Paul Orstavik, Lead Originator at World Kinect Energy Services, provides expert insight into Power Purchase Agreements (PPAs), the benefits, the different types, and how they can help the public sector achieve its zero carbon emissions.
Sustainability and carbon reduction goals are being prioritised in many public and private organisations, with the UK government’s net zero target edging closer. The pressure is on for public sector organisations to consider ways to innovate to hit the net zero targets by the 2050 deadline.
Achieving net zero for many public sector organisations will require a well thought out strategy, long-term investment and will involve financial implications. Forward-thinking decision makers will need to be open to new techniques, products, and markets.
The COVID-19 pandemic has certainly offered an insight into how the world is impacted when there is a reduction in emissions and has acted as an accelerator for a focus on sustainability, leading to many public sector organisations to consider the impact of their activities on the environment.
For those decision makers in the public sector looking to accelerate their renewable energy goals, Power Purchase Agreements (PPA) are a viable option and will help them achieve their long-term sustainability goals.
In recent years, there has been an increase in demand from organisations committing to long-term solar and wind PPAs to help them achieve 100% renewable energy.
What is a PPA?
In its simplest form, a Power Purchase Agreement (PPA) is a contractual agreement between renewable energy buyers and sellers. Both parties come together and agree to buy and sell an amount of energy which is or will be generated by a renewable asset or provider.
When committing to long-term procurement of renewable energy from a specified renewable asset, the buyer provides the renewable asset with a stable income projection, which helps finance the renewable development. The renewable buyer can then claim additionality, to be responsible for supporting new , expanding renewable generation sources.
Investing in a PPA helps demonstrate your company’s commitment to climate change, that you are responding to investor/ consumer demand and helps towards meeting your carbon reduction targets. A PPA can also help reduce energy expenses, diversify energy supply, and help achieve long-term stability.
PPAs, however, are usually a long-term agreement lasting between 10-15 years, compared to a normal energy contract that lasts 2-3 years. Some do go on for longer, especially solar projects. The longest PPA to date is 28 years.
To invest in a PPA, you need to be ready to commit to the long-term, however, taking the risk will lead to significant benefits within just a few years.
As banks become more accustomed to what they are lending, we may see PPA contracts becoming shorter, maybe down to 7 years. The cost of renewable energy is also becoming significantly less expensive since 2010, so now is a good time to consider PPAs and invest.
Benefits of PPAs
Power Purchase Agreements (PPAs) can be complex, and many businesses can be put off by the lack of understanding and long-term commitments, however, the benefits will outweigh the substantial commitment, especially with the looming net-zero deadline.
Here are 6 reasons why you should consider investing in a PPA:
- Requires little to no upfront cost
- Reduces exposure to energy price volatility
- Helps organisations achieve energy targets and contributes towards hitting net zero emissions
- Avoids the rising price of energy certificates and retail margins
- Demonstrates an organisation’s commitment to sustainability to stakeholders
- Diversifies an organisation’s energy supply.
Types of PPAs: Onsite v offsite
There are two types of PPAs available: onsite and offsite, both of which come with their own benefits and can help mitigate your Scope 2 emissions.
An onsite PPA is an agreement to purchase renewable energy directly from a project developer that uses the organisation’s own location to generate renewable energy.
For example, this could be a Council building installing solar panels on site. By doing this it can protect against rising energy costs and is a visible commitment to sustainability with zero upfront cost for setting up. Usually, in exchange for ‘leasing’ your space, the organisation receives a fixed renewable energy price and safeguarding against a volatile market.
However, not all organisations will have the available space to accommodate the installation of an energy project and it is a long-term commitment.
An offsite PPA is an agreement to purchase renewable energy from an external supplier. Offsite PPAs tend to be beneficial for organisations that do not have the capabilities to set up an onsite energy project.
There are numerous benefits to offsite PPAs, including no upfront cost to your organisation, a wider variety of renewable energy options to choose from and it can provide sizeable cost savings.
Decision makers must consider several factors before deciding on an offsite PPA:
- They could be restricted to competitive (deregulated) electricity markets depending on location
- The availability of offsite PPAs is limited to customers with large electricity loads and investment grade credit.
- They are also open to market price variation, balancing, and other potential project issues.
Are you ready to invest long-term?
As well as carbon offsets and investing in renewable energy certificates, PPAs are an alternative solution to accessing renewable energy and reducing your carbon footprint.
For public sector decision makers, investing in a PPA is a great way to access renewable energy at a reasonable cost, showcase your commitment to sustainability to the public and also to central government, and can bring long-term energy cost stability and predictability.
Public sector organisations that fail to invest in sustainability and carbon reduction will leave themselves at risk not only of paying higher costs in the long-term, but potentially facing backlash from the public as environmental pressure intensifies and governments enforce new legislation.