At AUSPACK 2019, Australasia’s largest processing and packaging machinery event, the Australian Energy Storage Alliance (AES) ran a panel session “Meeting The Energy Challenge: The Long-Term Financial Benefits of Commercial Power Purchase Agreements”.
The well-attended panel session, facilitated by Sam Staples, Market Development Manager, showcased the cross-industry work the Alliance is doing. Panellists included; Aylin Cunsolo, Special Counsel at global law firm Baker McKenzie; Jackie McKeon, Project Director at the recently launched, independent, non-profit Business Renewables Centre – Australia; and Brett Wiskar, Chief Future Officer at Wiley.
The panel session looked at the basics of commercial power purchase agreements (PPAs), the long-term financial benefits, how to make the appropriate selection, and the risks to consider when looking at PPAs.
Energy storage is inherently tied to renewable energy in terms of the technology’s future development in the way it can smooth power output, store excess generation, and provide fast-frequency response and voltage regulations to support utility networks. The cost of this technology is decreasing quickly.
Sam: “PPAs are an excellent way to source clean energy for companies, and lock in a favourable price for future use. They are suited for those companies that don’t have suitable space or infrastructure to house renewable energy installations, who don’t want to pay the upfront cost of renewable-energy installations, and for those who can’t house sufficient generation to significantly offset their consumption.
Jackie: “A PPA is a contract for longer-term renewable energy procurement and storage between an energy buyer and either a developer or retailer. It’s for an agreed price and an agreed quantity of energy over an agreed period of time. It effectively allows the buyer to hedge against market fluctuations of price volatility and current electricity procurement. The other major benefit is to help reach some sustainability goals, such as decarbonising a business or meeting renewable-energy targets, either contributing to global targets required by a parent company or from within.”
Different PPA structures
Aylin: “There are a number of different corporate PPA structures. A couple of years ago we published our green hedging guide together with WWF, setting out a few key structures. We’re now working together with the Business Renewables Centres to try and get some consistency in terminology.”
- Virtual or financial PPA: Buyers pay a fixed price for an agreed quantity of electricity, generally by the project. This acts as a hedge against increased electricity prices. If the spot price goes up in the electricity market, then the buyer receives a greater income under their PPA, which will offset against the increased cost under the retail contract. However, that hedge isn’t perfect. The other aspect is that the buyer will most likely be consuming energy when the facility isn’t producing energy. So they won’t be covered when the sun’s not shining for a solar farm, or the wind’s not blowing for the wind farm.
- Firming products: Are alternatives to the virtual or financial structure; g.: under a virtual PPA with a solar farm, the buyer can get a complimentary financial hedge, covering night time. Putting the two hedges together gives a perfect hedge on the load. Retail contracts that better fit in with the PPA can be negotiated, such as flexibility in switching on and off the spot-price element.
- Corporates who have adopted these virtual structures include: Telstra (has entered into various different corporate PPAs) and Mars (in relation to their Total Eren’s Kiamal solar farm).
- Retail or supply-led PPA, or “sleeved structure”: This is essentially when agreeing a PPA with a retailer. Very similar to a normal retail contract, except for a longer term, and negotiated alongside a PPA, which is entered into between the retailer and the project (and back-to-back with the retail contract entered into). This gives a fixed price on the load, but because it’s been negotiated alongside a PPA, gives greater transparency into how the fixed price is made up. It’s a more competitive deal if entered into as part of a competitive tender process. Having underpinned the particular project subject to the PPA gives “green claims” and naming rights, , which can be beneficial from a marketing perspective.
- Behind-the-metre PPA: Relating to onsite generation and storage, this is a great option if available, and if space exists on the roof, g.: for solar. This does not usually cover for your whole load, however, is an option to consider as part of a portfolio, e.g.: a behind-the-meter PPA arrangement can complement a virtual PPA.
Solar’s role in the electricity market
Brett: “I think it’s horses for courses. It’s clear there’s an array of different solutions and we’re going to see heavy users in a commercial industrial space have a mix – some solar, some wind, and storage arranged different ways.”
CWP Renewables supplies all Sydney Airport’s power through a PPA. They’re generation assets of wind and solar, but they’re nowhere near Sydney Airport, so there’s interface with the grid. Some businesses will generate a portion of their energy themselves, but very few will generate all their energy themselves and if they do, it won’t be onsite.
“Solar thermal makes a lot of sense for certain applications, depending on your load profile and your geographic location. PV makes a lot of sense, and continues to get cheaper and cheaper.”
Battery prices are remaining incredibly high right now because of raw-material demand for the “Teslas of the world”. Future increased mining capacity will allow raw material to be available more cheaply, and battery prices will drop just as with solar PV cells in the past 10 years. e.g.: a tier-one Bloomberg-rated provider such as LG: their cells have become 20% cheaper each year for the past three to four years. That will continue, making PV highly accessible to most business.“Most businesses have enough roof space to maybe handle 10-15% of their energy, giving a little bit of price relief against retail impact. However, real relief will come from creating a hybrid solution – a mix of technologies, a mix of legal structures, what the business can generate, what their neighbours can sell when they’re generating excess, what can be bought off the grid or a company.
Aylin: “Location of the project versus location of a business’s operations is very important for dealing with some of the risks in a corporate PPA.”
“The market will probably ultimately determine which technology becomes most prevalent. Solar has come down enormously in price. Wind has had some challenges with planning approvals and community issues, but there are still many projects for both in most states.”
Filling capacity with off-site generation
If a business can only cover 10% of its capacity, how many are signing up to PPAs who have their own solar and are looking for off-site generation to fill the rest of their capacity?
Sam: “The best financial outcome in the long term is for a business to own its own solar.”
Jackie: There are 30-35 corporate PPAs to date – large-scale, off-site procurement – with varying structures, such as whether other solutions (like demand management), have been used. e.g.: a PPA might have been coupled with load shifting. Energy efficiency is another really important point. Business Renewables Centre seeks to provide information on all these points to help corporates determine the best mix of the options for them, and then focus on what we see as probably the most challenging one of the state, which is the corporate PPA.
Brett: In an ideal world, everyone would have a great big solar array and a massive amount of batteries, but that’s just not practical for most. So I see a lot of people having some owned capacity. I can also see some people moving into PPAs with a BOOT [build-own-operate-transfer] kind of model. There are no rules, but businesses can end up with controlling some of their destiny, not necessarily deploying their own capital upfront to do it. Taking control of their own destiny is almost an ideological question as opposed to an economic or an engineering question. Others however, will PPA themselves forever and ever, and just use it as a hedge against the market.
Aylin: Even in a structure where someone takes control of their own energy, there’s an important role for government because policymakers must design the regulatory framework in a way that gives the right price signals to use devices in the right way. It’s not a strict divide between private and government.
Sam: “A lot of states are selling off the infrastructure themselves, so there is a natural progression to the private sector of the energy sector regardless of who’s making the decision on where we’re getting the energy from.”
Jackie: There’s a lot of leadership in the private sector, particularly because of international initiatives, like the RE100, and science-based targets initiative, where organisations are committing to certain targets.
Other companies that have done corporate PPAs in Australia are Carlton & United Breweries, Orora in the packaging industry, and some of the government organisations, including the Victorian Government.
“It’s an across-the-board leadership opportunity at this stage. We’ve had the first movers, and now we’ve got the fast followers coming along and looking at PPAs.”
Outlook on resources related to storage & renewable energy solution & neuralisation
Brett: “From a storage perspective, the market is comparatively young. I don’t think the market’s found its even keel for the resources going into that at the moment. PV generation is mature. The technology incrementally, in terms of the science behind the cells converting the energy that hits it, is plateaued but still eking its way up, whereas battery technology is moving forward dramatically. We’re looking at flow batteries, we’re looking at a range of different chemical-storage – lithium, iron batteries and carbon are currently constrained by the efficiency of anodes and cathodes in the battery. Material science to create polymers to increase the yield out of those by 1,000% is being looked at. There is so much change coming in that space.
“Solar will get incrementally better every year. Batteries will change five times in the next 10 years, and we’ll end up with a completely different piece of technology. I don’t think that the resources going into storage are known yet. But, because it’s dark about half the time, we’re going to have to store some – and that’s probably the only knowable element of that.”
Sam: “I actually don’t think we know what the final storage solution will be. Hydrogen as a storage medium has made leaps and bounds. There are different technologies – solid-state batteries and kinetic energy being trialled primarily in Europe, and some North American installations.”
Brett: “The technology is so new we don’t actually know how to use it to get the most out of it yet. So as that science matures, we might find we’ve already been using the technology for a while, but we weren’t using it correctly, and that may suddenly completely change the capital game.
“It’s not just the technology, it’s the use-case for it, and then whose capital, whose warranty, how creditworthy are all the people in the mix. The PPA market in Australia is relatively immature market.”
How energy storage affects a PPA
The Bulgana Green Power Hub in Stawell (Victoria’s Wimmera) is a major new wind farm under construction with battery storage. The 15-year agreement between the Victorian Government and Neoen Australia adopts a behind-the-meter structure entered into with Nectar Farms.
Jackie: They entered into a PPA with the developer; onsite storage will be used for load shifting; they agreed to contract a small percentage of the power from the wind facility, and the Victorian Government has agreed to purchase the balance under a support agreement. The storage Tesla batteries are incorporated into that.
“I see the role of storage in the future in combining it with a virtual PPA off-site structure. e.g.: storage could be co-located with the solar or wind facility as a hybrid, and then offer a firmer product. Storage has the ability, when combined with the solar/wind farm, to allow the project to offer a firmer product that matches electricity consumption. Once storage prices drop, there’s a key future role for storage.
“There are a lot of different firming solutions emerging to be able to cover that, and make that PPA more attractive. Storage is one; bolting on other hedging products is another way. So it will be very interesting to see how PPAs change over time as storage emerges and develops.”
Aylin: “Quite important regulatory changes are being considered to help facilitate the role of storage and providing a firming capacity, which regulators are currently considering. Plus we’re moving to a five-minute settlement interval, which is a really key reform that’s been approved but won’t come into effect until 2021, and essentially that will allow storage to play in the spot market by responding quickly; that should change the dynamic in the market too. So there are a few key changes in the regulatory context that are likely to support storage coming in online.”
Potential impact on PPA if energy user significantly reduces their load
This is one of the biggest concerns corporates have in entering into a long-term PPA.
Aylin: “If there is a risk of changes in your consumption over the long-term, and a significant reduction of your load, then that effectively means you’ll be over-hedged, and is something to take into account when structuring PPA arrangements. There are some interesting products that might become available in the future, such as a blockchain of an energy-trading platform for corporate PPAs, giving buyers the flexibility to trade their interest in a PPA.”
Brett: On an engineering level, everybody who is considering generating or reassessing their power source should determine if and where they can reduce power use before signing up for long-term financial obligations. Because entering into a PPA is a financial obligation for an extended period of time, deploying capital to generate your own energy is also a financial commitment for an extended period of time, up until you get ROI.
Can the business install LED lighting? A more contemporary refrigeration solution? Change work practices? Build IoT-enabled facilities that have a better management of power across the facility?
“If you can cut usage by 20%, then go to market with 100% certainty you need X amount, rather than determine later you need less. Then you have excess-generation capacity you’re trying to monetise on the grid in an isolated location where no-one may want your spill. So that engineering project must come first.”
Jackie: “Hedging for a portion of the load by going for a smaller percentage, or a base amount first, may be a good opportunity to test what a PPA is like for your organisation. Conversely, the bigger the load, potentially the more competitive kind of arrangement that can be made. It is a balancing act, and is about each business understanding what the energy market is for them.”
What happens to a PPA when selling?
Aylin: If shares in a company are sold, the PPA automatically runs with the company. PPA transfer needs to be negotiated in property asset sales.
“If you’re reducing down the business and the PPA is no longer suitable, then you would try and look for another buyer to assign it to.”
Where can small businesses find information on futures energy pricing?
This is a heavily regulated market, with many players in the space who can give price indications. Australian Energy Market Operator is a good place to start.
Brett: Forecasting is the challenge. There is no monopoly state-owned power company decreeing what power prices will be. Prices change depending on demand, generation, which assets are available at a given point in time, and the spot market’s impact.
The cost of PV or solar thermal or battery storage can also be researched so businesses can determine when it’s likely to make sense for them.
A business can ask its retailer or grid provider for 30-minute interval data, going back two years, to determine exact demand; data loggers installed in a facility can also show demand. All this will give a solid understanding about a business’s energy consumption, including how much different areas use.
Taking that with some published information about forecast retail costs, and forecast costs around generation and storage, or even some data about what PPAs are being signed, will give some visibility about where the market’s going.
Aylin: In terms of PPA prices, it’s important to note that currently it is a buyer’s market from a corporate’s point of view. We’re coming to the end of the RET (Renewable Energy Target), and most retailers have met their liability, so they’re less interested than a few years ago in PPAs with renewable projects. That means there are some really competitive PPA prices out there from a corporate’s point of view.
“That probably won’t stay, because when we get a new federal government at least we’ll get some policy certainty. If it is a Labor government, then there will probably be new policies directed at increasing renewable energy, meaning retailers are likely to have additional liabilities, and will be active in the PPA market again, making it less competitive from the corporate’s point of view.
“At the moment, corporates entering into PPAs are getting great prices, and the idea is that they’re getting a good return under the PPA, which then offsets against increased electricity prices under the retail contract.”
Sam: Forecasting can be inaccurate, so it’s a personal matter for businesses to make their own decisions. There is risk associated with that, but from a business perspective, it’s advantageous to have a fixed price for a set amount of electricity or generation to be consumed, regardless of what the market actually does.
Jackie: “In a nutshell, no-one has a crystal ball, however, we are seeing transition in the energy market. We’re seeing closing of coal. So this is going to take time. The other component is market volatility. So if price certainly is important to a business’s CFO, then it’s something worth considering.”
Brett: Some businesses will value certainty above others. For some, energy costs are 2% of their operating cost, for others it’s 25%, so certainty makes a big difference if it’s 25% over 2%.
It’s possible we could see a complete about-face in all predictions from analysts – they could be completely wrong – but it’s more likely that the vague direction that they’re pointing is probably right-ish. An analogy is you buy a computer today, or wait 18 months for it to be faster and cheaper, but you’ve gone without for 18 months.
“If what a business has in the energy space is painful, and getting more painful, then at some point it has to be painful enough for the business to do something. But because of assets such as we’ve discussed today, and the knowledge and information being out there, it’s a question about whether a business has the impetus to act or alternatively sit back and wait for it to happen to them. The PPA market may have matured more by then, with better or easier deals or processes, but, essentially, unless a business is prepared to just pay the bill as it rolls in every month, then it has to do something. And it’s not 2009, you can do something.”
- Aylin Cunsolo, Special Counsel at global law firm Baker McKenzie. Aylin specialises in renewable energy project development, energy regulatory matters and energy contracting, including retailer and corporate power purchase agreements, connection, energy supply and metering agreements. She also specialises in energy resources and infrastructure transactions, including M&A and joint ventures, and has experience in advising the New South Wales Government on electricity and market reform.
- Jackie McKeon, Project Director at the recently launched, independent, non-profit Business Renewables Centre – Australia. The centre helps companies to procure large-scale, off-site renewable energy via corporate PPAs. For the past 18 months, Jackie has managed the WWF Renewable Energy Buyers Forum as renewable technologies manager for low-carbon futures at WWF Australia. As part of this, Jackie managed commercial-scale solar projects in the property sector. The centre has a whole-of-industry approach to helping standardise and simplify corporate PPA processes, which at this stage are still complex, and somewhat of a mystery to much of the industry.
- Brett Wiskar, Chief Future Officer at Wiley. Brett has worked in digital, technology and innovation in Australia and the UK. His entrepreneurial approach to innovation has driven business change and digital-platform adoption in large corporates and government agencies across Australia. He has worked with some of Australia’s largest brands on their digital road map and innovation programs. At Wiley, Brett works with clients and project teams in diverse areas, including digital enablement, innovation, big and small data, strategy, business models and the future of food industries and markets.