Corporations can drive down the cost of renewables

Letha Tawney | Sep 09, 2015

At a time of record low renewable energy power purchase agreements in the United States –- as projects compete for buyers before federal subsidies expire -- corporate buyers could bring real benefits to other energy customers. Working with their utilities, corporations could help to lock in low electricity costs that everyone can enjoy later.

For example, if a utility knows that sometime after 2016, it will need to add new electricity generation –- capacity –- to its portfolio, it could partner with large buyers today on a power purchase agreement or investment. These buyers are actively seeking ways to add new renewable energy to the system beyond of their utility’s current offering anyway. The utility could subscribe large customers to the project’s output for the first several years and then tap its electricity for the rest of the customer base in later years. It could have an option to buy the project in later years or just an option to buy the energy at today’s low prices. Working with customers means those low cost resources can bring benefits to other ratepayers in later years.

When companies like those that have signed the Corporate Renewable Energy Buyers Principles announce new projects, they emphasize that they are fully paying for their use of the electricity system and not asking for other customers to pay for them. This aligns with the Buyers’ Principle to “fairly share the costs and benefits of renewable energy procurement.” But there’s opportunity to go beyond avoiding cost shifting and bring benefits to the larger grid.

Reducing costs over the long-term

Beyond the specific opportunity to take advantage of the glut of projects and snap up some great pricing today, enabling large customers to work with their utilities to buy the renewable energy they need offers benefits to other customers.

Retaining these large customers with healthy credit ratings in turn improves a utility’s own credit rating and ability to draw investment. In an era of falling utility credit ratings, this can be useful, particularly because those utility ratings directly affect how much a utility will have to pay for any big equipment needed to serve the larger customer base. Whether they’re buying poles, trucks or a new gas-fired power plant, a healthy credit rating keeps costs down for all customers.

Second, a long term, predictable agreement with these customers lets utilities plan better for the future. They are facing unprecedented complexity in planning. How will electric vehicles, distributed solar power and batteries and new energy efficiency solutions affect demand for electricity? How fast will they be required to get rid of their coal power plants or upgrade the pollution controls on them? Knowing they have locked in large customers to support a certain amount of zero-carbon electricity removes at least a little bit of risk for the utility -- and for all the other customers in the system. It can help avoid investment decisions that may prove costly and wasted in the future.

Finally, there has been a move among corporate buyers to experiment with an “anchor tenant” model, where a large buyer helps a project reach a cost-effective scale that is more than the buyer alone needs. The buyer takes on some of the risk for the extra energy produced, in case it doesn’t sell at a high enough price to cover the cost of the project. But the developer works to get smaller buyers to purchase the rest of the energy. This model has been primarily used by independent power producers, but utilities could similarly be partners with their corporate customers to make potential projects larger and more economic, lowering costs for everyone.

Regulators can look for opportunities beyond the economic development story

Utility regulators and consumer advocates, conscious that special economic development deals can sometimes shift costs from industrial and large commercial customers to other customer groups, often require that voluntary renewable energy programs explicitly avoid shifting costs. But they could also look beyond this basic requirement and find opportunities for the large buyers to lower costs for all customers through their need for low-cost renewable energy today. The electricity system will have to be decarbonized, probably more quickly than many in the sector are comfortable with. Working with large buyers that want to move quickly could lead to decarbonizing in an orderly way that drives down the cost for everyone.

Letha Tawney is the director of Charge, the World Resources Institute’s electricity initiative. 

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