Author: Pete Dignan, President and CEO at Renewable Choice
While it will be a few weeks until final 2016 wind and solar numbers are announced, the corporate, industrial, & institutional (C&I) news coming out of the year is purely positive. Although overall power purchase agreement (PPA) contracts by U.S. C&I buyers in 2016 declined over 2015’s record numbers, the sector still finished strong, with RMI’s Business Renewables Center (BRC) reporting a total of 1.56 GW of U.S. deals signed by C&I buyers, 32% higher than 2014.
Despite the slowdown, and market ambivalence surrounding the incoming administration, we remain fully confident in the current momentum in the U.S. and abroad. We’re not alone in our confidence; the BRC estimates that more than 80% of its members plan to either maintain or increase their renewable energy commitments heading into the New Year.
We believe five trends will dominate C&I sector renewable energy market growth in 2017:
- Favorable economics
- Expanding international markets
- Science-based targets
- Small buyer syndicates
- Compelling responsibility stories
Economics remain favorable
Worldwide, the cost of generating renewable energy continues to decline—even without subsidization in some cases—with the most marked reductions in the price of new solar, which reached historic lows in 2016, surpassing all fossil fuel generation and wind as the cheapest form of electricity, a result largely dependent on development in emerging markets like China and India.
These favorable economics—driven by the falling costs of wind and solar technologies, market deregulation and maturation, and financial incentives in many regions—will continue to make long-term contracting in the form of PPAs attractive to C&I buyers, who stand to benefit dramatically from a low, fixed price for power over the long-term.
2017 will be of particular import for C&I buyers thanks to the timing of the Production Tax Credit (PTC), the U.S. tax incentive for wind power. In order to earn full credit under the current PTC, developers were required to start construction on projects by the end of 2016. In some cases, this was a simple as “safe harboring” turbines for future use. In its 3rd quarter market report, the American Wind Energy Association (AWEA) shared that over 20 GW of projects were already under construction or in advanced development. Vestas, the world’s largest wind turbine manufacturer, also reported in the 3rd quarter that it had received 660 MW of PTC-eligible component orders. Extrapolated to the broader market, this means that there may be as many as 30 GW of safe harbored turbines available.
Going forward, developers will need partners to support these projects, which now have four years to reach commercial operation in order to receive PTC incentives. This means that there are still three years to complete a PPA and take advantage of the subsidy. With a finite number of projects, 2017 is the opportune time for C&I buyers to enter the PPA market.
International markets will expand
2016 already delivered growth in international markets, with Mexico’s self-supply regime and India’s aggressive renewable energy targets driving development in these two countries. Opportunity still exists in both in 2017. Other regions are also on the horizon this year including Australia and Poland. C&I buyers with a higher tolerance for risk have also successfully done PPAs in the U.K. and northern E.U. where the economics of deals are not as favorable (although this is projected to change, perhaps as early as this year), and some, including Google, have executed deals in South America, where Chile is most promising.
There are two primary benefits to considering PPAs outside the U.S. The first is that individual regions may provide unique incentives to C&I offtakers, ranging from lower project size thresholds to shorter contract terms to additional financial opportunity. The second is that these deals help C&I buyers meet their goals by addressing non-U.S.electricity load and Scope 2 emissions.
It is highly likely that international commodity markets will also grow in 2017. For example, a TIGR expansion is already planned for India, and Mexican CELs are scheduled to come online this year as well.
Science-based targets and climate action will drive new commitments
Over the past few years, NGOs including CDP, WRI, BSR, and WWF have been developing frameworks for buyers to utilize science-based targets to drive actual climate action. In 2016, CDP’s questionnaire reflected alignment with WRI’s Scope 2 guidance for reporting market-based emissions, which are directly linked to emissions-reducing activities such as the purchase of renewable energy. The questionnaire also emphasized the setting and achievement of science-based, climate action goals. To date, 204 companies have joined the science-based targets community.
The science-based target initiative stems from the UN’s work to identify what actual actions are required to mitigate climate change and its impacts. Effectively, a gap exists between our present carbon trajectory and the emission reductions commitments under the Paris Agreement. NGOs are urging private industry to make up that gap by aligning their carbon reduction goals with those set by the UN to achieve a dramatic decrease in global carbon emissions by century’s end.
It behooves companies to get on board with the science-based targets initiative, as they will not be immune from impacts of climate change, including floods, drought, and climate-based conflict. Moreover, companies can also influence their suppliers to do the same, by encouraging suppliers to utilize either renewable commodities or PPAs.
We expect there will be greater pressure for companies to join the community in 2017 and align their goals accordingly.
Smaller buyers will enter the market in force
In the past year, smaller buyers have been clamoring for the opportunity to enter the PPA market. Constrained by their size, these organizations are calling for small buying syndicates that will allow them to join forces with other buyers in order to get a deal done.
Developers are already creating opportunities for aggregated buying and we anticipate that this will become solidified in the New Year. Any smaller companies looking for an aggregation play should contact us directly.
The story will become even more important
In the wake of Google’s 100% renewable energy achievement and the compelling story they have to tell, we expect that other C&I buyers will want to consider the various angles on their own story in order to engage stakeholders.
In addition to their economic advantages, renewable energy sources come with a host of co-benefits that appeal to corporate buyers. For example, renewable energy reduces water consumption, improves air quality, and can create jobs in addition to reducing emissions and achieving science-based targets.
Companies can distinguish themselves as sustainability leaders by choosing a PPA, capitalizing on both the economics, as well as promoting the environmental and social benefits, of these contracts. PPAs also typically require a cross-organizational effort to complete, which creates a compelling opportunity for collaboration that many C&I buyers have found creates additional internal synergies.
To learn more about how your organization can embrace these market opportunities for renewables in 2017, reach out to our Strategic Renewables team today.