Part 2 of 4: During the month of July, Energy Edge is publishing a four-part series that will explore the decisions that need to be made before entering into a renewable energy purchase. Check out our blog each week for the next article.
You have been asked by your CEO to prepare an energy strategy that will lead your organization to being 50% renewable by 2020. Where do you start?
In Part I of this series we posed six questions that would be helpful to answer before purchasing renewable energy. These were:
- What am I going to do with the renewable energy I purchase?
- How much renewable energy should I buy?
- How do I determine whether I should buy wind or solar power?
- How do I economically evaluate rooftop solar or other behind the meter renewable generation?
- What are the major risks I should consider?
- Who should I solicit renewable energy proposals from?
This article will explore the first two question listed above.
Question 1: What am I going to do with the renewable energy I purchase?
To some, this question may seem silly. What else would you do with renewable energy other than use it to meet load obligations. Right? Well, that is not necessarily the case.
Many corporate buyers purchase renewable energy without any intent of consuming it themselves. Their goal is to simply displace existing fossil generation. In doing so, they are reducing the carbon footprint of the grid where the renewable energy is being produced. Sometimes, the renewable energy is generated in markets where the buyer doesn’t even consume power.
If simply displacing fossil generation is the goal of your renewable energy purchase and there is no intent to serve load with it, then an RFP for a Virtual Power Purchase Agreement (VPPA) is in order. These transactions are simpler than purchasing physical renewable energy and provide a wide range of projects to choose from since you are not limited to the geographic market where you consume energy. Removing this limitation allows you to focus on the most attractive markets for wind or solar, usually where the most windy and sunny conditions exist.
However, VPPAs come with a certain amount of financial risk that a buyer should be very aware of. We will dedicate a future article to the full benefits and risks of VPPA.
Now, if your intent is to use the renewable energy to meet your load obligations, then the RFP you issue would look quite different from an RFP that is seeking a VPPA.
This RFP would seek projects that can deliver power to same grid where you consume energy. The production profile of the renewable energy (i.e. solar vs. wind) becomes very important to understand as it will have a big impact on economics. You will also want to structure your load purchase in such a way that the renewable energy purchase is financially integrated.
While buying renewable energy to serve load requires some additional work than buying a VPPA, it also significantly reduces a buyers overall financial risk. This will also be explored further in a future article.
As you can see, the answer to “What am I going to do with the renewable energy I purchase?” can take a buyer down two very different paths.
Question 2: How much renewable energy should I buy?
Your organization has committed to being 50% renewable by 2022, and you’ve decided that you intend for your renewable energy purchase to meet your load oblications. Your organization consumes 50 million kWhs per year. So, you should by 25 million kWhs per year in renewable energy right? Well, yes and no.
Yes, you will ultimately need to buy 25 million kWhs per year in renewable energy in order to meet your organization’s goals. However, you might not want to buy 25 million kWhs of renewable energy from one renewable asset. You might want to make two purchases from different renewable assets that have different generation profiles.
The best way to think about this is in terms of peak demand first, then kWhs second. Best practices would encourage you try and match the renewable asset’s peak production output in kW to your organization’s peak demand in kW. This way you are not buying more renewable energy than you can consume.
Once you have determined the kW size of the renewable asset that matches your peak demand, then you will be able to understand how many kWhs that renewable asset will generate on an annual basis. If the renewable asset sized to match your organization’s peak kW produces 25 million kWhs per year then you have met your renewable objective. However, if the renewable asset produces less than 25 million kWhs per year you will need to make a second purchase in order to meet your organization’s goals.
For this second purchase, you likely need to look at a different type of renewable asset to purchase energy from. You will be looking for a generation profile that is complimentary to the generation profile of your first purchase. Ideally, this asset will produce energy at different times of the day than the first asset you purchased from.
We will explore the different types of generation profiles associated with different types of renewable assets in the next article.
Check our blog next week for the second part of this four-part series.