Spurring significant growth in renewable energy, the number of large commercial, industrial and institutional users seeking renewables to power their operations has exploded. According to a recent report from Advanced Energy Economy, 71 of the Fortune 100 and nearly half of the Fortune 500 have adopted renewable energy or sustainability goals. The rising demand for renewables is, in turn, driving market dynamics to force an evolution in utility business models already facing competitive pressures from the fast pace of technological change in the electric industry.
Beyond the usual options for existing “green” operations, however, these sophisticated corporate buyers are giving siting priority to new development in states and regions with ready access to renewables, offering opportunities for significant economic development. In many cases, companies prefer to directly support new greenfield wind and solar projects to demonstrate that their investment adds new renewable capacity to the local grid that would not have been developed otherwise.
In restructured regional energy markets like ERCOT and PJM, direct access to renewable projects is readily available. But in regulated jurisdictions served by incumbent, vertically integrated utilities, corporate customers have fewer options to procure renewable electricity directly from a specific solar or wind project. Realizing the potential to attract new large, high-quality load from these companies, several utilities have adopted what are known as “green tariffs,” sometimes at the request of a prospective customer.
What is a green tariff and what does it do? Simply put, green tariffs are an evolving breed of rate offering that facilitates direct renewable procurements, often through a collaborative arrangement between customer and utility. Some are structured like a subscription, allowing multiple customers to buy their energy from utility-procured renewable projects. Others allow the customer to negotiate its own renewable power purchase agreements with a project and “sleeve” the agreement through the utility, allowing the customer to lower the direct cost of electricity while ensuring its share of fixed system costs are not subsidized by other ratepayers.
Opportunities to develop green tariffs will depend, in part, on existing state laws and regulations, especially when it comes to ratemaking principles and requirements. Groups like the Advanced Energy Economy have been actively working with constituents to develop model enabling legislation for various renewable energy tariffs. The World Resources Institute closely tracks green tariff development in each state. Electric cooperatives, in contrast to traditional investor-owned utilities, often have fewer regulatory hurdles and more freedom to offer cutting-edge tariff programs. In all cases, green tariff design also will require more extensive evaluation based on the unique characteristics of a utility’s existing procurements, policies, cost and rate structures.
Nevertheless, there are some fundamental issues regarding contract and rate structure to consider in the design of any green tariff.
Framework for Efficient Cooperation
As previously noted, some green tariffs allow customers to simply subscribe to a portion of a renewable project which the utility will either develop or procure on its own. This approach gives utilities full control over the procurement and pricing and may work for some companies with smaller loads that have no desire to engage the markets directly. On the other hand, larger, sophisticated users that want more involvement in the negotiations (and more control over pricing) tend to prefer green tariffs structured to allow sleeved power purchase agreements.
These green tariffs often involve a “special” service contract that provides the framework for how the customer and the utility will cooperate. At a basic level, the contract should cover the process for how renewables are procured and whether negotiated rate structures will apply. It might also include terms for any system upgrades or new capital expenditures required to interconnect the customer’s facilities, though utility templates for facility extension agreements can be used. Public Service Company of New Mexico’s green tariff, for example, allows customers to bring power purchase agreements (PPA) to the utility and lead on the negotiations, as does Rocky Mountain Power’s Schedule 32 rate for Utah customers.
Because the customer and the utility will both play active roles in procuring renewables, the process and timeline must be clearly established. Customers want to know that the procurement process will proceed in a timely fashion and match any phasing of their load, but the utility will need ultimate control over which contracts it enters into.
A pre-negotiated term sheet establishing key commercial and legal provisions meeting the needs of both customer and utility can be very helpful. Terms impacting the cost of the resource and appropriate risk allocation will be a primary focus, but assignment, change of control, lender accommodations and other terms affecting the “bankability” of a project from the developer’s perspective should be considered as well. With the utility and customer on the same page, each can more effectively engage with third-party developers.
Ensuring green tariff customers pay their fair share of the cost of the renewable resource is another important consideration. Public utility commissions tend to disfavor tariffs that shift costs to other ratepayers. Basic rate components include the “energy charge” for each kilowatt-hour of consumed energy (indexed to the PPA cost), as well as a separate “demand charge” component to recover system costs to serve the new customer’s load. The utility may also have rate riders that may or may not apply to the customer.
Utilities often insist on minimum eligibility requirements for a customer’s facility, such as a minimum load factor or service voltage, to ensure only large, high-quality loads will qualify. This makes sense given the significant investment they will make in extending facilities and negotiating for a long-term renewable power supply. Data centers, for example, represent some of the most desirable new load and tend to operate at high efficiencies with load factors in excess of 90 percent, which can provide a net benefit to a utility’s system.
Adding renewables to a utility’s system can also result in net benefits, and the customer bringing the new renewable energy resources should gain some benefit from the value of any excess capacity and energy contributions. Any rate adjustments should account for variations in technology, like capacity values between solar PV systems with single- and dual-axis tracking. In some cases, particularly where production is coincident with system peaks, the procured renewable resource may defer the need for new system investment.
Finally, what happens if a customer wants to terminate the arrangement early? Utilities could be left with a considerable liability if excess power cannot be used by the utility or is being purchased at a premium. Conversely, the utility may stand to realize a net benefit if the excess power can be used to defer new purchases or can be sold for a profit. Early termination payment provisions must be carefully coordinated with the PPAs serving the customer’s load and calculated so that neither the customer nor the utility obtains a windfall.
Phasing and Renewable Intermittency
Basic electric service from existing utility resources may be required before the time renewable resources are procured or whenever production from procured resources does not match the customer’s load. This service is typically billed at the utility’s standard rate. However, some utilities offer competitively reduced “economic development rates” for an initial period of time in order to attract new customers and accommodate initial ramp-up time. These incentive rates may be variable or temporarily fixed.
Customers with strong sustainability commitments may require an unbundled renewable energy certificate purchase option in order to match any “brown” power supplied by the utility grid. This may be necessary to cover during periods when the renewable resource is not available or to firm and shape electricity service to the customer’s load. In either case, the customer and utility should agree on acceptable sources of the unbundled renewable energy credits and whether they will be transferred to the customer or retired on the customer’s behalf.
While the structured procurement process should be designed so that estimated annual renewable energy production from the contracted resources matches the customer’s load as closely as possible, it is possible that there may be over- or under-production relative to the customer’s load. Through either a monthly credit or other periodic true up, the parties will need to agree on the mechanism for aligning the actual costs to serve the customer. Because of the intermittent nature of some renewables, including both hourly and seasonal variability, green tariff customers may want the energy charge component to reflect a levelized production value based on estimated facility output and billed at the weighted average of all procured resources. Other adjustments may be necessary to account for other costs and benefits that may be realized under the power purchase agreements and other service arrangements.
A Growing Trend
Apart from the fundamental contracting and rate design issues described above, a successful green tariff depends on numerous other factors impacting both the utility and each customer. The key is balancing the individual needs of each potential customer with the efficiency of having a generally applicable green tariff that does not require extensive negotiations every time it is used. In any case, both customers and utilities are clearly warming up to innovative new ways to bring renewables to the grid in a continuing trend that is sure to intensify over the next decade.
Joshua Belcher (left), counsel in Eversheds Sutherland (US) LLP’s Houston office, has a national, multidisciplinary practice counseling clients in the utility, power and pipelines sectors. He guides clients through mergers and acquisitions, financings, project development and energy commodities transactions, with a focus on helping companies identify and manage complex environmental business risks in the context of the transaction and ongoing operational compliance. Joshua has extensive experience in both the development and acquisition of utility-scale and customer-sited energy projects, including combined heat and power, wind, biomass and solar facilities. Joshau represents both corporate buyers and project developers in the negotiation of renewable power purchase agreements for physical energy and financially-settled hedges and the purchase and sale of associated environmental attributes. He can be reached at [email protected]
Ram Sunkara is a partner in Eversheds Sutherlands (US) Houston office and serves on the firm’s Executive Committee. He focuses his practice on negotiating and finalizing acquisition and disposition agreements, structuring transactions and auction processes, and managing all aspects of a deal. Ram leads the Natural Gas Liquids (NGLs) and Petrochemical teams and the Distributed Generation and Renewable Corporate Procurement team. Ram also co-leads the Liquefied Natural Gas (LNG) team. He can be reached at [email protected]
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