Procure with Purpose: The Deal Structure Matters
Previously Emily Haworth explored ways corporate buyers of renewable energy can increase the positive impact of the projects they support. We now take a look at the importance of the structure of a purchase of renewable energy and how different transaction structures can be evaluated from an impact perspective. Specifically, we find that there are three different types of impacts that can be created when a purchaser commits to buying renewable energy: 1) Direct financial impact on a specific project, 2) Contribution to aggregate market impact 3) Creating new opportunities for renewable energy purchases by driving market innovation.
Types of Impact & Evaluation
1 ) Direct Project Impact
Direct project impact occurs when a purchaser contracts directly with the project developer in advance of project construction. Examples of this type of commitment include onsite installation of solar PV, as well as long-term Power Purchase Agreements for renewable energy from off-site projects. A prerequisite for a direct project impact is that the financial commitment is significant enough to move the project to the construction stage. This is also what allows for corporates engaging in these types of investments having a strong ‘additionality’ claim for their financial commitment.
Examples of this type of purchase include TSMC’s agreement with Orsted in Taiwan, Google’s agreements for renewable energy in the United States, South America and Europe, and Weir Minerals agreement for renewable energy in Australia. New and emerging tools, such as Clearloop’s Reclaim program seek to enable the same type of impact but for smaller purchase volumes more accessible to small and medium enterprises.
2) Market Impact
Buying an environmental commodity, such as a REC, has a market impact by increasing demand and, at least in a supply constrained market, the value of a REC. The exact significance of this impact has generated much debate (and controversy) as every purchase is part of a whole that in aggregate is impacting the market. Parsing out the exact impact of one specific purchase is made more difficult due to the interactions between REC pricing and underlying power market pricing. Additionally, in certain markets the voluntary REC market co-exists with a compliance REC market providing further complexity in deciphering specific purchase impacts. Recent trends in several REC markets that had previously experienced record-low REC prices (US and Europe for example) are showing that the increased uptake of RECs has driven voluntary REC prices to, in some cases, exceed compliance price.According to NREL, From December 2020 to August 2021, REC prices (nationally sourced, Green-e Eligible) increased from $1.50/MWh to $6.60/MWh.
Source: NREL Status and Trends in the Voluntary Market (2020 data)
3) Innovation Impact
Companies agreeing to new types of solutions and products can help drive the adoption of these, potentially multiplying their own impact. In fact, the voluntary renewable energy market has historically moved forward when companies demonstrate innovative commitments (and risk appetite) to drive the development of new renewable energy markets and products.
Examples of this include the first ground-breaking deal between Apple and Sunseap to help create the REC market in Singapore, Google’s first Corporate renewable energy PPA, and Microsoft’s purchase of Peace Renewable Energy Credits (P-RECs) in the Democratic Republic of Congo. Utility green tariff programs that allow purchasers to fund new projects in collaboration with utilities are another example. More recently corporations have pushed for the development of new hourly REC markets to create the potential for even more impactful products in the future.
High-Impact Transactions
So which transaction type is best? Most companies are constrained by either internal (size, physical presence, etc.) or external (regulatory and power market structure) factors that limit which purchase options they can engage in. While almost any company can buy RECs it is important to evaluate to what extent the given market will be impacted by this purchase. However, physical installations of renewable energy or a long-term PPA are more difficult transactions to engage in for most companies.
In order for companies of all types to continue their drive towards 100% renewable energy, in a manner that helps drive the entire grid to get to 100%, the continued deployment of new products and solutions is required to make sure company or market constraints do not get in the way of impact intended by voluntarily transacting for renewable energy. At Apala Group we look forward to contributing to this innovation and advising companies on how to evaluate the impact of renewable energy projects and transactions.
For more information on how to Procure with Purpose, reach us at info@apalagroup.com.
Sources:
https://www.power-technology.com/news/tsmc-signs-power-purchase-agreement-with-orsted-in-taiwan/
https://www.power-technology.com/news/deal-news/google-renewable-energy-purchase/
https://www.nrel.gov/docs/fy22osti/81141.pdf
https://renewablesnow.com/news/google-energy-sings-first-wind-farm-ppa-84105/
https://www.energypeacepartners.com/blog/announcing-the-first-sale-of-p-recs