Advances in Renewable Energy Contracting Options for Customers

How to integrate renewable energy projects into your business’s energy procurement strategy.

Many businesses are pursuing coordinated efforts to integrate renewable projects directly into their energy portfolio as part of their sustainability commitments. Such renewable energy projects could include, among others, solar and wind installations. While purchasing renewable energy credits (RECs) – either separately or in concert with a business's energy procurement – remains a valid approach to support sustainability goals, some businesses, particularly institutional electricity customers like colleges and universities, may be interested in a more tangible connection to their renewable energy investments. Such options currently exist.

Notable advances have occurred in both the number of renewable projects in the market as well as the ways in which renewable contracts are integrated into customers' energy portfolio. A few years ago, most renewable developers required off-take commitments of a minimum of 15 years, if not 20 years. The time frames have shortened, and some developers are now willing to offer 10- to 15-year terms. While these terms are still longer than most retail supplier offerings, retail supply options with shorter duration terms have also evolved, with more product options becoming prevalent, such as zero emissions products and access to offsite renewable energy projects. Some electricity suppliers are willing to explore both longer-term conventional power purchase agreements (PPAs) and shorter-term renewable retail supply contract options with customers.

Exploring Options With Retail Suppliers and Renewable Energy Developers

A common vehicle to solicit competitive offers for energy is through requests for proposals (RFPs). A less formal process could also be undertaken whereby an electricity customer contacts several different retail suppliers, including its current suppliers, to gauge their current offerings, pricing and terms.

If a business is interested in targeting supply directly from renewable energy projects, the RFPs should be crafted in such a fashion to elicit proposals from either renewable developers or from retail suppliers. Both methods are being successfully utilized. In fact, a customer could develop two separate RFPs: one for renewable developers seeking retail pricing associated with specific projects in development or currently operational and one for retail suppliers. Such RFPs would include the business's desired specifications, like the preferred renewable energy type, location of the facility to be served, the amount of energy to be delivered and the preferred term. Utilizing either of these approaches enables a business to consider purchasing the energy output from renewable energy projects currently proposed for development, including initiatives in the local community already underway.

To the extent that a business elects to pursue a project with a renewable energy developer, third-party support may be necessary to facilitate the delivery of energy from the renewable project to the business's retail supplier. If a renewable energy project developer is not licensed or otherwise authorized to sell electricity directly to retail customers in the state where the business customer is located, a transaction manager may need to step in. A transaction manager must be eligible to do business within the applicable wholesale energy market and have established trading relationships with other retail suppliers to enable the energy output from the renewable energy project to be scheduled on the business's behalf. As such, the transaction manager would be responsible for accepting delivery of the energy output of the renewable project. Generally speaking, the renewable project's energy output would then be delivered to the wholesale energy market operated by a Regional Transmission Organization or RTO, such as PJM Interconnection, L.L.C., in the mid-Atlantic region or ISO-New England, Inc., in New England. Such a structure enables a business to work directly with a renewable energy project developer given that a business's retail electric supplier could change multiple times over the 10 to 20 years that are traditionally the lifetime of these renewable contracts.

Along this line, when exploring renewable energy options, a business must be mindful of the expiration of retail supply contracts. Alternately, a business could approach existing suppliers and ask them to reopen current contracts to enable the business to purchase energy from renewable projects. Many suppliers have increased their service offerings in this regard.

Advancing Transparency With an RTO Sub-Account

Another approach to consider is working with a retail supplier to establish an RTO sub-account. This method would combine all a business's facilities and accounts into a pooled structure within each wholesale market where this type of arrangement is available. Under this approach, a business has a completely transparent, wholesale sub-account administered by a retail supplier for a defined and known cost. As such, an RTO sub-account enables a cost-plus type of arrangement, which would accommodate purchasing directly from a renewable developer by having the retail supplier furnishing the sub-account acknowledge and incorporate the business's sources of energy supply.

This approach affords full transparency on all market costs and the ability to direct the output of any and all renewable energy projects into the sub-account for all accounts enrolled. An additional benefit of this method would be that any renewable attributes associated with these renewable projects could be retired to meet both the state-mandated renewable goals as well as to advance any further corporate sustainability objectives.

Careful analysis of billing components and a business’s usage patterns may transform a borderline economic renewable energy project into an attractive option.

Enabling Direct Market Participation With RTO Membership

Another approach to consider is for a business, or an energy services affiliate, to become a member of the RTO itself and directly participate in the market. Under this method, a business would establish an energy services affiliate that would become an RTO member and effectively serve as the business's own dedicated retail supplier, generally referred to as a Load-Serving Entity. The energy services affiliate would develop an internal purchasing strategy, including with respect to renewable energy, and manage such purchasing directly within the RTO construct. Such a strategy could integrate fixed-block power purchases as well as purchases from other wholesale generators. With direct market participation, a business would have full transparency in the costs allocated to its electric portfolio and ultimate authority in the ability to accept delivery of physical output of renewable projects into its account.

An RTO membership is best suited for larger energy consumers for which electricity represents a significant operating cost. Managing the regulatory requirements and ensuring the technical expertise necessary for this arrangement is resource intensive. For example, if a business were to decide to pursue the direct wholesale supply option to energy procurement within PJM, the following approvals, at a minimum, must be secured: (1) market-based rate authority from the Federal Energy Regulatory Commission; (2) membership as an LSE in PJM; and (3) an electric supplier license from the relevant state in which the business is located – assuming that the state has retail access. Upon receiving these approvals, the business would need to coordinate with the applicable electric distribution companies (EDCs) to serve the business's facilities. As such, the business would likely require dedicated personnel to ensure the account is monitored and managed appropriately or contract with a consultant or advisor well-versed in monitoring and administering this type of account structure. It warrants noting that most RTOs require expedited payment and active management of the account.

Considering the Viability of Behind-the-Meter Projects

A business could also consider developing a renewable energy project at its facility site and utilizing that project behind the meter. A benefit of this approach is that, in addition to being able to reduce onsite energy purchases from the grid, the facility will also benefit from reductions in certain-demand related charges, such as capacity charges and transmission charges. For example, a solar project that operates behind the meter can offset energy charges and consumption during hot summer days when energy prices are high and when demand charges are often set. Careful analysis of billing components and a business's usage patterns may transform a borderline economic renewable energy project into an attractive option.

Not so long ago, few options existed for businesses to source their supply from renewable energy projects. However, the market has matured such that several viable options exist. Businesses can support their sustainability objectives not just through purchasing fungible renewable energy credits but by also purchasing the renewable energy output from tangible projects. These options rest on a spectrum of customer ease from working with retail suppliers to more direct customer involvement. A good first step is determining where your business sits on that spectrum.

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