Sage Energy CEO says for many Fortune 500s, VPPAs are the way to go green

A growing number of Fortune 500 companies like Microsoft, Amazon, Google and Walmart have been making headlines with announcements of hitting major renewable energy targets. As pressure to reduce carbon emissions escalates in the face of climate change, this expanding group of corporates is pushing towards "100 percent renewables" with procurements of green energy via solar, wind, and hybrid projects.

But are these companies actually putting solar panels on their rooftops and erecting wind turbines in their parking lots? Well, not exactly.

Virtual Power Purchase Agreements, or VPPAs, are financial contracts that are fast becoming a popular way for large and mid-sized companies to satisfy renewable energy goals. As a hedge mechanism that allows companies to enter into contracts for the purchase of environmental attributes, or renewable energy certificates (RECs), VPPA contracts are virtual and not tied to any specific physical asset. The power generated under that contract is sold into the local grid, with corporate offtakers owning all of the associated RECs.

In 2019, more than 80 percent of power purchase agreements signed with U.S. corporate offtakers were VPPAs, with the scope of these companies rapidly shifting to include companies of all sizes and sectors--from major food chains like McDonalds and Starbucks, to tech companies like Apple and AT&T. And with 60 percent of Fortune 500 companies committing to targeted greenhouse gas emissions reductions, utilization of VPPA financing is only expected to grow.

“Especially for larger corps, and Fortune 500s in particular, they’re looking for virtual PPAs, and so there are a couple of different ways to do that,” Tom Williard, Principal and CEO of Sage Energy Consulting, told NPM. “Our customers are typically looking to reduce their carbon footprint and to normalize their energy costs, and there are usually corporate initiatives on both sides of those lines. They go out to the market and start talking to folks like Sage and say, ‘Hey, how can we do this?’ Sage will look at clients’ needs and figure out what sort of combination of solutions work best for them, and one of them for these larger corporates is often VPPAs. It's basically a hedging instrument where they also get the renewable energy credits to make that claim.”

To date, Sage has successfully managed the development of more than USD 2bn in clean energy projects, many of these negotiated around PPAs on behalf of clients. Last month, Sage announced its partnership with LevelTen Energy, which will enable more streamlined sourcing of PPAs for its clients through the LevelTen platform.

“A lot of companies, especially European-based, have strong environmental goals, and we’re looking at their portfolios and working with them to figure out what is the most effective way they can address those needs," Williard said. "It's more of a case of ‘all of the above’ in renewable energy. If you can do it locally, you can meter. Oftentimes, that's more effective as far as financial returns are concerned. And each client is different, so each client has an appetite for certain kinds of risks. That’s where we’ll often start the conversation with them, which is, 'what kind of risk are you looking for? What kind of risk do you want to avoid?' And then we try to put together the services that best meet their needs and their risk profile.”

Much of Sage’s business falls behind the meter (BTM), where the risks are predominantly associated with actually developing the projects, as well as the value of BTM energy around tariff structures and built-in incentives. Because these contracts and projects tend to be longer-term, there are often significant risk elements included in Sage’s analyses.

For VPPAs, however, the bigger risks often come with the developers themselves.

“Oftentimes, we’re looking at projects that haven't been built yet, and so there's a tradeoff with going with an earlier-stage project which hasn't been developed as much, with maybe a developer that doesn't have smooth financial backing,” Williard said. “For them to get in the market, they're going to bring a lower-cost product, but if in two years it doesn't come together, then the corporate may be out of time to meet their requirements or goals, and then it's a real scramble."

As part of its analyses, Sage explores each developer, looking at their risk tolerance for project investments and corresponding risk strategies, project timelines, the percentage of the project that is already funded or financed, and how much of that project is actually in the ground.

"For different kinds of projects there are different risks, and we try to desegregate those risks for our different clients so that they know what's going on and have a realistic view of what's possible with these projects," Williard said.

A slam dunk?

Just six weeks into his presidency, President Joe Biden has already taken major steps towards his promise of a nationwide clean energy economy. Through a flurry of executive orders rolling back damage done by the Trump administration, and new actions like rejoining the U.S. into the Paris Climate Agreement, the Biden administration has already energized the clean energy sector with promises kept.

“What we see is support for renewable energy,” Williard said. “There are grant programs, financing programs for developing EV technology. We think there is going to be a lot of support for EV technologies, batteries, and there will be support for environmental programs on carbon that were rolled back by the Trump administration.”

To place the U.S. on a path to a carbon-neutral power sector by 2035 and a net-zero economy by 2050, the Biden administration has already established a National Climate Task Force and has ordered federal agencies to procure carbon-free electricity and zero-emission vehicles to help revitalize clean energy industries.

But hitting Biden's robust clean energy targets is far from a slam dunk.

“The executive actions are very limited,” Williard said. “Where there’s money behind initiatives, that usually requires legislation. It's not an unfriendly environment, but I’m not sure it's entirely friendly with a 50-50 Senate. There’s a lot of talk--it's just going to be a tough lift. If the Democrats go ahead and blast the filibuster, which is somewhat hard to imagine, we will see some significant short-term upside potential.”

What's hot

By 2030, energy storage markets are estimated to grow 2.5–4 TWh annually, approximately three to five times the current 800 GWh market, according to the U.S. Department of Energy.

The convergence of electrified transportation, a rapid decrease in battery storage costs, and increased variable renewable generation has led to a surge in research and market deployments of energy storage across the global electric and transportation sectors.

“There’s clearly building momentum around storage, and most of that is lithium-ion,” Williard said. “There’s also significant issues with it that we’re seeing here in California just with supply and demand. Vendors are entering and exiting the market, especially anything that's not small to utility-scale. There’s a supply issue, so storage is really buzzy. I think it’s going to continue to make more sense--it enables other intermittent renewables and some of the other development out there. I think we’re definitely going to see more work on the storage side.”

In a recent vision statement, the U.S. Energy Storage Association (ESA) laid out a path to hit 100 GW of new energy storage by decade's end, slated to include batteries, thermal, mechanical and pumped hydro. The organization has been calling for an investment tax credit (ITC) for stand-alone storage facilities, as well as for emerging policies that remove barriers to market participation.

“In both transmission-scale wholesale markets, as well as BTM and distribution markets, we don't think storage is being fully valued yet, especially as you drive down into the distribution markets,” Williard said. “There are value streams out there that are being talked about and being developed right now, but they're not really in place. But once that is recognized, I think we’ll see a bit more lift for the storage market. It also has the advantage because that technology is getting cheaper all the time, and it really enables other renewables.”