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 questions 3 & 4 listed above.
Question 3: How do I determine whether I should buy wind or solar power?
While there are other forms of renewable energy other than wind and solar, such as geothermal, biomass and small hydro, wind and solar are the predominant sources of new renewable energy being added to the grid. Accordingly, we will explore how to compare these two different asset types before you make an energy purchase.
The first two things to know about wind and solar energy is that 1) they have very different price points and 2) they can produce power very differently throughout the day.
But first, let’s go back to the very first question we posed in our list above which was discussed at length in Part II of this series. The answer to that question will determine how you compare a wind and solar offer.
If your answer to question 1 was that you simply want to displace fossil generation from a power grid and you are not trying to serve load, then a Virtual Power Purchase Agreement might be a good fit for your organization. If this is the case, then what you are most wanting to compare is the VPPA price and the production profile of the asset against real time market prices. In a VPPA structure, you pay a fixed price to the owner of the renewable asset and in return, you are paid the market price of energy when the renewable asset sells energy.
In this instance, you want to find the cheapest priced project that also produces energy at the highest priced times on the grid. This way you are minimizing your cost and attempting to maximize your revenue. Your organization’s load profile does not come into consideration at all.
However, if you are wanting to serve your load with the renewable energy you purchase, then you will need to bring your load profile into the comparison process. What you will be looking for is how the renewable generation profile matches up against your load profile and what is the avoided cost of the grid energy you no longer need to buy.
Since solar and wind have different production profiles, the value of the grid power they replace will be different. For example, in Texas, solar replaces much of the on-peak power you would otherwise purchase from the grid while wind tends produce less during the day and more during the early morning and evening hours. Additionally, these different productions also mean the power you still need to purchase from the grid to fully serve your load will also need to be taken in to account.
Ultimately, you will need to model the total cost of delivered energy required to serve your load. The best fit, least cost outcome is usually the right answer.
Question 4: How do I economically evaluate rooftop solar or other behind the meter renewable generation?
Evaluating behind the meter generation is similar to evaluating an offsite renewable purchase in that you are comparing the cost of the onsite renewable energy against the avoided cost of grid power purchases. However, with behind the meter generation, you are also avoiding the transmission and delivery charges you incur when purchasing power from the grid.
A complete economic analysis will need to include the following: a) the hourly generation profile of the asset, b) the capital and ongoing O&M cost of the asset or the PPA price if a third party will be using their capital to build and operate the asset, c) the hourly load profile of the meter where the generation asset will sit, d) the expected forward cost of grid power, and e) the transmission and delivery tariff associated with the meter being analyzed.
A financial model will need to be developed that will incorporate all of the above data. Some of the complex assumptions will include determining a long-term view of both grid power costs as well as the regulated transmission and delivery charges. While liquid markets exist for 5 – 10 years for grid power, behind the meter assets are designed to provide energy for periods closer to 20 years. Assumptions will need to be made around what the future cost of power will be beyond the 5 – 10 year liquid market quotes that are available. Additionally, assumptions around the long-term costs of the utility delivery charges will also need to be included in the model.
While behind the meter generation is certainly a little more complex to evaluate, its benefits can be significant.
Check our blog next week for the fourth part of this four-part series.