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The Role of Corporate Renewable Power Purchase Agreements in Supporting Us Wind and Solar Deployment

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The Role of Corporate Renewable Power Purchase Agreements in Supporting Us Wind and Solar Deployment THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT BY JAMES KOBUS, ALI IBRAHIM NASRALLAH, AND JIM GUIDERA MARCH 2021 ABOUT THE CENTER ON GLOBAL ENERGY POLICY The Center on Global Energy Policy at Columbia University SIPA advances smart, actionable and evidence-based energy and climate solutions through research, education and dialogue. Based at one of the world’s top research universities, what sets CGEP apart is our ability to communicate academic research, scholarship and insights in formats and on timescales that are useful to decision makers. We bridge the gap between academic research and policy — complementing and strengthening the world-class research already underway at Columbia University, while providing support, expertise, and policy recommendations to foster stronger, evidence-based policy. Recently, Columbia University President Lee Bollinger announced the creation of a new Climate School — the first in the nation — to tackle the most urgent environmental and public health challenges facing humanity. Visit us at www.energypolicy.columbia.edu @ColumbiaUEnergy ABOUT THE SCHOOL OF INTERNATIONAL AND PUBLIC AFFAIRS SIPA’s mission is to empower people to serve the global public interest. Our goal is to foster economic growth, sustainable development, social progress, and democratic governance by educating public policy professionals, producing policy-related research, and conveying the results to the world. Based in New York City, with a student body that is 50 percent international and educational partners in cities around the world, SIPA is the most global of public policy schools. For more information, please visit www.sipa.columbia.edu THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT BY JAMES KOBUS, ALI IBRAHIM NASRALLAH, AND JIM GUIDERA MARCH 2021 Columbia University CGEP 1255 Amsterdam Ave. New York, NY 10027 energypolicy.columbia.edu @ColumbiaUenergy THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT ABOUT THE AUTHORS James Kobus is a research analyst at LNZ Capital LP, where he focuses on investments in the power and clean technology industries. Prior to his work at LNZ Capital, James was a research assistant at the Columbia SIPA Center on Global Energy Policy. James has also worked as a power sector investment analyst at both The D. E. Shaw Group and Morgan Stanley. Through his work at GreenMax Capital Advisors, James has contributed to international development finance efforts including the World-Bank-funded Regional Off-Grid Electrification Project, aimed at scaling the off-grid solar market in West Africa. James holds a master of international affairs from Columbia SIPA, with a concentration in energy and environmental policy. He also holds a bachelor’s degree from the University of Michigan, where he studied finance and philosophy. Ali Nasrallah graduated from Columbia University with a master of public administration in development practice, where he focused on renewable energy and climate change. He also received a bachelor’s degree in electrical engineering from the University of Jordan in Amman. Ali has worked in the energy industry in different roles with the private sector, business associations, academia, and as a consultant for public agencies. His experience spans regions such as the Middle East, Africa, South America, and North America. Jim Guidera has been an adjunct professor of international energy project finance at Columbia SIPA since 2014. He has had a long career as an energy banker, including 20 years as the project finance group head at Credit Agricole CIB in New York, a leading lender to renewables and other energy projects in the North American market. He continues to consult on energy financing though Ghent Associates LLC. ENERGYPOLICY.COLUMBIA.EDU | MARCH 2021 | 3 THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT ACKNOWLEDGMENTS The authors would like to thank several anonymous reviewers who provided useful comments and feedback. The authors would also like to acknowledge Dr. Melissa Lott, Matthew Robinson, Christina Nelson, and Sarah La Monaca for their overall guidance and contributions to this paper. Finally, the authors would like to thank the numerous renewables PPA market participants and analysts whose input informed this study. This policy paper represents the research and views of the authors. It does not necessarily represent the views of the Center on Global Energy Policy. The paper may be subject to further revision. This work was made possible by support from the Center on Global Energy Policy. More information is available at https://energypolicy. columbia.edu/about/partners. 4 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT TABLE OF CONTENTS Executive Summary 07 A. Background 09 B. Recent Trends in the US Corporate Renewable PPA Market 12 Sustainability Goal Setting 12 The Matching Concept 12 A Focus on “Additionality” 12 A Partial Hedge of the Buyer’s Power Costs 13 C. Impact of COVID-19 on the US Renewables PPA Market 15 Negative Drivers 15 Positive Offsets 16 Overall Takeaways 16 D. Growth Drivers in the Corporate Renewables PPA Market through 2030 17 Growth Driver #1: A Vast and Largely Untapped US C&I Power Demand Pool 17 Growth Driver #2: An Increased Focus on the Sustainability Profiles of US Corporations 19 Growth Driver #3: Rapid Growth in Technology-Sector Power Demand 20 Growth Driver #4: Continued Cost Declines for Wind and Solar 25 E. Constraints on the Corporate Renewables PPA Market Size 27 Constraint #1: Regulation That Limits the Feasibility of PPAs in Some Regional Markets 27 Constraint #2: The Need for Renewable PPA Prices to Be Competitive with Wholesale Power Prices 29 Constraint #3: Scale and Creditworthiness Requirements 33 Constraint #4: Financial Risks and Alternative Emissions Reduction Mechanisms 35 F. Putting It All Together: Sizing the Corporate Renewables PPA Market over the Next Decade 37 Base Scenario 38 Upside Scenario 39 ENERGYPOLICY.COLUMBIA.EDU | MARCH 2021 | 5 THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT Downside Scenario 40 G. Policy Implications 41 Federal Policy Implications 41 State-Level Policies 43 H. Conclusion 45 I. Appendix 46 How PPAs with Renewables Work 46 Case Studies: Comparing Forward Prices with the PPA Price Offers from Wind and Solar Sources 47 Expanding on Constraint #4: Financial Risks and the Existence of Alternative Emissions Reduction Mechanisms 55 Overview of Projections for Base, Upside, and Downside Scenarios 58 Notes 60 6 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA THE ROLE OF CORPORATE RENEWABLE POWER PURCHASE AGREEMENTS IN SUPPORTING US WIND AND SOLAR DEPLOYMENT EXECUTIVE SUMMARY In recent years, many of the world’s biggest corporations, including Google, Facebook, Microsoft, and Apple, have pledged to power their businesses with increasing amounts of renewable energy in order to reduce their carbon footprints and contribute to efforts to address climate change. Such efforts have had an encouraging impact on US power sector decarbonization, with a material and increasing share of US wind and solar deployments now driven by the procurement preferences of corporate customers. The vast majority of corporate procurement of renewable energy has been secured via power purchase agreements (PPAs). Going forward, a wider universe of companies is expected to look to such PPA agreements as a means of contributing to a low-carbon future, raising the question of how substantial these initiatives might be in supporting the overall transition to zero-carbon electricity. Indeed, a number of positive underlying trends are likely to facilitate continued growth in the corporate renewables PPA market. For example, electricity demand in the technology sector continues to grow rapidly, while renewables PPA penetration in the commercial and industrial sectors more broadly remains low, with room to grow. Additionally, expectations of continued declines in the costs of solar and wind technologies are likely to facilitate more procurement. Lastly, US companies are facing increased pressure from customers, employees, and institutional investors to improve their greenhouse gas emissions profiles. At the same time, certain factors may constrain the size of the PPA market, such as market regulations that limit the feasibility of PPAs in certain regions and the need for renewable PPA prices to be competitive relative to wholesale power prices. Scale and creditworthiness requirements can also limit the universe of potential corporate buyers, and the financial risks brought about when signing long-term contracts may further deter some market participants. Finally, companies increasingly have alternative emission reduction mechanisms at their disposal, such as renewables energy credits (RECs), carbon offsets, and green tariff programs. This student-led paper, from the Power Sector and Renewables Research Initiative at Columbia University’s Center on Global Energy Policy, explores the drivers influencing the renewables PPA market and assesses whether these procurement initiatives by nonutility corporations are likely to continue growing in the United States at a rapid enough pace to support power sector deep decarbonization goals. The analysis finds that while robust private
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