Last month, ACORE hosted an executive meeting in San Francisco with senior-level developers, financiers, utilities and corporate buyers to discuss the results of the midterm elections and the new market structures that are driving growth in corporate procurement of renewable energy.
Our first panel featured policy experts from E.ON and Lincoln Clean Energy in a discussion on the implications of the midterm elections on renewable energy growth and investment, which was followed by an afternoon session with representatives from Walmart, IBM, First Solar, and Apex Clean Energy that focused on how corporate offtakers are engaging their suppliers to procure renewable energy throughout their value chains. Finally, we capped the day off with a panel featuring executives from Wilson Sonsini Goodrich & Rosati, NEXTracker, Whole Foods and Schneider Electric Energy & Sustainability Services. These speakers discussed the range of issues related to flexible corporate power purchase agreement (PPA) contracts with smaller offtake requirements and shorter tenors.
Here are a few of takeaways from the meeting:
Major Potential for Growth in the Key States
The 2018 U.S. midterm elections secured a major political realignment, with Democrats scoring significant gains in state and federal elections across the country. Democrats picked up 40 seats in the House, with key leadership changes in the House Energy and Commerce, Transportation and Infrastructure, and Ways and Means committees. Furthermore, there is good reason to anticipate rapid state-level progress as pro-renewable Governors and legislators are sworn into key states. Promising avenues for ambitious state renewable efforts include Colorado, Illinois, Nevada, Maine, Michigan, New Mexico and Kansas. A new analysis by Wood Mackenzie Power & Renewables examines precisely how much these Governors-elect could drive demand for wind and solar power if they act on their pledges to increase renewable energy utilization in their states. In Illinois, Colorado, Nevada, New Mexico and Minnesota voters elected candidates who committed to achieving at least 50 percent renewables by 2030. If these five states were each to enact renewable directives at this scale, the analysis projected it would lead to over 34 gigawatts (GW) of new wind and solar power by 2030.
The Renewable Energy Value Chain Takes Hold
Large corporations, which have emerged as leaders in environmental stewardship and renewable energy procurement, are beginning to foster greater renewable energy use in their supply chains. With over 150 companies committed to RE100, large multinational companies are now taking steps forward by creating market incentives to help lower carbon emissions across their value chains. The term “value chain” refers to the process by which a company accounts for the value added to a product throughout its development while accounting for its scope 1-3 emissions. This trend has emerged as a viable option for companies to track and reduce their supply chain emissions. For example, in 2017 Walmart launched Project Gigaton which looks to reduce one gigaton of CO2 from its value chain by 2030. To date, over 400 of Walmart’s suppliers now seek to lower their carbon emissions. If Walmart accomplishes its initiative, the total carbon emissions offset would equal the annual emissions of Brazil.
As cities, states and businesses look to lower their emissions in a decarbonized economy, large corporate offtakers possess the economic and policy clout to influence global supply chains, as well as the expertise to help other companies navigate through complex PPA structures. Strategic initiatives, especially among established offtakers and industrial manufacturers will be paramount to achieving deep decarbonization. ACORE released a new paper at the meeting titled Decarbonizing Corporate Value Chains: How Upstream, Downstream & Midstream Companies are Advancing Renewable Energy Purchasing, highlighting five areas corporates should consider when implementing value chain programs. These include:
- Downstream Companies: How Leading downstream adopters of renewable energy procurement can leverage Renewable Value Chain Initiatives and better engage their suppliers.
- Upstream Companies: How upstream companies (industrial manufacturers) can gain a competitive advantage by producing less carbon-intensive products and services.
- Midstream Supplier Compliance: How midstream suppliers can adapt and procure renewable energy to comply with Renewable Value Chain Initiatives.
- Policy Objectives: How leading companies and their suppliers can help change energy markets in support of a renewably powered economy.
- PPA Evolution & Value Chain Tracking: How companies can pursue flexible PPA contracts and track their scope 3 emissions to implement Renewable Value Chain Initiatives successfully.
Flexible PPA Contracts Offer Incredible Potential
While large multinationals have led the growth in corporate procurement to date, the next wave of corporate demand will likely come from industrial manufacturers and midstream companies. In part, this growth will be due to growing pressure from customers and supply chain partners who expect greater sustainability commitments.
However, there are still significant barriers to broad-scale adoption of corporate PPAs. The complexity of traditional power purchase agreements continues to stymie smaller buyers, preventing them from entering the market. In response, methods such as PPA aggregation have started to gain traction. The efficiency from bundling multiple contacts together to reach economies of scale has enabled PPA aggregation to represent over 40 percent of new deals in 2018. Innovative structures such as a Joint Tenancy and Reseller Contacts are also gaining popularity among smaller corporate buyers, helping these new buyers to access renewables.
Finally, seasoned corporates are exploring new options to hedge their risk exposure. Of course, collars, put options and call options are routinely contracted, but companies that execute large renewable deals require flexible contracts to mitigate corporate risk further. For instance, Microsoft, in partnership with REsurety, Nephila Climate and Allianz announced a new contract called a volume firming agreement (VFA). Essentially, the contract reduces the buyer’s exposure to weather-related risk in energy production. Future weather variability is thus transferred from the corporate buyer to an insurance company that is willing to inherit the risk. New financial innovations such as these will help the market become more efficient and expand corporate demand for wind and solar power.
Corporate Renewables Purchasing Looking Strong for the Year Ahead
Although there are still several challenges in the market, 2018 has proven to be a record-setting year for renewable energy. In November 2018, global corporate renewable energy procurement reached 10.6 GW, shattering the previous record set in 2017 of 5.6 GW. Most of this growth is being driven by RE100 companies that now represent a $94 billion investment opportunity.
Despite being one of the cheapest generating assets in the market, renewable energy’s growth is increasingly being driven by the imminent need to decarbonize our economy. If we hope to achieve rapid decarbonization, demand for renewable energy must follow supply. Corporate incentives such as consumer demand, supply chain pressure, innovative contracting and ESG scoring are all motives that can unleash demand for renewable energy.