The Corporate PPA Market - Episode 51

I'm looking forward to a lot more great conversations with some of the leading voices in this space . We'll talk 24-7 . Renewable energy , recent climate disclosure requirements from California , the Advent of Fusion Power . Today , though , we go back to my roots and talk about the corporate power purchase agreement of PPA Market .

Renewable procurement has changed a lot over the past few years , and we'll dive into both the things that are going well and not so well in this important area . 8 Minutes it's how long it takes the suns raised at Earth , or about how long it takes for me to eat all of my kids Halloween candy when they're not looking .

Hey , you start with one almond joy and , before you know it , let's get it on . The corporate PPA market is a big part of the energy transition right now . Bloomberg NEF estimates that the market grew by 18% in 2022 to reach 36.7 gigawatts of new renewables coming online , supported in part by corporate agreements to buy the power from these assets .

In Europe , the consultancy PlexiPark estimates that 80% of all renewable energy projects were tied to a corporate offtake in some way . The corporate PPA is a convergence of two really big trends within the energy transition .

On the one hand , you can't talk about the massive growth in renewable energy development without talking about the influence of corporate PPAs and , on the other , corporate sustainability and net zero commitments would be impossible without the advent of these offtake agreements .

Now , this episode isn't meant to dig into the specifics of the contracts and how a PPA or virtual PPA works . I'll send you all to a previous episode from season one , where I discussed how these contracts are constructed .

But I do think it's valuable to talk about how this market is evolving , especially in the face of the Russian invasion of Ukraine and the passage of major legislation such as the Inflation Reduction Act here in the US . On the one hand , both of those events have introduced strong tailwinds behind renewable energy development .

The volatility of natural gas prices , whether caused by or inflamed by the war in Ukraine , has shifted the calculus for a lot of corporations . At one time , corporate PPAs were signed primarily in order to meet net zero commitments , but today there's a lot more evidence that corporations are signing these contracts to hedge against rising power prices .

In the first few weeks of Russia's invasion , power prices surged by over 40% and , while natural gas prices have cooled off some and by relation to power prices , electricity and energy prices remain elevated , which makes renewable power far more attractive , especially given some of the tax benefits created by the IRA to subsidize and accelerate the development of these

projects . The IRA will essentially pay for 30% of the cost of developing a new utility-scale renewable project . So lots going for renewable energy right now , right , and corporations are eating this up . Well , not so much those growth rates I quoted before from Bloomberg . Those were 2022 numbers . 2023 has been a bit of a different story .

The Clean Energy Buyers Association , seba , tracks corporate deals in the US . In 2022 , they tracked 16.9 gigawatts of new capacity via their corporate Clean Energy Deal Tracker . The first half of 2023 , only 6 gigawatts . We're on pace to maybe equal 2021's numbers . So what's holding it back ? Partially , it's supply chain issues .

Costs have gone up for both solar and wind projects , but it's not just the material or labor . As interest rates remain elevated , basic financing costs are higher . Permitting and interconnection costs remain high . And to harp on that interconnection point for a moment . It's really tough to get a new project through the queue .

Here in the US , funding wait times are incredibly long and even if a project is lucky enough to make it through the process , the costs can be extraordinary .

The new power may require new transmission lines , which can be extremely expensive , and even though those lines could benefit additional projects and the costs theoretically could be spread across multiple developers , the system for some reason requires the first project to bear all the costs for the new line .

I keep coming back to a quote by Rob Gramlich , president of Grid Strategies , where he said that the approach is quote like trying to put the whole cost of a new highway lane extension onto the next car on the road end . Quote . It just doesn't make a lot of sense . But this is where we are rising costs , bottled up , interconnection queues .

Despite the benefits of the IRA , the headwinds are still very prominent Now . Layer onto that the fact that corporations with net zero goals are looking at PPAs is a big tool in their tool belt . There's a lot of demand for these contracts but , right now at least , not a lot of supply .

The result exploding prices for renewable energy , level 10 energy in their quarterly outlook notes that North American PPA prices are now 21% higher than they were back in 2022 . I recall back during my days at Edison Energy , where we could negotiate a PPA in Illinois for something in the high $20 range per megawatt hour .

I heard this week that anecdotally at least , those projects are selling as high as $75 per MWH . Wow , On the one hand , that really explains the lack of momentum of deal flow on these projects , but on the other , who in the world is paying those kinds of dollars for renewable energy ?

Turns out it's basically about five to seven major companies that are behind the recent contracts . New technology firms such as Amazon , microsoft , google , meta . These are the players scooping up PPAs wherever they can find them . Amazon , in fact , and according to Bloomberg , bought nearly five times as much renewable energy last year as their nearest peer .

This is a problem because , while it's great that these big corporations are enabling the renewable energy space to continue to grow , these corporate PPAs are increasingly becoming a luxury item that only a few highly sophisticated buyers are able to participate on .

As a result , a whole bunch of other well-meaning and anxious corporations are being left out in the cold .

Corporate sustainability is tough as is . But when one of your major tools is taken away from you , it makes it really difficult to achieve the momentum and inertia . You need to do the really tough decarbonization next .

The good news is that the Department of Energy and the Federal Energy Regulatory Commission , ferc , are taking steps to break down some of those barriers that we talked about . They are actively addressing these transmission interconnection issues , issuing guidance on streamlining , permitting making it easier for lines to cross state boundaries , reducing costs .

In fact , last week , the DOE flowed over $3 billion into transmission upgrades , as the largest single grant issuance towards transmission in US history . But it's also incumbent upon the renewable industry to make life simpler , too .

New products such as 24-7 hourly matching , price collars , escalators , additionality , emissionality profiling these have all been very successful at limiting the risk for large corporations and maximizing the impact of each new project .

But it's also made it really confusing to contract , simplifying the process , like what Level 10 and Google are introducing through their standardized PPA contract called REAP . Well , we need a lot more innovation in this space to make renewable energy accessible to all corporations . I'm Paul Schuster and this has been your it's Friends .