The report is authored by the Edison Energy Supply Team: Emily Williams, Director of Supply; Mary Kate Francis, Energy Supply Associate; and Charley Hildt, Energy Supply Analyst.
This article is adapted from the Altenex Market Report – Spring 2017, a comprehensive assessment of the policy, technology, and pricing developments shaping the North American renewable energy market.
C&I energy users are increasingly focused on controlling their energy costs and improving the environmental performance of their operations while reducing their exposure to market volatility. Organizations ranging from General Motors to the District of Columbia and Howard University have succeeded in doing so by locking in stable wholesale prices for clean, renewable energy.
The C&I appetite for renewable power continues to grow, with nearly half of Fortune 500 companies declaring climate and clean energy goals, and a separate initiative of 90 companies committing to secure 100 percent of their global electricity from renewables.
The power purchase agreement (PPA) has emerged as the most widespread and successful tool for C&I buyers to procure renewable energy, and is addressed in detail in this report. For an offsite PPA, this structure involves buying renewable energy in the wholesale electricity market. It does not require installing new technology on site or laying out capital up front.
When viewed in conjunction with the retail side of the equation, a renewable energy PPA that is correlated to markets where the buyer has load can reduce the volatility of the buyer’s overall energy expenditure.
To make an informed choice, corporate purchasers must understand and evaluate power market dynamics and project economics. Today, renewable energy procurement decisions need to be made in the context of the following market trends:
- Wholesale power prices are rising from record lows. Natural gas prices heavily influence wholesale power prices, and as the U.S. shale gas revolution drove natural gas prices to 18-year lows in early 2016, wholesale power prices saw parallel declines. In the remainder of 2016, natural gas prices ticked upward, and buoyed power prices. Despite a warm winter, gas and power prices are still above last year’s lows. A slow rise in natural gas prices, complemented by modest growth in electricity demand, is forecast to put power prices on a gradual upward trend. This bodes well for the economics of renewable power PPAs.
- The economics of renewables are increasingly competitive, with the cost of wind down 66 percent and solar down 85 percent over the past nine years. The solar industry has reduced the price of solar panels and inverters, developed more efficient installation techniques and implemented innovative financing. The wind industry has lowered turbine prices and achieved technological and siting improvements. According to investment bank Lazard, new-build wind power is now the most cost-competitive source of new electric generation in the United States.
- Renewable power project inventory is up, and it’s a buyer’s market. A highly competitive field of project developers, ranging from multinational conglomerates to nimble startups, are actively developing and marketing projects throughout the country. Developers have cut deeply into their own returns to remain competitive in today’s low power price market. While there are many suppliers competing for market share, buyers must ask the right questions to weigh the differences in projects’ risk profiles.
- Now is the time to lock in contracts, as renewable energy is effectively “on sale” in the near term. Renewable power is being offered at a discounted price in the near term, thanks to federal tax credits for wind and solar energy. However, those incentives are subject to established phase down schedules. For wind projects, the Production Tax Credit’s value has already declined from 100 percent to 80 percent, which translates to increased PPA prices for prospective buyers. As there are currently some projects on the market that are 100 percent PTC-qualified and others that are not, Altenex closely monitors projects’ tax credit qualification status and helps clients secure contracts with the most cost-competitive projects.
- Rising interest rates, and potential reductions in corporate tax rates, create urgency around closing deals. With interest rates expected to continue ticking upward in 2017, renewable project developers are looking at a higher cost of capital moving forward. Additionally, the corporate tax rate reductions that lawmakers are discussing would limit the pool of capital available to monetize the federal tax incentives, further increasing developers’ cost of capital. These changes would translate to higher PPA prices for prospective buyers.
- Record renewables penetration requires careful examination of project pros and cons.Renewables penetration levels are changing the dynamics of several markets. The impacts of solar power in CAISO have suppressed on-peak prices below those of off-peak hours. Recent wind penetration records, 50 percent in ERCOT and 52 percent in SPP, require the grid operators to have robust plans for keeping supply and demand in balance. Corporate buyers will need to consider the risks of price trends, production curtailment, and transmission constraints on prospective projects, as those factors will limit the financial benefit they can realize from a renewable power PPA.
- Power purchase agreements that beat major electricity forecasts are available in key markets. Because wind and solar have no fuel cost, developers can offer long-term (12 to 25 year) fixed-price contracts. The best projects can sell electricity at prices below industry-standard electricity forecasts. Looking across the seven deregulated wholesale markets, Altenex sources a large selection of PPAs that outperform the electricity forecast benchmarks in ERCOT, PJM, and SPP, and presents examples of such deals in this report.
- New structures widen options for renewable energy contracts. Buyers with smaller power demand and sensitivity to term length can benefit from Altenex’s PowerBloks™ structure, which offers contracts for power in 10 MW blocks, and for 10-year terms. Large buyers with load in a few specific, regulated utility territories have the option for new market-based retail rates that allow them to pair an offsite PPA with a retail rate that gives them exposure to hourly wholesale power prices.
This report contains an overview of the extensive project inventory Altenex has available to clients, as well as the major policy-driven and market-driven opportunities and challenges that affect these projects. Using unparalleled market intelligence and a state-of-the-art risk analytics engine, Altenex advises clients on the smartest energy procurement decisions they can make to achieve their sustainability and financial objectives.
In the coming weeks, we’ll be sharing summaries of our views on specific key markets around the U.S, including ERCOT, PJM, NYISO, SPP, CAISO and ISO NE. Follow us here on the Edison Energy blog to learn more.
The report is available to Altenex clients and to select commercial, industrial and institutional entities, jointly referenced here as C&I buyers. To request a copy of the report, please contact Christen Blum, Edison Energy, at Christen.Blum@EdisonEnergy.com