Renewable energy purchasing has evolved into a sophisticated combination of savings calculations incorporating demand charge savings, multiple energy pricing options, and increasingly flexible generation siting. Large corporations have embraced this trend, by buying more renewable energy than ever — a recent PwC survey showed 72 percent of surveyed firms are actively pursuing clean energy procurement.
While this trend benefits firms with dedicated staff to evaluate decisions like building on-site generation versus buying off-site supplies, or navigating the complex contracting process, not all businesses have these resources available to them.
Fortunately, smaller firms without energy management teams specializing in these deals don’t have to overlook the ability of renewable energy purchases to cut costs and boost environmental performance — as long as they follow a few evolving best practices.
Renewables Can Save Big — If The Calculus Is Correct
Evaluating the financial benefits of renewable energy should be the first step in any firm’s decision to invest in their own clean energy generation, or to purchase output from an off-site power plant. Indeed, 76 percent of PwC survey respondents said attractive ROI/payback was the main driver in their intent to purchase.
First, identify electricity consumption and utility spend data for an in-house review in line with the management adage of “what gets measured gets managed.” Savings have traditionally been in the 15-20 percent discount range for a customer’s effective rate, but with the low price of natural gas and short-term power rates depressed by the shale gas boom, customers should target savings between 5-15 percent depending upon utility rates. Natural gas prices have begun bottoming out, and given today’s depressed gas market, a lower savings margin is more realistic.
Second, determine the appropriate percentage of solar energy to procure compared to total electricity consumed. Ironically, buying too much clean energy may result in penalties – some states penalize utility customers for purchasing more than 100-110 percent of their annual energy usage through renewables, since they want to avoid consumers becoming net generators of electricity back to the grid. This threshold is determined by state net metering regulations, which may change over time, so keep current with legislative mandates and regulatory changes.
When negotiating contracts, push for flexibility on purchase commitments. By better understanding potential changes to power usage and demand charges from energy efficiency improvements (or other changes to load or consumption), firms can optimize renewable energy purchases to minimize unexpected utility charges.
Beyond stabilizing costs at a lower rate, firms can also realize additional savings from on-site generation through reducing utility demand charges. Demand charges are based on maximum electrical usage over a specific period of time; some utility tariffs base maximum demand on the annual peak over a 12-month period, or on a monthly peak demand.
Water makes an apt analogy here — consider demand charges as based on the size of a pipe and not how much water actually flows through it. If an on-site solar facility will reduce a businesses’ energy profile, target savings by lowering demand charges.
Which is Better — On-Site or Off-Site Generation?
Once expected cost savings are identified, evaluate whether investing in on-site generation or contracting for supply from off-site projects is better.
Available roof or property space often determines if on-site (or behind-the-meter) projects are best. If ample roof and ground space are available, on-site generation may realize cost advantages by using existing infrastructure to interconnect to a utility’s distribution or transmission network, compared to the extra cost of interconnecting a new solar system to the utility grid.
However, the option of connecting on site is limited for a large majority of commercial and industrial customers. The National Renewable Energy Laboratory estimates at least 48 percent of businesses in America don’t have suitable roofs to host solar arrays. Fortunately, two fairly recent market developments can meet renewable energy demand from off-site generation — virtual net metering (VNM) and community solar.
VNM is ideal for businesses unable to host on-site renewables generation or those unsure about entering into a project lease because of property concerns. For instance, corporate properties could be less than ideal for siting solar due to the following issues: Is the property a brownfield requiring costly site cleanup before development can occur? Could the facility close or relocate, resulting in added cost for removing the solar array or complexities re-routing the energy to another location? Is the roof north facing, ten years or older, in poor condition, or already encumbered by machinery taking up space?
Contracting to buy electrical output from renewable energy facilities located several miles off-site can cut costs and emission without worrying about being locked into an array firms may no longer need and which is physically located at one site. The decision isn’t an either/or proposition — 80 percent of the PwC survey respondents said they were planning both on-site and offsite VMN purchases. Whether working with a solar developer or purchasing renewable energy at scale from local utilities, options abound.
Firms should seek VNM contract flexibility up front. Some states will allow shifting off-takers from one location to another, but it’s state-specific and predicated by regulations. VNM availability varies by location but states like Massachusetts and New York have enabling policies in place for commercial, municipal, and residential off-takers — compare this to states like Connecticut and Rhode Island where only municipal off-takers can participate in VNM at this time. As more states put in place legislation enabling VNM, a greater number of commercial and industrial customers can adopt solar nationwide.
Community Solar’s Commercial Upside
Firms may also want to consider community solar — while these projects are typically targeted toward residential customers, commercial customers can be a particularly good fit as anchor off-takers to accompany a pool of residential customers. Many states cap community solar projects at a certain size (for instance two megawatts per project in Massachusetts and New York), but the larger demand represented by a commercial customer may make its buying power more attractive to a project developer who may in turn pass along a more favorable price.
Consider it this way — community solar projects need a certain amount of demand in order to be profitable, and multiple small-scale residential customers who may shift subscriptions don’t provide the certainty of one commercial customer. If a firm can sign up as an anchor client consuming 50 percent of a project’s output, the project developer can count on a higher rate of return and may provide a favorable price discount for the customer.
Careful When Marketing Environmental Attributes
Costs are a key consideration, but many corporate renewable energy deals still focus on emissions reductions — 85 percent of the firms surveyed by PwC said sustainability goals or cutting greenhouse gases were the main driver of their deals. While purchasing carbon offsets or renewable energy credits traditionally sufficed for branding purposes, declining project costs now mean customers can buy clean energy and save money.
If sustainability is the main driver, be careful about marketing the environmental benefits of renewable energy purchases. For instance, installing onsite solar, but selling the renewable energy credits it generates may complicate claims about reducing greenhouse gas emissions. Any business worried about public perception can always consult an outside certification entity like Green-e to ensure compliance with environmental claims.
Realize Renewable Energy’s Upside
Renewable energy represents huge upside for all corporate buyers — not just large corporations. Innovative and well-developed renewable energy policies will mean wider adoption of VNM across the U.S., increased energy cost savings, and reduced global warming caused by harmful greenhouse gas emissions — making green business synonymous with good business.