CONSUMER POWER: THE UNIQUE ROLE OF CORPORATES IN RENEWABLE ENERGY
August 17, 2016
Interest is growing in Australia in the role that corporate electricity customers can play in the renewable energy market. This includes large corporations, Universities, councils and other large electricity users.
Historically, the electricity customers for large scale wind and solar farms have been electricity retailers. Emerging new models see corporates play a more important role as direct customers of renewable energy operators, underpinning the development of new projects.
For such corporate electricity customers thinking of participating in renewable energy procurement, a key question is why? What are the benefits, and why not leave it to regulation and the utilities? Well, there are a few good reasons. Corporate customers have several key advantages over other participants in the market. Read on:
Long term certainty of future consumption
It is a turbulent time for energy companies, with great uncertainty of what the future holds. Rooftop solar, batteries and energy efficiency is seeing a fundamental shift in our energy system, leaving utilities to develop new models in the face of declining revenues. Additionally, electricity customers change retailers often, with most corporate customers tendering their electricity every 2–3 years, and some even more often.
In comparison, many corporate customers have been using large amounts of electricity for decades and there is great certainty they will into the medium and long term. Renewables need long term customers to attract investment, and many corporate customers have more certainty and are better placed than electricity retailers to make this commitment.
Exposure to long term electricity prices
Electricity retailers are very competitive, and trade in futures and complex contracts to provide cost effective electricity to their customers. They are incentivised to try and source the cheapest generation they can find, but not over commit on certain strategies that may backfire. Most futures are traded only up to the medium term, and in the long term it is preferred to follow the market rather than get caught out trying to beat it.
Even for the largest corporate customers, electricity costs may only be 1–5% of total organisational costs, relieving the pressure to follow competitors closely. This makes them more able to make long term commitments to renewables. Even a commitment of a moderate portion of energy costs can unlock new investment in solar farms.
Corporate Customers don’t own any electricity generation assets
Many of our electricity retailers own electricity generation assets. Investment in new renewable generation increases supply, and may see a reduction in the revenue of their existing assets. This can deter utilities developing or contracting with new renewable energy projects.
Corporate customers are not conflicted and actually benefit from electricity prices dropping.
If through deployment, renewable energy developments and technologies become cheaper and cheaper, this poses an even greater risk to utilities that are heavily invested in existing generation assets. But this is great for corporate customer electricity bills.
Fixed pricing providing a hedge
A key advantage of renewable energy is the lack of input costs, as they don’t need fossil fuels whose pricing is subject to global, and sometimes volatile markets. This means renewable energy generation prices can be locked in at fixed prices for 10–15 year or even longer contracts.
For corporate customers, committing a portion of energy costs to a long term fixed price Power Purchase Agreement provides a natural hedge. If electricity prices rise, then a portion of their costs stay the same seeing a cost saving. If electricity prices drop, while they will be paying a premium for the portion committed to renewables, they are still ahead due to the balance of their supply becoming cheaper.
A future of cheap abundant renewables — scary for generation owners, great for corporates
Investors considering investment in new renewable energy projects have to consider that due to their investment, increasing the available supply of electricity, it is possible that medium and long term electricity prices will drop. This makes investment in renewables exposed to the spot price difficult
For corporate customers, they can benefit from lower energy prices in the wholesale market, through reduced overall electricity costs.
Improvements in technology are crucial to reducing the cost of renewables. We have also seen that through deployment, costs come down further through refinement of design and installation techniques. And as more data becomes available, renewable energy projects become more bankable, bringing down the cost of capital.
It is not necessary to get to 100% in the first project. Solar PV is very scalable, allowing pilot projects, and the ability to refine and revise on subsequent projects, and built towards their targets. In any field, your second project is always better than your first, and third better than your second.
Corporate customers have a unique role they can play to participate in renewables coming down the cost curve, and capitalising on the benefits.
To finish, this video by Powershop is a great explainer of how new wind and solar farms will bring and keep electricity prices down in the future: