Hi, This is Dana Perkins, and this is Mark Taylor, and you're listening to Switched on the BENF podcast. Today we're going to talk about power purchase agreements, which fit quite well into the narrative at the moment, because earlier is this last September, there was Climate Week in New York. There were climate strikes around the world had by Greta Thornberg. I believe they approximated about seven million people attended those.
The United Nations held their twenty nineteen Climate Change Summit, and Bloomberg Philanthropies held an event called the Global Business Forum, where countries and companies continue to talk about various things facing the world, including emissions. An ever increasing number of countries and companies are coming up with what are called science based targets that are aligned with the Paris Agreement and the goals that were outlined there. Companies are just
doing a lot of things to clean up. One thing that comes to mind when I hear power purchase agreements and companies cleaning up is the Mickey Mouse shaped solar farm in Florida. It sits out Disney World, and it's just one thing that that Disney is trying to do to clean up its act. It's the happiest solar farm on I'm sure it is. Um then there are several
efforts like this around the world. Mike Bloomberg at the at the Global Business Forum had a cool quote that he said, we've only scratched the surface of what we can achieve when government and business leaders work together on climate change. So I guess that's what last week was all about. What businesses can do really and how they can cooperate with government. So it's not all just governments sitting in the U N or in a room or whatever,
going back and forth. But there are things that businesses can do on their own end together. But back to the Paris Agreement, I thought the US was out of it, so not technically, the United States is still technically in the Paris Agreement, even if they're not necessarily moving towards
their targets. Now. This is because and actually I was informed by Al Gore who was in London for part of Climate Week and gave a talk and he where he reminded everyone that the US is technically still in the Paris Agreement until the day after the next inauguration. So the US is in limbo they're in Paris. Not in Paris, the US is still signing the majority of
back to power purchase agreements. Of the power purchase agreements signed throughout the world are signed in the United States, So pretty big amount for a country that isn't quite sure what they think about Paris. Okay, So so we're not going to get too far into politics today, but we are going to talk, as you said, about what companies are doing, and signing p p a s is one of those things because they have these sustainability targets they're trying to achieve and p p a s are
a pretty well trodden path to achieving them. So sustainability aside. Given how cheap renewables have gotten, it seems p pas make a lot of sense for companies that just want to secure cheap energy for the companies. And today we'll be speaking with Kyle Harrison, who is BNFS Corporate Sustainability Analyst, and he's going to be speaking with us regarding a research note that is titled to h Corporate Energy Market Outlook.
Benef Users can get this report on benf dot com, the BENF Mobile, Apple, the bloomber terminal at BENF Go and please note that benif does not provide an investment or strategy advice, and you can hear a full disclaimer at the end of the show without much further ado, let's hear what Kyle has to say. Kyle, thank you
for joining us today. Thanks for having me. We are here today to talk about p p A s and I think the first thing that we should do is actually explain what a power purchase agreement actually is, so let us know. Yeah, that's definitely a good place to start. So it's a long term, typically fixed agreement UM for clean energy between an off taker typically a corporation or a utility, and then a developer of a clean energy project.
So for every unit of generation that a solar or wind project generates, the off takers agreeing to pay that fixed amount. And what it actually does is it gives a developer the revenue certainty they need to go ahead and secure financing. So as a corporate buyer, I can actually say I signed a p p A for this solar project in Texas because of my demand for clean
energy that solar project was built. Why would anybody want Why would a company want to sign a p p A. Companies are are increasingly setting emissions reductions goals UM, and a big portion of those emissions from companies comes from the purchasing of electricity, which is called the scope to emission. So a lot of companies are actually setting renewable energy targets alongside these emissions reductions goals, and that's actually guiding them and kind of the key component of their strategy
when they're setting out and reducing emissions UM. So for some companies, you can actually go ahead and reduce your energy consumption by locking into one of these clean energy
contracts UM. But for a lot of other companies, and we'll talk about this a little bit later, but as you get more of these industries and sectors beyond the technology space that are getting into this clean energy buying sector, a lot of these companies are avoiding what we would call transition risk, so they're increasingly getting pressure from investors UM and internal employees to actually be more sustainable UM.
So these companies that are actually getting ahead in the game and buying clean energy to be more sustainable UM, they're less susceptible to that investor pressure. Is the objective to these p p a s is it mostly around clean energy and sustainability and emissions reductions or is there cost advantage to it as well. There's definitely a cost advantage, So, like you mentioned, Mark, part of it definitely comes down to sustainability UM because again it's an effective way to
reduce emissions. But for a lot of companies when they go ahead and sign a clean energy deal UM. So for example, if you install solar on your rooftop UM, that could potentially be cheaper than your retail electricity bill um. So companies can save in that regard. But at the same time, a lot of these power purchase agreements that we're discussing, they're structured as financial hedges where a company
is actually hedging against a wholesale market price. So if you sign a p p A and you lock into that fixed rate for clean energy and it's actually cheaper than the wholesale market price, companies actually save money in the long term. So there definitely is an economic incentive for this as well. Well. And that's what some of our other research reports at BIENNA for saying that the price of renewable energy actually is in some regions actually beating other sources of energy. So it may just be
good financial sense for companies. My question is what types of companies actually want to buy p p A s. Are they the big data heavy companies that have really energy intensive storage needs, or are they manufacturers or something else.
When we saw the first corporate clean energy purchases, UH, this space was really dominated by big technology companies um so, I think these companies that have big data centers that utilize a lot of power demand um and for these companies that was an effective way to hedge against the prices that they'd be paying for power. Um So, those big buyers like Google, Microsoft, Facebook, Amazon, they were really
the first to get ahead in this game. But increasingly data as you mentioned, as the cost of clean energy has come down and there's actually an economic incentive for company to start buying clean energy, we're seeing all these
new industries enter this market. Um SO. To give you a sense of scale, there's now roughly two hundred companies that have established a one Renewable Electricity target UM and joined a campaign that we call the r E one hundred um so, these companies are actually going to go ahead over the next couple of years and offset one of the electricity they consume with clean energy purchases. So that's really exciting. UM. You're seeing manufacturing companies, big retailers
like Walmart UM. But what I would say is actually the most exciting is we're starting to see the oil
and gas industry get into the space. So at the end of x on Mobile actually went ahead and signed two of the largest power purchase agreements that we've seen in the United States to date UM and for them, kind of going back to your question, Mark, this is a way for them to go ahead and mitigate this transition risk UM and this investor pressure that they're going to inevitably get to go ahead and reduce their emissions and conduct business more sustainably. So can you describe that
those p p as in a bit more details? So who wins when Excen signs a big p p A. Both contracts were signed with orstad UM, and I actually think that brings up a good point is that you're seeing a lot of big European companies get involved in this space, both in Europe and in the United States. UM. And it was for a solar and wind project in Texas, which has really been the hottest market globally for these corporate pp as. This brings me to another question that
I was really wondering about. So you were talking about in in the note you mentioned how of corporate pp A volumes this year, So nineteen are in the US. This project is being built by European company. And one thing I do know being in London is that we have a higher density of E s G investors in Europe than the you do in the US. Yet we've got so many more p p as being signed in the US. What's kind of driving that big difference and
why are they so popular in the US. It really comes down to the ease of signing one of the contracts. So in the United States, you have this blueprint for signing one of these power purchase agreements. You have all of these advisory companies like Schneider Electric and Edison Energy that now exists in this space, and they'll actually go ahead and hold your hand through this entire negotiating process.
So as you get all of these new entrants into the corporate procurement market, whether they are from Europe or Asia or the United States or anywhere else, typically they're actually going to go to the United States first to sign these deals. Because there was so much experience in the market and it's a lot more comforting for them.
So that's really been the big driver, because I agree with you that overall you're seeing so many companies from around the world and outside of the United States make these really ambitious clean energy commitments. To give you a sense of scale, there's actually over twenty companies in Japan alone that have now set this r E one hundred
goal that I mentioned earlier. But all of these companies are setting these targets out to, and what that tells me is that there's a public acknowledgement from all of these companies that there's no immediate term option for them to buy clean energy domestically in Japan. So what these companies are actually doing is moving to the United States
to sign the contracts. So if we look at Japan, for example, you now have over twenty companies that are based in Japan that have set one of those already one hundred goals that I mentioned earlier. But all of these companies are setting their targets out to and to me, that's a public acknowledgement that there's no short term solution for them to buy clean energy domestically. They're instead looking at the United States to sign these deals, um, and this is a trend that we expect to see moving
forward in the US. Then you're saying it's fairly straightforward to sign a p p A in Japan. My understanding is that they do this through auctions, and that there was one fairly recently that maybe didn't quite get the uptake that was planned. Can you explain more what is so complex about Japan exactly? And I should have mentioned this earlier, but there actually is no p p A
mechanism in Japan currently. So if I'm a Japanese company and I want to buy clean energy at a large scale, well again, making an effort to incentivize new clean energy build on the grid, which a pp A does, I have no option to do that in Japan right now. What I instead have to do is tap into this non fossil market that was rolled out in the last
couple of years. So I can actually have go ahead and have a energy retailer in Japan go ahead and buy these non fossil certificates for me, which correlate with a unit of clean energy generation, and then they can actually go ahead and retire those non fossil certificates on my behalf. Um, so for companies, that's kind of the most accessible way for them to tap into this clean
energy market UM. But as you mentioned, it's kind of the market is very small right now and it's really not living up to its potential UM and to me, that signals again that Japanese companies acknowledge UM that they need to take away and see approach for this. They're either going to buy clean energy in the United States or they're going to continue to push for more accessibility for clean energy at a large scale UM domestically because
right now they don't have that access. What would facilitate a faster rollout in Japan or pretty much anywhere else. Is it largely a regulatory environment or is it down to how the utilities do things. It's a combination of both. I think what you need is boots on the ground from large multinational companies that have a footprint in some
of these Asian markets. To give you an example, UM, Google has spent years and years lobbying with regulators in Taiwan, which has a very similar power market structure UM and historically did not allow for p P a s UM, so they spent a lot of time working with the regulators to allow them an option to do so, and actually in the beginning of twenty nineteen they signed a ten megawatt solar p PA. So it's small volume, but
it's still a step in the right direction. You need to see that type of lobbying in markets like China and Japan and India, UM and even some markets in Europe as well. So I think that's one big driver. And the other way that companies can actually make a big impact here is by targeting their supply chain. So some of these multinational companies, they might not have operations in some of these Asian markets, but they do have
a heavy supply chain presence there. So actually going ahead and setting sustainability goals for your suppliers is actually going to go ahead and pressure them to further pressure regulators and actually open the door. UM and the same goes for utilities. They're facing the exact same type of pressure that Asian regulators are already at this point. Para purchase agreements are going to lead to additional capacity needing to
be built to hit the shortfalls. So you mentioned that ninety four gig watts are roughly ninety seven billion U S dollars in New investment will be needed in order to reach this is this big number, small number and kind of what dent does this make in emissions? Yeah, it's it's a big number, um, you know, compared to global clean energy investment, it's still a small portion. But what you have to remember is that this is still
a very small grouping of companies. So again, it's roughly two hundred multinational companies that have set these R E one hundred goals um, and that group of companies continues to grow over time. So as you have more R E one hundred companies making these types of clean and commitments, this demand this ninety four giga watts of clean energy, build this nine billion dollars of clean energy investment. It's
only going to grow. And what we've seen in the last couple of years that we've been doing this forecast is that demand for the R A one hundred continues to keep pace or even outstrip the actual existing activity from R one hundred members UM. So again just kind of the short answer would be the number is not huge right now, but it's going to get a lot bigger. So power purchase agreements are going to grow in size, but then also energy demand is growing, population is growing.
Is this even going to make a dent? And I guess the real question here is our power purchase agreements growing at a rate that is at least faster than energy demand is growing. It depends on what industry you look at. So in the financial space, a lot of banks actually have decreasing electricity demand UM, so they're implementing energy efficiency UM. But at the same time, a lot of banks are actually letting go employees and shrinking their
workforce UM. So the financial industry demand is going down UM. And overall, I think if you were to look at the financial financial industry alone, these p pas and this activity will eventually outstripped demand. However, if you look at
an industry like technology, it's the complete opposite. So we actually just put out a report on a big Google clean energy announcement UM and going ahead and doing that research, what we discovered was that between two thousand and ten, Google's electricity demand has actually grown four hundred and fifty percent, So they now consume over ten terra watt hours of electricity on an annual basis, and that's equivalent to a
small country. So even if we used a conservative growth forecast, for Google's electricity demand moving forward, their demand is still going to exceed twenty terra wat hours or thirty terra watt hours of electricity in the next couple of years UM. So for them, they're going to going to need to continue to sign clean energy deals at a very rapid pace, um, more rapid than they've even currently been signing deals at UM. So again, I think it really comes down to the
industry UM. But as a whole electricity demand continues to grow at a faster rate, the project to meet that is definitely one of the bigger questions we have in the space. So currently, uh, this market wall big is still small enough. Um. We're developers, like or said in a lot of other European and US developers are actually turning their attention to selling clean energy to corporations. So if there's demand from a corporate buyer, there will be
a seller to provide them the project. That's where the space is at currently. But again, as more companies set these goals, as electricity demand goes up, there's definitely the risk that there won't be enough supply to meet all of this demand. We haven't seen that yet, but I think it's something that all of the stakeholders in this space need to start thinking about more and more companies are signing up to the R one hundred or Renewable
Energy one hundred. But you also mentioned two other frameworks that companies are using to I've down emissions, So the e P one hundred and the e V one hundred. Can you explain what those are? Sure? So the e P one hundred UM or I'll take a step back and say that both of these campaigns work in a very similar way to the R one hundred UM. The e P one hundred happens to focus on energy productivity
or energy efficiency. So the e P one hundred actually encourages companies to double their energy productivity over a set amount of time, so forever unit of a product that they produce, they'll actually use half the electricity that's needed
compared to where they currently set that target. The e V one hundred applies to electric vehicles, as the name implies, companies will go ahead and make some type of commitment to electrify their commercial vehicle fleet or install vehicle charging infrastructure. Is Amazon part of that. So they signed the deal the other day with Ryvan Right for a hundred thousand electric bands. I believe is that what you're talking about. Yeah, no, it definitely is. Amazon is very gung ho about not
setting sustainability like joining sustainability campaigns. So they did set that commitment and that would technically apply to the e V one hundred, but I don't think they're actually a member. UM. I don't know for specific reason why they're all they also have a one renewable energy goal, but they're not an r A one hundred member. Is there a reason that the company would be or wouldn't be part of
these campaigns? I think for a lot of companies, the reason that they would join one of these things is to for the pr purposes, Right, So you're actually making a large commitment that you're going to go ahead and buy one dred percent clean energy or electrifier fleet. The downside of setting one of these commitments is that you're now holding yourself accountable to hitting that target in a
certain time frame. Exactly who has the most aggressive target in the r like in terms of a year, Yeah, a lot of the big tech companies um or I should say Google and Apple UM they had one clean energy goals UH last year and the year before and they've actually hit them. Um, so they have really been the last forward thinking here. Going back for a second, I'm used to seeing pp as that you know, historically
have been signed between a developer and utility. Right, So I'm going to build a wind farm that I'm going to sell to Envy Energy or or whoever it might be for X amount of years, for X amount of dollars um. Are these these p p a s are are heavily regulated. Are corporate pp as regulated the same way as one between a developer and utility? Yeah, and in a lot of ways um. On the surface level, the structure of a corporate pp A versus utility p
p A are very similar. So, as you mentioned, markets, a fixed agreement between a buyer and a seller, and for every unit of generation, that buyer pays that fixed price to the seller. When you actually dig in a little bit deeper to these contracts, there's a lot of nuances that make a corporate pp A very different than the utility p PA. For example, a lot of utility p pas are what we would say settled at the node.
So what that means is that they're hedged against a nodal power price so a very specific power price and a specific part of a wholesale market. Corporate pp as, on the other hand, are actually settled at the hub level UM, which is a much larger um swath of a power market, and prices tend to vary differently from a nodal price UM, and that's actually coming from the demand of corporate buyers. I would say. The other big
difference is actually term length. So a lot of utility p pas are in that twenty to thirty year range because utilities are comfortable signing these volatile energy agreements. For corporations, energy is not the core component of their business. They're not energy companies UM, so for them, they're much more comfortable making shorter term UM commitments to buying clean energy. Are you seeing a lot of projects that are pas that have gone into effect? Have you seen them already expire?
Since you've been studying this now, we haven't seen any corporate pp as reached that expiration level yet UM. But what I would envision happening is corporate buyers will go ahead and sign deals with new solar wind projects UM because as Dana mentioned earlier, the price for solar and wind continues to plummet UM and you're likely looking at much cheaper prices five, ten, fIF teen years down the
line than what you're seeing now. Does this mean that if I signed a p p A with a with a corporation from my solar plant UH with my solar farm five years ago, and I've got another five in the contract at that end of five years, will nobody want my power and have to rebuild the cellar farm. There's a lot of other types of off tape structures
that developers can take advantage of. So Yes, they can traditionally take that project merchant so actually sell that power directly into the wholesale market and get the volatile energy price at whatever it may be at that time. UM. But there's also a growing number of insurance products that
exist in the market today. UM So you actually have insurance companies stepping in as off takers as alternatives to corporate buyers UM and they'll sign very complicated agreements like what we would call a proxy revenue swap UM that are actually settled as a function of revenue rather than uh a price per unit of generation like a pp A that we described earlier. UM So, for a lot of developers they'll actually go ahead and work with insurance
companies as an alternative. We are b an e F. We like to talk about the future, so I want to know we're talking about in nineteen you're saying of the activity with p p as is happening in the US, what's the future going to look like? Is it still going to be really heavily in the US. In the short term, It's going to be in the U s UM And the reason is that you have the illuming step down of the production tax credit and the investment tax credit for so learned wind in the US UM.
So there is this short term urgency both from developers but also off takers to go ahead and sign deals and get these projects commissioned in time to qualify for these tax credits. So the US will be the biggest market moving forward, at least in the short term UM. But we really do need to see the Asian markets and the European markets evolve UM for this truly to be a global phenomenon UM. So you need companies to
continue to make commitments in Europe and Asia. You need multinational companies to continue to put boots on the ground and actually work with regulators and utilities to open up access to buying clean energy, and you need to actually go ahead and galvanize the supply chain to make similar types of commitments. UM. As these trends continue, we do anticipate that Asia and Europe will pick up some of the slack um, but for the short term, it's still going to be a U S story. Kyle, Thank you
so much for joining us today. Yeah, no problem, Thanks for having guys. Bloomberg an e F is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg an e F should not be considered as information sufficient upon which to base an
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