An Introduction to Green Power Procurement

Green power is becoming an essential component of leading sustainability programs. Developing a strategy for green power procurement will help ensure that companies define and achieve their objectives in an efficient and cost-effective way. Seven distinct green power procurement options are explored in our white paper Green Power Procurement – Understanding the Options. All offer unique benefits and considerations and can be the basis for developing a strategy. For purposes of this article, we present a brief discussion of two green power options – power purchase agreements (PPAs) and utility green power products.

Power Purchase Agreements

PPAs are a contractual agreement used in the utility power sector for long-term purchase of electricity produced by a particular source of generation. For electricity prodgppclip4ucers, PPAs offer long-term revenue certainty with a credit-worthy purchaser that allows the project to attract capital investment. For electricity purchasers, PPAs offer a long-term supply of green power with stability in prices, often at or below current market prices. True PPAs are restricted to customers located in deregulated electricity markets. However, in some regulated markets like California, “direct access” agreements offer an alternative similar to a PPA, but using the utility as an intermediary.

PPAs are increasingly becoming the most common green power solution for large-scale electricity consumers, particularly those in the IT sector, due to the ability to meet significant fractions of a company’s electricity demand with a single large-scale project that avoids a large upfront capital investment.

Synthetic Power Purchase Agreements

A synthetic PPA, also known as a virtual PPA or a contract for differences, is a financial swap that allows an electricity purchaser to provide financial and credit support to a project developer by setting a floor price for electricity sold by the project to the wholesale electricity maggpclip5rket. If the wholesale price is below the floor price, the purchaser pays the developer the difference. If the wholesale price exceeds the floor price, the developer pays the purchaser. In return for guaranteeing a floor price, the purchaser receives renewable energy certificates (RECs) from the project. This option is a potential solution for customers that have electricity load distributed over a number of smaller facilities, or with loads in regulated electricity markets. Unlike a physical PPA, synthetic PPAs do not include the purchase, sale and delivery of physical electricity and as a consequence, there is no need for a purchaser’s facilities to be located in the same power market area as the project. The combination of wholesale electricity market revenues and the floor price provides the owner with sufficient financial and credit support to proceed with project financing and construction, thereby providing the critical support necessary for a new project to be implemented. From an electricity purchaser’s perspective, a synthetic PPA can provide a long-term fixed price supply of RECs along with potential for annual revenues on the contract. If properly structured, this contract can hedge against future electricity price increases or volatility.

Utility Products/Green Tariffs

Electricity markets in a growing number of states offer customers the ability to purchase green power directly from a local utility. These agreements allow the customer to contract for some or all of their purchased electricity, which is attributed to existing green power projects feeding into the local grid. The utility will then retire the coinciding RECs on the customer’s behalf, allowing the customer to claim the environmental benefits associated with the purchase of green power. Because utility products and green tariffs are typically based on existing renewable energy projects, their impact on the development of new green power projects is not as direct or significant as with other green power procurement options.

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