Commercial and industrial activities contribute a substantial amount of the United States’ emissions footprint. Fortunately, recent years have seen significant growth in the number of companies committing to net zero emissions targets.
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As of 2021, more than one-third of S&P Global 1200 companies had set (or committed to setting) science-based emissions targets: up from a mere 13 companies in 2016. And as of March 2021, Forbes estimated that more than one-fifth of the world’s 2,000 largest companies had made net zero pledges, a number that has since continued to grow.
While the nature of these pledges varies, it has become abundantly clear that publicly announced sustainability goals are the new normal for today’s businesses. One of the most proven and effective approaches for C&I companies to make meaningful progress towards their emissions targets has been to procure renewable energy directly from solar and wind projects through power purchase agreements (PPA).
Companies still lacking emissions commitments won’t be able to sit on the sidelines for much longer. The SEC has proposed rules requiring public companies to report their emissions within a specified framework and to disclose aspects of their operations that pose investment risks through climate-related exposure. Currently, companies that choose to decarbonize their energy are doing so voluntarily. But regulations like the one the SEC is proposing could shift the decarbonization movement from a voluntary action to an obligatory one. Companies that don’t start planning now on ways to account for and reduce their emissions risk falling behind, and they risk entering a PPA market that is even more competitive than it is right now.
C&I entities, including those in particularly energy intensive sectors such as steel, chemicals and cement, can look to forward-thinking companies like GE, 3M and Honeywell as examples. They have jumped ahead of the pack with public decarbonization and renewables targets. While the task of decarbonizing the variety of energy usages across an industrial organization may seem daunting at first, organizations are rising to the challenge, and more solutions are arising to help.
To address Scope 2 emissions, which are associated with the production of electricity consumed, C&I organizations are increasingly using PPAs as a solution that provides robust sustainability impacts. As opposed to simply buying renewable energy certificates (RECs) to offset their electricity use, a PPA can provide buyers with RECs while also contributing to the financing of new-build renewable energy projects: a concept known as “additionality.” What’s more, the “contract-for-differences” settlement structure used in most PPAs can act — if structured properly and correlated to a buyer’s retail energy purchases — as a financial hedge on electricity markets, providing financial certainty for buyers over the long-term.
State of play for PPAs
Demand for renewable PPAs will continue to grow. Data from the Clean Energy Buyers Association shows that publicly announced deals have grown every year for the past five years. But as renewable developers battle through myriad supply chain, interconnection, permitting and regulatory headwinds, it’s becoming more difficult for renewable supply to keep pace with record demand.
Data from LevelTen Energy’s Q1 2022 North America PPA Price Index revealed that P25 solar prices (the 25th percentile of all solar PPA offer prices on the LevelTen Energy Marketplace) rose 6 percent during Q1. On a year-over-year basis, solar P25 PPA prices in North America have increased by nearly 16 percent.
At first glance, these price trends may make potential PPA buyers feel uneasy. But it’s important to evaluate a PPA offer within a broader market context. While PPA prices have indeed been rising, so too have wholesale electricity prices. So, while the cost of entering a PPA has been, on average, going up, so too has the value of entering into a PPA. Wholesale electricity prices are projected to remain elevated for the next three or four years, meaning that it’s likely to be cheaper to go green by securing a PPA now than in a year or two. For companies with renewable energy targets, PPAs remain one of the most economically sound and highest impact options of acquiring RECs.
The smart choice for buyers
In this highly competitive market, buyers should be ready to act quickly on PPAs that meet their needs and should be flexible when arriving at contractual terms with developers. With a stressed development landscape, made even worse for solar developers with the Commerce Department’s current investigation, buyers are increasingly being asked to take a partnership approach to shoulder some of the development risks associated with this challenging renewable development landscape.
To learn more about the PPA landscape and download the free Executive Summary of LevelTen’s PPA Price Index, visit leveltenenergy.com/ppa.
Rob Collier is the VP of energy marketplace at LevelTen Energy, where he oversees the development of software and services solutions that streamline PPA transactions for renewable energy buyers, sustainability advisors and utility-scale developers.
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