Australian companies have had time to digest our national commitment to the UN’s Sustainable Development Goals and the Renewable Energy Target (RET). These initiatives come as Professor Alan Finkel AO assesses the energy landscape in his Independent Review into the Future Security of the National Electricity Market. Several big consumers of power in Australia are looking to push the boundaries even further. They want to execute a procurement strategy for their long-term energy needs.
One that maximises a renewable energy solution.
So, just how do they intend to achieve this? Well, until now, Australian corporates, whether they be public, private or statutory, have really had three options when it comes to achieving carbon neutrality:
Reducing demand-side emissions – energy efficient buildings and equipment, lighting upgrades, reduced air travel
Reducing supply-side emissions – solar panels, on-site tri-generation
Purchasing and retirement of carbon offsets.
Heavier users of electricity, however, are now focusing on an alternative. They’re leveraging the strength of their own balance sheets to access secure, long-term, renewable energy through corporate power purchase agreements (PPAs) with renewable generators.
Playing the role of developer in a wind or solar farm is rarely a practical solution. However, simply ticking the “green power” box on a standard, two or three-year retail power supply agreement is inadequate, too. And while a synthetic PPA can be achieved by way of contracts-for-difference or hedging, corporates with a strong focus on sustainability, and a major economic exposure to future electricity price hikes, may want to facilitate the development of new renewable generators instead.
Often, corporates have multiple physical locations, each of which are supplied electricity from the national grid. Not all of these locations can be directly connected to a wind farm or solar farm, nor can one renewable generator provide all of a corporate group’s power supply all of the time. Therefore, corporates will still need to purchase the electricity consumed from an electricity retailer which will participate in the NEM in respect of the purchase of the electricity consumed.
Renewable generators are entitled to create large-scale generation certificates based on the amount of eligible renewable electricity they produce above their baseline. One large-scale generation certificate is equal to one megawatt hour of eligible renewable electricity. Large-scale generation certificates are usually sold to liable entities such as electricity retailers, who are required to surrender a set number to the Clean Energy Regulator each year based on a percentage of the electricity they sell to consumers. Typically, the retailer would source those LGCs and pass on the cost to the corporate under the retail contract. So, without a clever procurement strategy, a corporate with a PPA may find itself buying all of the power and LGCs produced by its renewable generator, as well as paying the retailer for the electricity it consumed and the cost of the LGCs to be surrendered by the retailer, which will flow through the retail contract. A double whammy.
That being said, corporates don’t usually wish to become a participant in the National Electricity Market (NEM). From a purely practical perspective, they don’t want to purchase all of the electricity from the owner of the new renewable generator, such that they have to register as an intermediary and actively participate in the NEM electricity generation.
To address this, there is an alternative. The corporate can undertake a competitive process for the procurement of a bundled supply of electricity and LGCs (with separate prices for black and green power). The LGCs are sourced from a new renewable generator to be developed by the successful proponent.
Unless the developer of the new renewable generator is also an electricity retailer, the procurement process results in the developer establishing and operating the new renewable generator and selling to the corporate the LGCs created from the electricity generated. A separate retail contract would be entered into with an electricity retailer in respect of the electricity consumed by the corporate. The retailer and the developer would need to participate in the procurement process as a consortium.
Where the developer and the retailer are different parties, the retail contract would provide for the corporate to supply LGCs (which it acquires from the developer) to the retailer to enable the retailer to satisfy its RET obligations and avoid the corporate paying for more LGCs than necessary. The corporate can then voluntarily surrender additional LGCs purchased from the developer such that its entire electricity consumption is effectively derived from renewable generation.
This type of procurement process has previously been successfully undertaken in Australia. However, there are a number of commercial issues which would need to be resolved including: variability in generation and consumption (including mismatches in timing in the NEM between generation and consumption); change in law risk; and credit risk. Also, accounting advice (including whether the arrangements would constitute a finance lease) and tax advice would need to be obtained in relation to the desired contracting structure before the preferred procurement process is determined.
A variation to this structure may involve the corporate also paying the developer for the electricity generated and, via a “wheeling” contract, with the retailer obtaining a credit against electricity consumed by the corporate. In this way, the developer will receive payment from the corporate for electricity and LGCs produced thus leveraging the corporate’s balance sheet to assist the developer in securing funding for development of the renewable generation project.
For those financial institutions lending to major consumers of electricity, particularly those that are ASX-listed, now is an opportune time to ask what these borrowers are doing about their long-term energy security. This is rapidly becoming an economic issue, as well as an environmental one. It could also be significantly value accretive if it is done well. If executed poorly, it could prove the exact opposite.