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July 20, 2017

Powering Portfolio-wide Real Estate & Operations with Renewable Energy

Unsubsidized wind and solar have been hurdling down their respective cost curves and have become financially-competitive with conventional energy sources. As an example, Tucson Electric’s signing of a solar & storage PPA for less than 4.5¢/kWh in May represents the new US integrated solar & storage price benchmark. This is the latest example of aggressive price reductions over the past 2-3 years that have promoted an equally aggressive growth of renewable energy capacity, consistently outperforming traditional energy forecasts. Concurrently, more and more companies are committing to various sustainability, GHG emission, and renewable energy targets, with 101 RE100 companies (and counting) committed to 100% renewable energy globally.

Many SR Inc Sustainable Business & Enterprise Roundtable (SBER) Member-clients are leading globally on corporate procurement of renewable energy. On June 15th, Bay-area SR Inc Member-clients gathered at Salesforce’s HQ in San Francisco to discuss the latest best practices in corporate procurement of renewable energy and how they might take advantage of innovative procurement mechanisms to reach their sustainability goals portfolio-wide.

The Opportunity

SR Inc closely tracks trends and developments in the fast-paced renewable energy market and has been advising its Member-clients on these movements and their significance for more than nine years. Some of the more important include the following:

1. Utility scale wind and solar has achieved cost-parity with coal and NG: Utility scale wind and solar costs have declined rapidly in the last year, particularly through the integration of storage. As of December 2016, solar and wind prices were the same or cheaper than coal in more than 30 countries without subsidies, and solar continues a cost decline of 20% compounded annual rate (WEF, 2016).

2. Corporate commitments to 100% renewable energy are rising fast: The number of companies committing to 100% renewable energy globally (101 just within the RE100 with more than 3 dozen others not within the RE100) has risen nearly 50% since last year’s Q2 Symposium. As their total energy demand far exceeds their portion currently sourced from renewables, the potential for renewable energy growth remains very strong.

Figure 1: Important considerations to developing 100% Renewable Energy Goals. Sourced from Salesforce presentation (Sher, M., 2017).
Figure 1: Important considerations to developing 100% Renewable Energy Goals. Sourced from Salesforce presentation (Sher, M., 2017).

3. Corporate off-site RE procurement has typically required large commitments: While the number of off-site corporate off-taker PPAs have been declining, the average size of each deal has been increasing faster, resulting in an increasing rate of procured renewable energy.

4. Many leaders are transitioning to the procurement of bundled RECs: While the purchase of unbundled RECs (expense only) is an important gateway for corporations to start experimenting with renewable energy claims, a growing number of leaders are setting more aggressive targets that prioritize bundled RECs along with their associated power. WRI’s Corporate Renewable Energy Buyer’s Principles make this priority clear: “We are increasingly interested in access to bundled energy and REC products.   Unbundled RECs do not deliver the same value and impact as directly procured renewable energy from a specific project or facility.” (WRI, 2016)

Figure 2: In December 2015, the Federal Solar ITC (Investment Tax Credit) & Wind PTC (Production Tax Credit) were extended to begin phasing out in 2020 and 2017, respectively. (BRC, 2017)
Figure 2: In December 2015, the Federal Solar ITC (Investment Tax Credit) & Wind PTC (Production Tax Credit) were extended to begin phasing out in 2020 and 2017, respectively. (BRC, 2017)

5. Member-clients want small-scale tranches of grid-proximate renewable energy projects: Most companies cannot make the large-scale commitments that have generally dominated off-site PPA deals for procuring bundled RECs while achieving additionality.

The culmination of these trends amounts to the need for a flexible procurement mechanism capable of harnessing the growing interest in renewable energy by smaller corporate buyers, economies of scale, and bundled RECs simultaneously. A re-evaluation of the VPPA is unveiled a potential solution.

The Virtual Advantage

Virtual Power Purchase Agreements (VPPA) have gained traction over the last four to five years due to their ability to provide corporate off-takers with a variety of attractive financial, operational, and sustainability-oriented characteristics. In a VPPA, an off-taker and supplier agree on a contract price (or “strike price”), which will effectively serve as the price that the off-taker will pay for energy over the contract term. The supplier sells its electricity to the grid at the locational marginal price (LMP). If the LMP is greater than the strike price, the supplier will pay the off-taker the difference between the contract price and LMP for the associated amount of energy bought. Similarly, if the LMP is less than the contract price, the off-taker will pay the supplier the difference. Thus, the supplier is always effectively paid, and the off-taker always effectively pays the contract price for the energy regardless of fluctuations in the wholesale market. Variations on this basic mechanism can be tailored to suit best the off-taker appetite for risk and upside cash flow as well as the core financing needs of the developer to build and operate the renewable energy system. Regardless, the off-taker is transferred the bundled RECs with crystal-clear additionality claims.

Figure 3: A schematic of the VPPA structure (NRG, 2017)
Figure 3: A schematic of the VPPA structure (NRG, 2017)
  • Positive NPV: While Contract-for-Differences (CFD) are not new to the finance world, structuring VPPAs in this way has allowed for the developer to secure financing while simultaneously allowing the off-taker to hedge both electricity price increase and, with tailored “collar”-type mechanisms, volatility. A well-designed hedge allows corporations to come out ahead financially, as opposed to continuing to be vulnerable to inexorable market price increases over time and separately expending money on unbundled RECs. Furthermore, off-takers can participate with no upfront capital expenditure.
  • Additionality: PPAs, with their associated bundled RECs, provide a clear additionality advantage over the simple purchase of unbundled RECs on the national market. See our previous Not All RECs Are Created Equal post for more on this delineation.
  • Flexibility: Since the transaction directly between the supplier and off-taker is purely financial, VPPAs allow corporations the flexibility to target the energy use of multiple load locations and operational profiles without the explicit treatment of power delivery. Furthermore, VPPA’s enable companies to take advantage of renewable energy projects with more attractive natural resources (e.g. wind and sun) and financials regardless of proximity to their actual energy demand location(s).
  • Risk-spreading: Unlike physical PPAs, VPPAs allow for the aggregated procurement of renewable energy on behalf of multiple corporate off-takers, not only spreading-risk, but also opening the opportunity for system size economies of scale to multiple off-takers who don’t have enough energy demand to justify a large project on their own. While the versatility of VPPAs make it a useful tool, it is important to make sure it is the right tool for the job for your company and required management response.

Management Response

Develop a portfolio-wide renewable energy strategy integrated with your corporate sustainability strategy, ASAP. SR Inc Member-clients view renewable energy as a major opportunity that should be integrated into their greater corporate sustainability strategies as soon as possible given the time-sensitivity of very low interest rates, declining federal tax credits, and fierce supplier competition. They recognize that by waiting, they risk missing-out on a buyer-favorable market. This integrated renewable energy strategy should encompass your company’s entire operational portfolio, including leased space. SBER Member-clients experience in the procurement of renewable energy have found that certain management best practices have enabled them to move to leadership in renewables including:

  1. Identify opportunity sites and know your renewable energy options. By identifying sites across  your US portfolio where (a) changing regulations are favorable, (b) you are paying over $0.07/kWh, and (c) your site is amenable to solar, on-site projects can produce year-one savings in certain US markets. Alternatively, consider community solar or utility-offered green products if they are available. For sites that are leased or otherwise incompatible with on-site options, off-site procurement from the same utility district as your site electricity demand can provide both high-quality bundled RECs and the associated price-competitive energy. Procurement from off-site renewable energy that is not grid-proximate can still provide high-quality RECs along with a robust financial hedge against electricity price risk via VPPAs.
  2. Keep an eye on energy storage. Recent advances in energy storage technology, rapidly decreasing costs, and shifting grid tariff structures make it impossible to neglect the consideration of storage integration into either on-site or off-site projects, as well as your overall renewable energy strategy.
  3. Examine opportunities for aggregated procurement of off-site renewable energy. While companies strategically pursue a full array of energy solutions – including energy efficiency, on-site and off-site renewable energy, as well as unbundled RECs – off-site renewable energy is evolving to provide attractive business cases on multiple fronts. Member-clients are increasingly interested in aggregated procurement of renewable energy to improve economic terms, reduce transaction costs and further de-risk procurement.
  4. Fortify your renewable energy procurement process. As the market has matured – producing dozens of deeply experienced, well-financed, well-referenced corporate suppliers and scores of interacting technological and transactional options – responsible corporate procurement of renewable energy solutions requires a well-managed, comprehensive, and auditable procurement process.
  5. Team up with an experienced strategic advisor to help navigate the complex landscape of renewable energy procurement actors and offerings. Experienced corporate off-takers develop blended internal/external teams with deep experience in both renewable and conventional energy. Outside advisors may be compensated by the corporate off-taker and/or any winning suppliers via a transparent, optimally RFP-disclosed, market-based fee.
  6. Engage your CFO. Develop a team and plan backed by current market-tested data to engage your CFO six to nine months before procurement to demonstrate why your renewable energy strategy and implementation provide a superior, risk-adjusted opportunity for your company.

A Force to be Reckoned With

Salesforce is an SR Inc Charter Member who has been leading the way in their commitment and implementation of sustainability and renewable energy ambitions. Their FY17 Stakeholder Impact Report outlines their aggressive sustainability targets in the face of the company’s own explosive growth. Targeting both Scope 1 and 2 emissions, Salesforce has set its sights on moving from 23% emissions mitigated via renewable energy in FY16 and 17 to 100% in FY18. They will follow a three-step, iterative process as a key methodology (2017):

  1. Avoid emissions by siting facilities on clean electricity grids.
  2. Reduce emissions through resource efficiency.
  3. Mitigate remaining emissions through renewable energy or high-quality carbon credits.

This process illustrates just how embedded Salesforce’s sustainability strategy is in its operations and its priority of upstream mitigation efforts. Furthermore, its 100% renewable energy commitment, joining the RE100 back in 2015, means that they are not relying on carbon credits to do the heavy lifting. In their endeavor to procure enough renewable energy to account for 100% of their global operations – up from 265,000MWh in FY16 to 371,000MWh in FY17 – VPPA’s have been an essential mechanism, with Salesforce signing two in 2015.

Max Sher, Sustainability Program Manager at Salesforce
Max Scher, Sustainability Program Manager at Salesforce

At the helm is 27 year-old Sustainability Program Manager, Max Scher, earning GreenBiz’s 30 Under 30 designation in 2017. Having developed Salesforces’ renewable energy and carbon roadmap, Max leads the company in its journey to Net-Zero Greenhouse Gas Emissions, as he works with and for Senior Director of Sustainability, Patrick Flynn.

At the highest level, companies should be thinking about how their product, service, business model, and operations can become sustainable, not only environmentally and socially, but financially as well. Today, all companies should take a portfolio-wide approach, examining their entire configuration of current and future energy needs and how those can be addressed by the full range of solutions in order to design a holistic strategy. As a valuable component of these strategies, Member-clients and SR Inc are developing robust and scalable approaches for aggregated off-site renewable energy procurement. SR Inc is leading a competitive RFI / RFP process to offer this approach, along with its variety of inherent benefits, to a wide-range of Member-clients.

Select Relevant SBER Executive Guidance & Tools:

 

ErikLandryErik Landry joins Sustainability Roundtable Inc as an MIT Sloan Sustainability Fellow. Pursuing a Master’s degree at MIT’s Technology and Policy Program of the Institute for Data, Systems, and Society, as well as a Sustainability Certificate from MIT’s Sloan School of Management, Erik approaches sustainability from a systems perspective. His current research within MIT Sloan’s System Dynamics Research Group pertains to capability building and resource allocation dynamics in complex social and technical systems. Before beginning his graduate studies, he spent two years at the U.S. Department of Energy’s Solar Energy Technologies Office – where he analyzed alternative market pathways for concentrating solar power as well as grid integration solutions for highly distributed photovoltaics – and one year at Argonne National Laboratory – where he studied the material chemistry of organic photovoltaics. Erik holds a B.S. in Chemistry from the University of Chicago

David Osborn is an accomplished corporate sustainability advisor serving dozens of SR Inc’s Fortune 500 and mid-sized client companies as they drive significant operational efficiencies and better align with talent, customers, investors, and regulators through corporate sustainability strategy. From his career in business consulting and executive leadership, David brings to SR Inc over 25 years of experience in building professional services and technology-driven businesses serving a broad range of client industries. David graduated from Dartmouth College where his studies concentrated in Economics and Geology. He received numerous academic honors highlighted by a citation in mathematics from the then college President John G. Kemeny. After IT systems experiences at Arthur Anderson (now Accenture) and Wang Labs, David graduated from Northwestern’s Kellogg Graduate School of Management with honors, a member of the Beta Gamma Sigma Honor Society and in the top 3% of his class.

After receiving his MBA, David cut his teeth at Bain & Company in their Boston office and then progressed up to Managing Partner at Booz, Allen & Hamilton (BAH) where he was ultimately elected by his Partners to head their Australasian business. After helping to grow that business from a very early stage to a staff of more than 100, David returned to the US to head BAH’s Retail Financial Services practice in North America. After a few years back in the US market, David transitioned out of his highly successful consulting career and served as Managing Partner / EVP at two innovative business service companies: the first a 150 employee, VC-backed innovative technology services provider in Boston, and the second a high-end, 200+ employee proprietary marketing services provider located in Princeton and New York. In both companies, David led over 200% growth within 2-3 years while substantially building the companies’ delivery teams and capabilities.

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