Commercial energy users aren’t limited to installing solar on their sites, let alone within their own utility any more. For those seeking to lower energy costs and their carbon emissions, there are options abound with a wider array of procurement options than ever before. While on-site renewable generation returns the most benefits in terms of energy savings, public sustainability recognition, and greening of facilities — companies with non-ideal sites or companies that already maxed out their on-site renewable potential, can choose to subscribe to community solar projects, or invest in a Virtual Power Purchase Agreement, depending on what’s available in their markets.
Power Purchase Agreements (PPAs) remain the most popular financing tool for on-site systems and off-site or virtual projects because they allow businesses to secure long-term price certainty without laying out capital upfront — I’ll refer to these as physical PPAs in this article. Some companies are choosing to invest in off-site projects through Virtual (or Financial) PPAs rather than build their own on-site solar or solar+storage projects. While there are certainly benefits to Virtual PPAs, there are also risks making it critical for businesses to consider which option provides the most benefits for their company.
Here is an overview of both on-site and off-site options, including a look at how each works, as well as key benefits and risks.
Off-site Clean Energy Generation
Not every business has the space available or solar resource to install its own on-site solar project. Some also may be restricted from solar development because of lease terms. These companies can still benefit from renewable energy generated off-site through a Virtual PPA Agreement (VPPA).
With a Physical PPA and on-site project, the business owns the power generated, Renewable Energy Credits (RECs), and can choose to use or sell it into the wholesale electricity market (in some markets). But a VPPA is purely a financial transaction in which a company agrees to purchase output and RECs to secure electricity at a fixed price, rather than a fluctuating market price. The project owner sells the energy into the market on the company’s behalf and passes the revenue back to the business. When market price exceeds the fixed VPPA price, the company makes a profit. But when the market price is lower than the fixed VPPA price, the business owes the seller aka system owner the difference.
In this way, VPPAs enable even smaller companies without energy trading expertise to quickly work toward their renewable energy goals with a fixed energy price. Though a business will receive power from the pool it’s bought into, it will likely still need to buy electricity from their utility to meet its power needs.
Businesses with distributed electricity loads can also benefit from VPPAs because as the buyers they don’t have to be in the same region as the renewable energy project. Though many states do have regulated markets that permit buying and selling renewable energy through methods such as net-metering, VPPAs provide an option for companies with loads in unregulated areas to participate in renewable energy development as well.
However, VPPAs do come with challenges and risks. For example, many forces—from renewable energy penetration to natural gas pricing to the regulatory environment to severe weather—can affect fluctuating market prices. Buyers need to be aware of market risks that can impact energy pricing and ensure they’re in line with that level ofrisk tolerance.
Furthermore, Physical PPAs require that the buyer obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the producer. But because VPPAs are strictly financial transactions, they do not. Many regulatory requirements for VPPAs are still under development and therefore may be subject to ongoing reporting requirements.
VPPAs are also usually only available in markets with third-party independent transmission system operators, such as a regional transmission organization (RTO) or independent system operator (ISO). As independent power producers, project developers must be permitted to sell power into the grid. They may not be allowed to in a vertically integrated market with a single entity responsible for electricity generation, transmission and distribution. Also, RTO/ISO regions pay a uniform, transparent price based on time and location of energy produced so the fluctuating price can’t be manipulated by the project developer.
VPPA pricing may also be considered a price hedge and therefore subject to accounting rules, which may be too great a burden for some companies. Some businesses may also lack the skills to negotiate VPPAs or successfully explain the benefits of VPPAs to stakeholders.
In some markets, companies can elect to subscribe to a community solar project in the same utility territory or load zone in order to receive credits for solar energy production. In most cases, these companies are considered the “host” because they would receive the majority of the energy produced, while homeowners and smaller businesses would subscribe to be credited from the remainder of the energy produced.
Companies benefit from being a subscriber of a community solar project in a similar way as committing to a PPA. They agree to purchase energy from the system and in turn receive credits for the energy produced, resulting in overall energy cost savings.
On-Site Clean Energy Generation
Businesses can also choose to install their own solar or solar+storage project on-site. They can then use or sell the power to buyers in the same grid region (in some markets).
Like with VPPAs, on-site generation with a physical PPA can also offer businesses a fixed energy price, but with added benefits. For example, direct procurement can offer better economics. On-site generation can reduce costs, diversify energy supply and hedge against future energy market volatility. Projects with solar and storage can also help reduce demand charges or can take advantage of time of use arbitrage. Projects can also be sized to meet the energy users demand.
Companies with a visible solar project also often receive positive press and are seen as environmental leaders for their sustainability efforts. Many companies also intall on-site projects for employee recruiting and engagement purposes. On-site renewable energy generation can also help businesses meet corporate goals and customer and investor requests to reduce carbon emissions.
While there is some regulatory jurisdiction for on-site projects—especially when it comes to how excess generation is credited back to a business—the majority of states allow net metering so PPA financiers can offer RECs to buyers for their electricity. Borrego’s political advocacy team keeps tabs on regulatory changes to advise customers while advocating for rules that maintain and advance project benefits.
There is also always some risk that the on-site system doesn’t produce as expected. However, solar power is a mature technology and working with an experienced commercial solar developer and installer like Borrego can ensure only quality equipment are used. Overall, using energy generated on-site is more efficient because a business is consuming power at the source.
On-site renewable energy procurement is well established and something most stakeholders can easily understand and support. Companies that can purchase an on-site system experience the best economics and all-around benefits.