By Charles Benisch
To hedge against the risk of increases in short- and long-term energy prices on the market, businesses are increasingly integrating renewable energy and distributed energy resources (DER) into their broader energy procurement and management strategy.
However, the current state of the renewable energy market can make this challenging. Determining the appropriate resource mix (conventional power, RECs, wind, solar, battery storage, biofuel) and the most effective financing strategies (PPA, VPPA, PACE financing, cash outlay) can be complex and time-consuming.
Too often, organizations lacking an enterprise-wide energy procurement and energy management strategy end up relying on a single renewable energy or DER technology and can miss out on lower-cost or lower-risk opportunities.
While this market can be complex, large organizations are integrating renewables and DERs into their strategy without putting a strain on resources or dragging down productivity in the process. For example, earlier this year the U.S. General Services Administration completed a 140 MW wind power purchase agreement—the largest such purchase ever completed in a federal contract—after developing a renewable energy procurement strategy.
Despite the complexities, when developing a renewable energy strategy it’s helpful to ask similar questions as you would if you are managing procurement more broadly:
1. What are the goals of your renewable energy strategy?
When developing a renewable energy strategy, there are many important questions to consider. Is renewable energy an add-on, or the focus, of your procurement strategy? Is it important that you use generation from a specific resource? How about geography? For example, when Microsoft purchased wind power for its data center in Cheyenne, Wyo., procuring from local resources was an important consideration.
2. What is the value of budget certainty?
Different products carry different risks. For example, Virtual PPAs can become a liability when the market price of electricity falls below the fixed “strike price”—but when the price is above the strike level in the VPPA, they generate income. Changes in the value of the PPA due to market prices can have further impacts on financial statements under certain conditions. Use of risk management tools and hedge accounting can improve budget certainty and help circumvent mark-to-market impacts on your balance sheet, making a codified risk management strategy an important component of your renewable energy strategy.
3. What’s the premium you’d be willing to pay for region or resource-specific projects?
Before determining your renewable energy procurement strategy, you need to determine what premium you are willing to pay, if any. On top of that, region and/or resource-specific supply may come at an additional premium. Would you pay 10 percent extra for local wind? Having answers to these questions will influence the types of products you engage with.
4. Flexibility in contracting requirements (e.g. contract length)?
Typically contract length is the big lever but there are other factors to consider when evaluating a contract. Are there any capital requirements? What about counter-party risk? The more flexibility you have, and the more risk you are willing to assume, will be important factors that determine the details of your contract.
5. Does your load closely match wind or solar generation profiles?
For some business, the uncertain base load profile of wind and solar generation is not a big issue, but for many, certainty is key. If this is the case, then perhaps fuel cells or some mix of generation capacity is a better fit.
6. How much of your load is located in competitive markets?
Understanding the specific market dynamics you’re engaging with in relation to your business load profile is key to making the right choices.
7. Which internal stakeholders need to be engaged?
This is an extremely important question that many businesses fail to fully address when building a renewable energy strategy. Typically, when it comes to sustainability, there are important stakeholders across the organization. It’s not just procurement, of course. How about finance, and/or facility management? How is the C-level integrated into your strategy development plans?
In summary, there are a few basic things to keep in mind as you develop an integrated approach to renewable energy:
Charles Benisch is marketing manager for EnerNOC energy procurement and advisory services.