Innovative Aggregation Expands Access to Large-scale Renewables
March 23, 2017
Owned and operated by Dominion Resources and located in northeast North Carolina, the solar array is now producing emission-free electricity on behalf of the three buyers. Boston-based A Better City initiated the collaborative, while CustomerFirst Renewables (CFR) advised the buyers throughout procurement and contracting process.
The buyers aggregated their demand and negotiated as a group to capture large-scale cost economics. Each buyer entered into their own power purchase agreement (PPA) for a share of the renewable output from Summit Farms. No capital investment was required from any of the buyers. While MIT contracted for 44 MW and Boston Medical Center for 15.6 MW, Post Office Square’s 0.4 MW PPA is the smallest direct purchase from a utility-scale energy project in the country.
This aggregated approach to purchasing renewables demonstrates that a broad range of organizations can capture economies of scale typically reserved for utilities, or the likes of Google or Amazon. Other businesses and institutions interested in fundamentally reducing electricity-related costs, risks, and greenhouse gas emissions should consider replicating this innovative approach to accessing large-scale renewable energy (LSRE).
According to Lazard’s most recent cost of energy analysis, dramatic solar and wind power cost reductions over the last 10 years have driven rapid growth in the renewable energy sector. Today, wind energy on an unsubsidized basis produces some of the lowest cost electricity in the country. Including federal tax credits, wind is the least expensive U.S. resource. Solar PV and combined-cycle gas turbines compete for second place, swapping back and forth based on the price of natural gas.
We are now at a point where renewables are having a major impact on the power generation market: in 2016 more than 60 percent of all new electric generation in service was renewable, and more than half of that was driven by commercial and institutional buyers. For the first time, customers are the driving force behind the biggest source of new electric generation in this country. In fact, over the past five years, the customer-drive LSRE market has exploded, growing by over 50 percent per year.
One of the keys to low-cost LSRE solutions is scale. The Lockheed Martins of the world have enormous energy needs to satisfy with large-scale projects, which helps them negotiate from a position of strength. Smaller organizations don’t benefit from the advantages of economies of scale, and thus would likely pay a premium relative to larger purchasers.
Recognizing this smaller-purchaser challenge, CFR in 2013 pioneered combining multiple organizations and pooling their interests together to achieve scale. The organizations do not have to look the same — MIT, Boston Medical Center, and Post Office Square, for example, are diverse in their industries, sizes and objectives.
There are four primary benefits to aggregating demand for LSRE projects, and contracts can be structured so they are accessible in deregulated and regulated states.
First, at large-scale, wind and solar generators can produce electricity less expensively than average grid power prices. Procured well, buyers can capture savings from day one as well as over time relative to current competitively-sourced power supplies.
Second, aggregation helps buyers share fixed transaction-related costs, which can make a big difference for smaller LSRE purchasers. For example, the legal fees required to negotiate a PPA, as an example, will be very similar for a 100-MW project as for a 10-MW project. These and other fixed project costs have a much larger impact on the overall economics of the smaller projects relative to larger ones.
Third, group purchases often attract a richer set of potential project bids and enhance the buyers’ negotiating position. Acting alone, Post Office Square would not have been able to attract strong proposals from project developers. However, by teaming with MIT and Boston Medical Center, the group received 40 project proposals through a competitive solicitation process. The large project scale helped the buyers negotiate attractive cost economics as well as contract terms and conditions that met the buyers’ needs.
Fourth, collaboration and alignment during the procurement strategy development and implementation creates a “we’re in this together mindset” that helps build momentum for an unfamiliar process. Procuring LSRE through 10- to 25-year PPA contracts is new to most organizations and represents a significant change from traditional short-term power purchases from utilities or competitive providers. Questions will undoubtedly arise along the way, and each buyer, whether large or small, can play a significant role leading the process as it unfolds.
To transition to a clean energy economy, organizations of all sizes will need to access LSRE in an economic and straightforward manner. Until recently, this was the exclusive domain of the largest organizations and utilities. Thanks to innovations in demand aggregation, any organization can now access low-cost LSRE. They just need a few like-minded organizations to dive in with them. Supported by an experienced advisor, an aggregated group of buyers can save money, reduce risks and emissions, and cement their role as a sustainability leader.
Gary Farha is President and CEO of CustomerFirst Renewables. CFR is an independent advisory services firm that designs and delivers economically attractive, large-scale renewable energy solutions, tailored and optimized to customer needs.