The climate crisis has made sustainability top of mind for many corporations. Investors, employees, and stakeholders are increasingly pushing management teams to have a more sustainable impact. For most companies, a large source of scope 2 indirect emissions is their electricity use. Therefore, to mitigate their emissions, companies are taking ownership of procuring renewable power like never before.
Historically, most people and companies have simply received power from their utilities. This often meant that they did not have much control over the generation methods used for their electricity – they simply connected to the local utility provider and received power via whatever combination of generation was available to that grid. Ultimately, this meant that the environmental footprint of your electricity consumption largely depended on where you lived, or where your company was based. For instance, due to their abundance of hydropower, Quebec generates effectively 100% of their power from renewable sources. However, Alberta has a grid which is far more reliant on fossil fuels. Consequently, a factory located in Alberta would have far higher scope 2 emissions than the exact same factory located in Quebec.
To address this issue, corporations are increasingly procuring renewable power directly from generators through bilateral contracts, where they have visibility to the source of the energy. These bilateral contracts are known as Power Purchase Agreements, or PPAs for short. A PPA is a long-term agreement which defines all commercial terms related to the sale of electricity between two parties. In practice, a power user will often pull a certain amount of electricity from the grid and a power producer would input the corresponding amount into the grid.
Furthermore, there are two main types of PPAs on the market: physical and virtual. Under a physical PPA, the producer and consumer must be located on the same power grid. The buyer will also agree to pay a fixed price to the seller. A physical PPA is the simpler of the two contracts, as the power producer will directly sell and supply the power to the buyer with the utility or grid operator simply handling the technical details and managing volume fluctuations. The source of the physical PPA may be solar, wind, or any other source of renewable energy. A benefit of physical PPAs is that the buyer will take title of the energy they receive and in turn receive the Renewable Energy Credits (RECs) associated with the power.
A virtual PPA offers far more flexibility, however it is more complex, requires more sophisticated power markets and financial instruments, and is not available under current regulations in many markets. Under a virtual PPA, the power producer will sell its power into the wholesale markets. On the other hand, the buyer will buy its power from its local distribution company(LDC) utility or take delivery at a specific point. In other words, the utility acts as an intermediary between the producer and consumer.
If there is a difference between the price the power is sold at and the price it is bought at through the LDC, the two parties will exchange the difference. This exchange agreement is known as a Contract for Difference or CfD. A virtual PPA offers several benefits. Namely, both parties do not need to be on the same grid, massively increasingly flexibility. Moreover, RECs can also be transferred virtually depending on the terms of the PPA.
Over the past decade, the amount of energy purchased via PPAs has been skyrocketing. For instance, Fortune 100 companies such as Amazon and Microsoft have been aggressively pushing to procure renewable energy to meet their sustainability targets. In 2021, Amazon alone purchased over 6 GW of renewable energy capacity, with the majority originating from solar installations. Furthermore, more and more companies have started to set “RE100” targets, thereby pledging to procure 100% of their power from renewable sources.
Ultimately, one can ask what all of this means for the Canadian market. Alberta, which has the most open power markets in the country is also seeing the rapid proliferation of PPAs. However, in less open markets such as Ontario, market participants are having to think outside of the box.
One solution is distributed generation. In Ontario, a power installation can be located on the same site as the power user. For example, a rooftop solar project on top of an industrial distribution warehouse. In this scenario, a physical PPA can be signed between the two parties and electricity can flow directly between the two, behind the meter.
In summary, corporate PPAs are becoming an increasingly important piece in helping companies meet their climate goals. Facilitating said companies’ access to renewable power can also be a key value proposition. In an Ontario context, as distributed generation is often the most viable solution, real estate owners can differentiate their building offerings by also offering access to distributed generation. If you are interested in differentiating your real estate portfolio through distributed generation, our team at Springbank Energy would be pleased to assist.