Why traceable green tariffs could be the next corporate PPAs

The latest trend in renewable energy procurement is for power purchase agreements that deliver electricity matched to the buyer's actual consumption profile, known as ‘hybrid’ or ‘24/7’ PPAs. This innovation aims to address the issue with traditional fixed-price, pay-as-produced PPAs, where buyers are exposed to long-term price and volume risk because they must commit to a fixed price for renewable energy, and still buy energy at the times when their PPA does not meet their demand. As electricity markets are increasingly seeing negative electricity pricing at times of oversupply, paying a fixed price for renewable electricity over long periods is starting to look very uncertain for buyers.

Under this new style of PPA contract, the seller takes on more of the ‘shape risk’ on behalf of the buyer by sourcing clean energy from a variety of energy sources (sometimes including energy storage).

But is there another way to describe a 24/7 PPA? Yes - it’s called an electricity supply contract.

This may sound facetious because electricity supply contracts are used by nearly all businesses and individuals to buy electricity since electricity networks were first created. But it is true that in general, energy buyers are generally not responsible for matching their electricity consumption with supply on an hourly basis because their ‘energy supplier’ manages this process for them. Sure, some energy suppliers can pass on an element of risk to their customers in the form of dynamic pricing for instance, but end-customers are by default protected from biggest dangers in the electricity markets such as imbalance charges or supply interruptions. Energy suppliers can be likened to insurance companies – of course anyone can decide to take on a risk themselves, but there are good reasons why individuals and businesses choose to take on third-party insurance for certain risks.

There are many reasons why energy suppliers are better placed to manage the risks of wholesale electricity markets than end-buyers, for example;

1.     Resources – since it is their core business, energy suppliers have dedicated systems and specialist knowledge. Expert teams often work in shifts to trade power around the clock. Very few energy buyers use enough electricity to warrant their own power trading desks, and even the big tech companies are generally not members of local power markets themselves.

2.     The portfolio effect - energy suppliers benefit from the ‘portfolio effect’ of having contracts with many customers and generators in one region. This concentration of volume makes it easier for them to manage individual fluctuations in supply and demand - they only need to worry about the net imbalance position, which makes it statistically easier for them to manage the risks.

3.     Appropriate allocation of risks - for companies whose core business is not energy, holding significant exposure does not make sense for their shareholders. Taking a bet on the price of solar energy in 15 years, for instance, makes it harder for directors to manage that business and for investors to evaluate them.

4.     Access to data – energy suppliers already have access to all the necessary market information and metering data and so are well positioned to manage power market risks.

This is why energy suppliers of various kinds still dominate the supply of electricity to customers, including in regions that have had many years of market liberalization. Even if corporates have several PPAs, they invariably still need an electricity supplier to manage the imbalance between their PPA and their actual consumption.

Electricity tariffs are clearly not perfect, however. One of their key downsides compared with PPAs is traceability. Buying a ‘green’ tariff labelled ‘100% renewable’ typically means the supplier has simply matched total consumption with energy attribute certificates (EACs) generated in the same annual period. Customers often don’t even know where those EACs have come from. On the other hand, PPAs enable buyers to have a direct relationship with a specific generator, if only for a portion of their consumption.

We are now starting to see energy suppliers offer fully traceable renewable energy tariffs where each customer of the supplier gets to see exactly where their energy has come from, and the relationship that their supplier has with each generator. In the UK for instance, a wave of innovative tariffs have emerged from energy suppliers in the past year offering asset-specific transparency to business customers (e.g Good Energy, TotalEnergies, Drax, Smartest Energy, SSE and E.On/Npower).

By including reporting on hourly-matching, buyers also get a credible view of their energy supply and carbon emissions, and send a powerful price signal that incentivizes additional technologies that deliver clean energy when and where it is most needed (see previous post on additionality).

The other benefit of PPAs is giving buyers an element of control. But the wide range of electricity tariff types on offer means buyers can still choose the level of risk they are willing to take on - fixed price, variable price, fixed shape/volume, variable volume.

The increasing convergence of PPAs and electricity tariffs poses an interesting question for the future role of independent power producers (IPPs). How much of the work managing energy market risks do they want to take on? Traditionally, IPPs have sought single large offtakers for their projects that are able to take on all of the volume and price risk from their projects. In future, IPPs will either need energy suppliers or traders to provide offtake agreements, or go ‘downstream’ and take on some of the risk management activities of energy suppliers if they still want to contract directly with corporate customers and capture a premium for the energy they produce.

For buyers, look out for a wave of game-changing, next-generation green tariffs from energy suppliers.