Building a Strategic Approach to Renewable Electricity Supply
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Manufacturing
Renewable Electricity
Renewables
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Renewable electricity is a critical piece of the sustainable energy system providing reliable and affordable Net Zero carbon energy for all. Renewable electricity sourcing is a key element in scaling the deployment of sustainable energy solutions, and is one area where corporate carbon commitments are being translated into action.
Given the rise of corporate renewable power procurements and the rapid increase in commitments to 100% renewable power — witness the 370 RE100 companies in over 175 markets—it is safe to say that if you are not pursuing renewable power procurement right now, you certainly should be.
As we delve into renewable electricity sourcing strategy, we will focus on four issues:
Our aim is to provide an understanding of how to construct a high-quality and strategic approach to renewable electricity sourcing with an emphasis on the high-quality options: on-site generation and corporate power purchase agreements (PPAs).
Renewable electricity options have matured in recent years and become readily accessible in many markets, with solutions to match every level of ambition. As a result, and driven by their growing affordability, availability, and ease of implementation, switching to renewables has become more widespread.
Particularly today, with global events leading to increased volatility in the gas and electricity markets, organizations feel the urgency to avail themselves of solutions that can serve as a hedge against market risks and provide long-term price stability. A well-designed renewables strategy can also rapidly reduce operational power costs.
When building their strategy, companies should consider four categories of renewable electricity sourcing options:
Is the generic term for what we usually call RECs (Renewable Energy Certificates, in the USA and Canada) or GOs (Guarantees of Origin, in most of Europe). These are instruments for tracking renewable electricity generation. They serve as proof that one unit of renewable electricity (typically 1 MWh) has been generated and injected into the power grid. Acquiring them enables consumers to claim the use of renewable electricity. EACs are a quick and short-term solution that can be purchased unbundled and independent of existing electricity supply contracts.
Are bundled contracts for electricity and EACs with a supplier. They allow customers to easily procure physical renewable electricity along with certificates by paying a premium through their power supply contract. The duration of the agreement is associated with the duration of your power supply contract, typically 1-3 years.
Are contracts for offtake of electricity, typically with a developer and a specific renewable power source (alternative models and roles exist). Long-term PPAs enable the construction of new energy installations through long-term engagement (10-20 years). Short-term PPAs (1-5 years) are typically used to buy electricity from already-existing installations. PPAs can significantly accelerate deployment of renewable power but may entail additional complexities.
Relatively relatively small installations that might be placed on a rooftop or carport and function ‘behind-the-meter' (i.e., direct use of energy generated without passing through a meter). However, companies increasingly have third parties manage renewable installations at their facilities, from whom they then purchase the generated power. The duration of this solution is between 10 and 25 years, depending on the contract and/or life cycle of the asset.
Each solution has advantages and disadvantages, so corporate decision-makers must consider multiple criteria when seeking the most advantageous mix of renewable electricity sourcing options. They should use the three criteria listed below when designing their mix of renewable electricity sources.
Three main drivers form the basis of any decision about implementing one or some combination of the following drivers:
Refers primarily to the availability of renewable electricity sourcing options in a geographic location. One must know what options are available on the relevant market and should consider the compliance of this solution with the company’s decarbonization commitment (if any), such as RE100 or a Science-Based Target. Also associated with feasibility are complexity and the time needed for implementation. An asset-based solution like on-site solar or a PPA for a new asset might be complex to implement, while supply-chain disruptions might delay delivery of the needed equipment. Liquidity is an additional criterion in the event one requires an option to terminate or transfer the contract (typically a PPA), as this as well may be very costly if not unfeasible.
Ensures additionality and aims for future-proof solutions, referring finally to the degree to which a solution helps combat climate change. More specifically, it concerns whether the RE solution acquired directly contributes to the development of a new RE generation asset, in which case its additionality is high. If one sources from an existing asset, the additionality is classified as low. Here one should exercise caution and seek advice from a reputable consultant because not all options are created equal and contracting certain types of solutions with very low additionality could expose you to greenwashing claims. Beyond additionality, the criteria determining quality include: temporality, or whether the time of production matches that of consumption, and locality, or the distance between where the load is consumed and where it is produced.
Refers to the comparative cost of the solution, its savings potential, payback period, whether an investment of a company’s own capital or a long-term financial engagement is required, and the exposure or hedging it can provide against future market developments. Experience shows the opportunity for savings typically comes at the cost of long-term engagement and a long-term position in the market. Still, buying electricity through long-term solutions could be a reasonable risk management strategy, particularly in a fluctuating market, though the business case needs confirmation on a case-by-case basis.
The illustration below provides a handy overview of the various solutions along with the pros and cons that will be relevant when deciding on a mix of sourcing solutions to achieve renewable electricity targets.
Many manufacturers concerned with sustainability and decarbonizing their operations are already familiar with these four options, with various levels of adoption across various industries and geographies. Given some basic familiarity about the options for decarbonizing electricity, there is an opportunity to take a deeper dive into the most advantageous options to better understand their complexity and potential risks.
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This familiar option concerns a renewable electricity source installed at the consumer’s facilities to cover part of the power consumption, usually in the form of either a rooftop or carport solar PV installation, or wind generation. There is a direct connection between the renewable electricity generator and the site, enabling direct use of the energy produced, providing strong additionality and proximity by delivering instant and unique GHG (greenhouse gas) reduction that can be included in one’s sustainability reporting.
The downside is that the limited volumes produced by self-generation are usually only between two and five percent of the electricity consumption of the entire site, depending on available surface area and intensity of consumption. There are, however, integrated solutions that can expand onsite production and consumption coverage. Holistic optimization of one’s own demand would include, for instance, having a rooftop solar PV installation with battery storage or electric vehicle charging stations to expand the amount of generated electricity that can be locally captured. The excess electricity that is not consumed in situ may be valorized by injecting it into the power grid, depending on the local regulatory framework. These solutions are also possible in a global program model where multiple sites and solutions can be leveraged.
A successful example of an integrated solution is an island for which ENGIE Impact designed a hybrid system for a microgrid — an isolated system typically depending heavily on fossil fuel imports. The system utilized solar PV panels on rooftops as well as battery storage solutions and an electrolytic fuel cell for hydrogen production. The idea was to optimize the investment in local energy production to reduce the CO2 emitted each year for electricity generation. The site has been able to reduce its emissions by 92% and reduce the cost of electricity by 56%. And while this site is an island, the same type of integrated system can be used for corporate sites.
Corporate PPAs are attractive because they contribute to the fulfillment of sustainability goals while delivering economic and branding benefits. A renewable corporate PPA is a contract between an offtaker and a developer to purchase electricity from an offsite renewable project. The offtaker commits to purchase either part of or the entire output from a specific asset at an agreed price for an agreed amount of time, typically more than ten years. This structure limits exposure to power price variability, while direct sourcing from renewable producers ensures long-term energy cost affordability.
Overview of the current implementation of corporate PPAs:
The growing popularity of this option should not, however, make one lose sight of the complexities involved, the first of which is the time to implementation. Because of the complexity associated with the implementation of these contracts, the assessment and procurement procedure can easily take over six months to complete. Building a renewables plant, considering the current situation with materials supply, can take up to 18 months.
The duration of the contract could also be considered a complicating factor. One may be committed to an electricity price for 15-20 years, so one should be well informed about the future price horizon. Other pitfalls include those concerning development (the renewable facility is not permitted or is not constructed in a timely manner, or not at all) and performance (it does not produce the volume expected), though mitigation measures exist to cover these exceptions. The most common risks, however, are associated with the type of scheme contracted1.
Illustrated below are three common schemes for purchasing energy that corporates may select when contracting a PPA, along with the associated risks.
The PPA may stipulate that the corporate purchases a supply of intermittent volumes of renewable power as it is produced. This carries a balancing or profile risk, in which hourly deviations between anticipated production and real production mean there will be temporal mismatches between the production profile and your consumption profile, which the corporate must cover.
A PPA in which one purchases a constant volume of energy every hour of each month. The seller carries the risk of failing to provide this volume—which they can mitigate by mixing technologies, such as solar and wind—while the purchaser runs a risk of cannibalization, a situation in which the market price for electricity falls significantly below the fixed reference price due to, for instance, abundant wind generating cheap power and pushing prices down. The risk is exacerbated when contracts are closed with power producers in different countries. Say you are consuming electricity in Belgium and the contract is in Spain. The price might be exceptionally low for a few hours in Spain, while in Belgium you are paying a higher reference price.
The producer supplies the entirety of the customer’s consumption profile via a PPA and an Energy Supply Agreement. This could carry an accounting risk for corporates under the International Financial Reporting Standards (IFRS), as according to those accounting rules, companies should consider a PPA as an investment and the savings as future income which they later must report on sheet.
We close by briefly highlighting three corporate examples of 100% renewable electricity sourcing strategies and the projected results.
It is our hope that these examples of corporations implementing actionable strategies on such a large scale will inspire participating manufacturers to use electricity better by looking at the strategic options available and the benefits of those solutions. The threshold for renewable electricity is low. The time to act is now.
Starting out on or accelerating the path to achieving Net Zero requires each of us to consider critical questions about the steps we need to take and strategies to apply within our particular contexts. And while many organizations believe they are already on the right path, key findings from ENGIE Impact’s Net Zero Corporate Readiness Report suggest otherwise. Namely, while businesses are upbeat and optimistic about their sustainability programs and abilities, the fundamentals necessary to enable that transformation—the decarbonization enablers—are not yet in place.
ENGIE Impact and WBCSD are helping the manufacturing industry develop decarbonization plans that companies across the world can implement and scale up immediately.
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