 12 or 15 years for the bulk of the power coming from a wind farm and then smaller buyers come in and take smaller chunks like for the first three to five years.
Typically, when a wind farm is built it might be built in stages but often you build the whole thing as quickly as you can and with some of these big buyers like the tech companies their load doesn’t come online all at once. They get one building, then the next, and they cannot take all the power from day one. But if they can get a smaller company to buy power for the first three or five years, and then when their full load comes online they can take more.
There are some examples of that. I do not know if that has been published but there have been a few contracts like that where they are looking to marry the different market needs of different kinds of buyers and put them together to match the market needs of the sellers.
Q: Are banks comfortable with the shorter PPA terms?
A: For now, banks are nervous about getting too short. The cost of wind and solar keeps coming down and that is great for buyers but what it means for the banks is that there is a lot of market risk five, 10 to 15 years. Imagine that you have a project with a PPA contract as short as five years, that means after five years you have to negotiate a new contract and find new buyers...or maybe the same buyers but still sign a new contract. There will be new projects coming online five years from now that will be cheaper.
As the existing power plant will not be able to charge as much as in the older contract you have to model out the different scenarios and figure out what the price for the first five years needs to be so that you still make a reasonable return with a lower price in the next set of contracts.
The first big contract we did when I was at Google was signed in 2010. It was a big wind contract. I think that it was a 20-year PPA and at that point banks were unwilling to do anything less than that. The market seemed too volatile and immediately after the Great Recession everybody was nervous about the future.
I think that now it has become much clearer what the path is for price points for wind and solar even 10-15 years out into the future. There is of course uncertainty but you can model the uncertainty and look at a range of scenarios and decide if you have at least 98% certainty you will make an annual rate of return of at least 11% if we charge this for the first five years.
And then solar is easier than wind in terms of size. You can do a 1-MW solar project and the costs are not quite as low as for 50 MW but pretty close. Wind, you know each turbine now is 2-3-5 MW so you cannot do a 1-MW wind project that makes any sense.
Q: What do you think markets with less experience in corporate PPAs can learn from what you have achieved in the US?
A: I think there are two big things that got the market really going in the US: 1) there was a lot of effort by NGOs and companies like Google to raise awareness, and 2) we banded together in trade associations to help each other and especially to help the companies that were new to this and to work with the regulators who were new to this.
Some time ago regulators had no experience with non-utility companies signing PPAs. The requirements there are different. Then once you get it started and you have examples it becomes easier. It is not like every PPA is a new thing. You get examples which you can use as a template.
I would say if there is interest by companies in regions where PPAs are not yet common, they should band together and learn from each other. They should reach out to the REBA and RE100 and some of the other NGOs that have been working with companies and get help. There is no need to reinvent this completely.
Q: You mentioned utility PPAs there. We see that in some parts of the US, like Virginia, utilities are preparing the grid for a future with much more renewables. Who is driving the shift?
A: There continue to be substantial purchases of renewable power by US utilities and I can say that while five years ago these were driven by the RPS requirements, today they are driven in part by that and in part by price. Utilities that have little or no experience with renewables tend to be stuck in the mindset from five or 10 years ago “ooh, it comes at a premium”. If utilities have experience with renewables or companies and others intervene in regulatory procedures and push them hard so that they really do the numbers honestly, they almost always realise “this is the cheapest option”.
We are seeing a lot of utilities certainly abandoning plans for coal plants and there are some even abandoning plans for new natural gas-fired power plants because actually it looks cheaper and less risky to install solar or wind or a combination.
Part of that is the uncertainty where gas prices will be in five or 10 years. You build a gas plant is a 30 to 40-year commitment. Maybe with the current price you can say for the next five years it will be cheaper than solar and wind but after that we do not know. And utilities, and customers, value certainty.
I just saw an article, and I think this is unusual, that there is a utility that is decommissioning an existing gas facility that has only been there for like 10 years. I think that is a really good sign. We have hit a tipping point on wind and solar.
We are also beginning to see very early stages of a shift away from natural gas and other fossil fuels in US buildings. A large percentage of commercial and residential buildings in the US use natural gas for heating, for hot water, for cooking. You might believe we could put carbon capture on big power plants, but we are not going to put carbon capture on my stove.
Maybe one day direct carbon capture will work well enough or cheaply enough that we could rely on it, but we cannot count on that. Certainly we cannot count on that happening soon enough.
There are already some towns that have begun to outlaw new natural gas hookups in new commercial and residential buildings. I think Berkeley California was one of the first and it is not the only one. The interesting there was that the local utility Pacific Gas & Electric supported this ban.
The gas-only utilities are fighting this bans because for them it is just a reduction in business. For PG&E it means their gas business will not grow but their electricity business will. PG&E’s rational was they see the shift coming -- we need to electrify. They do not want to invest in new infrastructure to bring natural gas in new buildings and then be left with a stranded asset. They are looking into the future and saying “this is where things are going, let’s avoid wasting that money now and then having to throw it away.”