January 8, 2018
Sometimes the world changes and few notice it; for a few years. Despite creating the first successful controlled flight with “Flyer 1” near Kitty Hawk, North Carolina, in 1903 the Wright brothers’ breakthrough remained relatively unknown for several years. I think something similar maybe happening with renewable energy.
MIT is multi-year Member-client of the Sustainability Roundtable Inc.’s Sustainable Business & Enterprise Roundtable business service which is missioned to accelerate the development and adoption of best practices in more sustainable business. In 2016, MIT worked with the non-profit “A Better City” in Boston to join with two other organizations, the Boston Medical Center and the Friends of Post Office Square (the owner of a park and parking lot in downtown Boston) to accomplish one of the first “Aggregated Procurements” of large scale, off-site, renewable energy in the United States among unaffiliated enterprises (earlier, U.S. federal agencies in 2015 and, in 2016, American University and George Washington University and Hospital completed Aggregated Procurements of large scale, off-site, renewable energy).
This enabled three diverse enterprises including MIT as a leading university, Boston Medical Center as the “hospital of last resort” in Boston and the Friends of Post Office Square a for-profit urban park and parking lot, to cause the development of 60 megawatts (MW) of new solar energy across 650 acres in Summit Farms North Carolina. Specifically, by aggregating their procurement of new, off-site, renewable energy these three enterprises were able to advance towards their environmental sustainability goals through capturing the economies of scale and transaction sophistication that had previously been enjoyed only by the world’s largest and most successful for-profit corporations. And in doing this these three organizations were able to pioneer what increasingly amounts to a new type of renewable energy for every high-credit enterprise. One that does not require the interested enterprise to have substantial land or roof space or naturally occurring renewable energy resources on-site or even within the same electricity grid. Indeed, this type of renewable energy transaction – which has only recently become available to the overwhelming majority of high credit energy users that are not among the worlds largest private energy users – has been the transaction that has enabled scores of the world’s most sophisticated and best known companies to publicly commit to using 100% renewable energy.
1. The Move from “Unbundled” RECs to More Credible “Bundled” RECs
Six developments have recently come together to create the opportunity seized by MIT that is increasingly available to every creditworthy enterprise that wants to meet its responsibility to be “part of the solution” in a move to a more sustainable world. The first development is the move by leading corporations and institutions from “unbundled” Renewable Energy Credits (“RECs”) to “bundled” RECs.
A good definition of a REC is that it is “the birth certificate” of a renewably produced megawatt hour of energy. Several years ago many leading corporations began to realize: for their claims about renewable energy to have more impact and credibility, they needed to move to buying only RECs that were “bundled” to specific megawatt hours of new renewable energy they were procuring. And whether the renewable energy project is on one’s roof or thousands of miles away, it is through buying and “retiring” (i.e. committing not to re-sell) the REC that enables an enterprise to credibly claim it caused the REC’s one MWh to be produced. Furthermore, to help develop national markets for RECs and to better finance renewable energy to displace fossil fuels, the standard setters for RECs permit them to be bought by any enterprise with energy demand in the same national market the REC is produced. This has made a decisive difference for some off-takers like the consortium led by MIT which could not find a project that they modeled as likely to be economically winning for them in the same grid they had demand. Although initially reluctant to look beyond their own grid, MIT and partners where impressed by the opportunity to displace a greater amount of fossil fuels in the distant North Carolina market which enabled the project to credibly report a greater net reduction in GHG emissions than would have been provided by a project of the same size in New England. (See: SR Inc Member Briefing on the Impact of Renewable Energy Purchases on Energy and Greenhouse Gas Goal-Setting & Reporting). For a more in-depth examination of the move to bundled RECs, see SR Inc’s blog post: “Not All RECS Are Created Equal”.
2. The Development of Virtual Power Purchase Agreements (“VPPAs”) structured as Contracts for Differences (“CFDs)
The second development that picks up on the corporate move from “unbundled” to “bundled” RECs is the development of a sophisticated financial transaction over the last six years that has enabled top corporates with massive energy demand to procure sufficient “bundled” RECs to credibly claim that they are on the path to 100% renewable energy. Without the emergence of this transaction form that has been led by companies like Apple, Facebook, Google and Microsoft and now even Bank of America and Goldman Sachs, it is unlikely that the growing number of top U.S. corporations publically committing to 100% renewable energy would be making those commitments.
This second development is the development of a transaction form that is, specifically, a Virtual (i.e. off-site and unconnected to the energy consumed by an enterprise) Power Purchase Agreement (“VPPA”) structured to operate as a Contract for Difference (CFD). This is a purely financial transaction that does not in any way affect the production or distribution of the electrons flowing into an enterprise’s facilities. It instead enables a high-credit corporate off-taker to commit to a minimum price (i.e. the “VPPA price”) for the production electricity at a new, remote, renewable energy project. This enables the renewable energy developer to get her renewable energy project financed and constructed. The developer then sells the energy produced by the project into the local market. If she sells the resulting energy for more than the minimum VPPA price the corporate off-taker contracted for, she provides both the more credible “bundled” RECs created by the project and the margin above the minimum VPPA price to the corporate off-taker. If the developer cannot sell the resulting electricity into the local market at a price equal to the VPPA price, the corporate off-taker still receives the “bundled” RECs and spends money to provide the developer at least the minimum VPPA price.
Consequently, very large corporate energy users who were tech savvy enough to understand why renewable energy tech produced electricity was going to provide more stable pricing and increasingly beat electricity dependent of fossil fuels on price, began five or six years ago to commit to what were initially twenty five (25) year term minimum VPPA prices and contracted for the difference (positive or negative) of the local marginal price the developer was able to realize. Very few, if any, made these long-term commitments unless their relevant, large internal and external teams modeled the relevant forward market prices and concluded that, over term, the commitment would provide them a positive Net Present Value “NPV”.
In this way, “super-intense” corporate energy users in the U.S. developed a no necessary first capital, positive NPV contract that provided them both a hedge (in their distinct internal bookkeeping) against their conventional energy buy (e.g. if the local price the renewable energy developer could realize was below the VPPA Price, that would be good news of any proximate conventional energy buy they had on the same grid) and more credible, more clearly “additional,” bundled RECs. The largest and most sophisticated corporate energy buyers had found a way to leverage the building advantage of renewable energy technology to have their more credible, bundled, RECs “cake” (which helped them better align with those customers, employees and investors who cared about their environmental sustainability goals) and “eat it too” while they also contracted for a needed energy hedge – all while driving what modeled in multiple scenarios to be a substantially positive NPV over term.
Unsurprisingly, VPPAs structured to operate as CFDs proved very popular among the rarefied “super intense” corporate energy users. This transaction form has propelled the development of more than 8 GWs of renewable energy and has become a principle driver of “utility scale” renewable energy development in deregulated wholesale U.S. markets as an increasing number of corporates and now some public institutions use the resulting “bundled” RECs to offset energy demand that is in the same grid as the renewable energy project as well as, in some instances, energy demand that is remote and often in regulated electricity markets. An entire non-profit trade association – the Rocky Mountain Institute’s Business Renewables Center which SR Inc’s Renewable Energy Procurement Services (REPS) is proud to sponsor – is now dedicated to helping corporates and others learn how best to take advantage of VPPA/CFDs so as to create 60 GWs of new renewable energy.
For all the mounting collective scope of developments financed through VPPAs structured as CFDs (and regularly simply referred to as CFDs) less than fifty companies – all among the largest in the world – have had the necessary scale, expertise and intense energy demand to use CFDs to cause the development of what are regularly more than 100 MW in capacity (e.g. 1000+ acre Solar development). Consequently, sophisticated market leaders understand that the very large single off-takers who have pioneered CFD renewable energy developments are the tip of a much large iceberg of demand from far more numerous high-credit, sustainability minded, enterprises that will need to aggregate their demand together to capture the economies of scale and transaction sophistication afforded by “utility scale” (e.g. greater than 30 MW) renewable energy developments.
3. The Systemization of Aggregated Procurement of Large Scale, Off-site, Renewable Energy
As Herve Touati, Managing Director of the Business Renewables Center observed when speaking on of the global renewable energy industry: “The industry realizes that aggregation is its next and highest priority. It is the nut to be cracked.” And the move towards aggregating the procurement of multiple, high-credit, enterprises is the third development enabling a new type of renewable energy for every enterprise. Google which has pioneered a great deal in this space, pioneered aggregated procurement in Northern Europe and Microsoft and REI have partnered with a utility based aggregated procurement in Washington State. But the U.S. Federal Agencies, DC area university and hospital and the MIT, Boston Medical aggregated procurements are among the first to be announced as completed in the U.S.
Like several others, SR Inc Renewable Energy Procurement Services (REPS) – which is lead by Advisors with decades of private sector experience in large scale renewable energy development, procurement and contracting – are leading aggregated procurements currently underway in the U.S. These aggregated procurements underway enable high credit corporate off-takers who may require only 10 MW or even 5 MW in a given power market to join with five (5) to ten (10) similarly high-credit off-takers to cause a 50 to 100 MW project to be built to provide them with more credible “bundled” RECs as a well as a hedge against any proximate conventional energy buy they may have, through a commitment each off-taker models as providing them a positive NPV in most all likely forward scenarios (e.g. in a forward market with both historically high and low natural gas prices). They also enable participating enterprises to help systemize aggregated procurement as a new ever more repeatable and scalable type of renewable energy transaction that creates clearly “additional” renewable energy and provides clear attribution.
As with MIT’s aggregated procurement, each off-taking enterprise will have its own CFD contract with the renewable energy developer. SR Inc REPS team leaders, who have deep financial, legal and technical expertise including a six-year-plus SR Inc Member-client who founded and led Cisco’s global energy and sustainability function, have long found it advantageous for procuring enterprises to require developers to negotiate a detailed, if legally non-binding, Letter of Intent before making final selection of a developer for expensive legal negotiations of a VPPA/CFD which rightly includes in-house and specialized outside counsel for a corporation’s first VPPA/CFD transaction. This requires meaningful more work for the SR Inc REPS team but is enables an integration of multiple corporate off-taker needs into a single, shared, LOI and aligns with SR Inc REPS role as a single negotiating partner representing the aggregated off-takers opposite the competing developers.
What SR Inc REPS is seeing in the confidential aggregated procurements it is conducting with and for SR Inc for Member-clients and other high-credit corporates, is pronounced buyer’s market. As one top developer stated when they learned of the pricing and downside financial protection provided by some of largest, directly competing, developers: “it is good to be buyer in this market.”
4. The Levelized Cost of Utility Scale Renewable Energy Is Now Less Than Fossil Fuels In A Growing Number of U.S. Markets
Although several factors are driving the current buyer’s market, none is more important than the fact the cost of producing “utility scale” renewable in the U.S. continues to drop dramatically. This is the fourth development driving the development of a new type of renewable energy for every interested enterprise. As Lazard noted in their 11th annual report on the Levelized (i.e. unsubsidized) Cost of Energy (“LCOE”) released in Q4 2017, in certain U.S. markets, utility scale wind and solar now costs less to procure through new development, unsubsidized, than buying from existing coal and even natural gas plants. And with the recent GOP tax bill largely sparing substantial (i.e. 26-30% but declining) federal tax credits for wind and solar developments and the current very low interest rates, this makes the risk-adjusted financial case for utility scale renewables very compelling.
5. Necessary VPPA/CFD Term Lengths Have Been Reduced from 20 Years to 15, 12 or even 10 Years
The fifth and sixth developments are simple but of shaping importance. They were not mentioned at the otherwise excellent presentation at the USGBC’s GreenBuild Conference this October about MIT’s aggregate procurement. Both play a key role in creating a new type of renewable energy for every enterprise. The fifth development is that a growing number of completed CFDs and dozens of competing bids for the aggregated procurements SR Inc REPS is leading, make it clear that the initially 25 year, then 20 year required VPPA term has been reduced to 15, 12 or even 10 years. Significantly, in the most compelling U.S. markets these much reduced terms are being offered on deals with impressively low VPPA prices that make a positive NPV very likely and, indeed, “in the money year one” against average trailing twelve month conventional electricity prices. This reduction in term to 15 or 12 years opens the CFD market to exponentially more enterprises who refused to contract for twenty years.
6. VPPA/CFDs Can Increasingly be Structured to Limit, Quantify and Reduce Corporate Off-taker Exposure to Financial Loss
The sixth and final development helping to create a new type of renewable energy for every enterprise is as subtle as it is important. Increasingly, the best financed developers are offering corporate off-takers with transaction structures that limit and reduce the corporate off-takers exposure to financial loss. Developers are increasingly willing to provide a “collaring” structure through which corporate off-takers surrender some of the upside margin that they might win above the VPPA price to the developer in return for reducing the corporate off-takers exposure to needing to pay up to the VPPA minimum price.
This relatively new final development enables corporate off-takers to quantify the total loss to which they could theoretically be exposed; which many corporate financial offices require regardless of how attractive the most likely NPV appears and how unlikely that potential loss looks. Consequently, with utility scale wind and solar increasingly at cost parity with natural gas on a unsubsidized basis in certain markets and the required term now at 15 years and reducing and, finally, with the corporate off-taker exposure to market price risk now being increasingly bounded by “collared” transaction structures, there is growing argument that this is a new form of renewable energy for every interested, high-credit, enterprise that has begun to fly. But ‘controlling that flight’ to ensure it advances an enterprise’s financial as well as environmental goals is of paramount importance and requires an experienced and focused internal and external team dedicated to ensuring that off-takers win all the advantages provided by this current, exceptional, buyer’s market.
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Jim Boyle is CEO & Founder of Sustainability Roundtable, Inc. For nearly ten years, Jim has led full-time teams of diverse experts assisting world-leading corporations, real estate owners, and federal agencies in their move to greater sustainability. He has led in developing SR Inc’s confidential, industry specific, annual management assessment and recommendation process for more sustainable operations and real estate that is compatible with major public standards globally. Further, he has directed the development of hundreds of pieces of SR Inc original, case based Management Best Practices Research and Executive Guidance & Tools available in SR Inc.’s digital library. Mr. Boyle also led in the creation of SR Inc’s Renewable Energy Procurement Services (REPS), which advises and represent Fortune 500 Member-clients and rapidly growing public companies across the U.S. and internationally in the development of Renewable Energy Strategies and the procurement of both on and off-site advanced energy solutions. Before founding SR Inc, Mr. Boyle advised fast growth technology firms, private equity firms, and institutional investors as an adviser on real estate strategy and transactions, and before that, as a large law firm attorney assisting corporate and investment clients on complex real estate and environmental compliance-related issues. He co-led Trammell Crow Company Corporate Advisory Services in San Francisco and returned to his native Boston and Trammell Crow Company’s market leading team in Greater Boston where he received the Commercial Brokers Association’s Platinum Award for the highest level of commercial real estate transactions. While at Trammell Crow Company, he incorporated and was the principal co-founder of the Alliance for Business Leadership, a MA based non-profit for CEO, investors and business leaders who share a commitment to public policy that advances a more broadly shared and sustainable prosperity. Jim is a graduate of Middlebury College and Boston College Law School, who early in his career served as a federal law clerk, an aide to John F. Kerry in the U. S. Senate and on Vice President Al Gore’s campaign for President. He lives in Concord, MA with his wife and two children and writes and speaks regularly on best practices in more sustainable business through-out the U.S.
Brittany Doherty, Program Director, is responsible for helping to design and deliver SR Inc’s confidential, annual Strategic Advisory & Support Service and, in particular, its year-round multi-member online and in-person meetings throughout the U.S., as well as SR Inc.’s confidential annual Management Diagnostic & Assessment Service. Prior to joining SR Inc in 2015, Brittany managed and wrote Sustainability Reports for the Town of Dartmouth, MA in accordance with the comprehensive, credible, and widely used, Global Report Initiative (GRI). Brittany graduated with a B.S in Organizational Behavior Management & Sustainability from the University of Massachusetts-Dartmouth, while actively developing a variety of sustainability initiatives for the university. Brittany served as the President of Net Impact at her university for three years, was a member of the Fair Labor Association Student Committee for two years, and also launched a pilot-teaching-program to integrate Sustainability into the global network of Junior Achievement. While Brittany was attending graduate school, earning a certificate in Environmental Policy, she worked as an Analyst for the Town of Dartmouth, assisting in the advancement of the Town’s economic, environmental and social policies. Outside of her work at SR Inc, Brittany has volunteered on the Sustainable Belmont Committee and assisted in the Town’s GHG Inventory project, as part of the Climate Action Plan. She also served as a valuable member of the Belmont Solar Campaign (BSC).
