Switching to renewable energy derived from the sun or wind is a compelling first step for many medium-to-large organizations wanting to make tangible progress toward sustainability goals, and with good reason: often described as “low hanging fruit,” renewables can help your company decarbonize, support local communities, and demonstrate your commitment to running a clean business into the future.
Knowing which fruit to pick is key, however, and the best options won’t be the same for everyone. There are several choices to consider when you’re ready to make the switch to renewables, so be sure you understand how they differ, and which best fits your company—and at what point on your sustainability journey. Coho advises on a full complement of solutions for a wide range of clients, and we can help guide you impartially to the solutions that will yield the best results.
The following is a menu of renewable energy offerings available largely in North America, and the breakdown on each, to help you approach your strategic energy decisions with knowledge and confidence.
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Power Purchase Agreement (PPA)
Renewable Energy Certificates (RECs)
Power Purchase Agreement (PPA)
(Also known as a virtual power purchase agreement, or VPPA; a physical power purchase agreement, or PPPA; and a corporate power purchase agreement, or CPPA.)
What it is
A PPA is a long-term (10 years or more) contract that a large-scale energy buyer (such as a large corporation) signs with a renewable energy project developer when a wind or solar farm is in development. The project can be built in any of the eight deregulated wholesale electricity markets across the U.S.
When the project is up and running, the electricity it generates is sold into the wholesale electricity market like at any other power generation site. Without a PPA in place, the developer would receive the floating market rate for that electricity.
But under a PPA, the developer receives a fixed rate from the buyer. The electricity is sold to the market, and the buyer receives the floating market rate, plus renewable energy credits (RECs). If the fixed rate owed by the energy buyer is greater than the floating rate that the electricity earns on the market, the energy buyer pays the difference. If the fixed rate is lower than the floating rate, the energy buyer earns the difference.
In this way, PPAs allow large-scale energy buyers to participate in wholesale energy markets. Energy buyers help to bring more renewable energy to the grid, and in return they receive RECs so that they may claim reductions to their own carbon footprint.
Wholesale PPAs can be designed to settle ‘virtually’ (VPPA), meaning the energy buyer only sees the financial transaction and the developer manages selling the energy into the market, or ‘physically’ (PPPA), meaning the energy buyer takes on the responsibility for selling energy into the market, usually with the support of an agent. There are benefits to both approaches, but typically energy buyers value simplicity and therefore prefer the virtual transaction.
The energy buyer continues to manage energy usage at their site as normal, which means they still have a utility bill for electricity. The economics of this arrangement benefit the energy buyer when they are receiving money from the solar or wind farm on a net basis, which offsets their electricity bill.
Pros
VPPA projects are abundant. There are currently hundreds of renewable energy projects planned or in development, and they are actively looking for energy buyers. That means energy buyers can choose projects that best meet their needs and align with their priorities. For example, an energy buyer may choose a project based on the least cost-additive scenario, but another may prioritize projects in their home state.
Cons
Without careful forward-looking economic and risk analysis, wholesale PPAs can create undesirable electricity market price exposure, risk of substantial loss, and added cost over time.
Eligibility
Practically any organization with investment-grade credit can enter into a wholesale PPA. Large-scale energy buyers with at least 100 MWs of electrical demand can contract directly with a developer, and smaller organizations can band together to create aggregate deals.
Best for
Wholesale PPAs are great for energy buyers with very large and/or very distributed energy usage across the U.S. looking to have significant impact with renewables quickly.
Green Tariff Programs
(Also known as utility tariff programs.)
What it is
Green tariff programs are utility-sponsored programs that enable energy buyers to purchase renewable energy and renewable energy credits (RECs) directly from their utility at a fixed rate in return for a fixed or floating bill credit. Buyers subscribe to a renewable energy project located within their utility service territory. The program cost is intended to reflect the actual cost of generating and delivering renewable energy while minimizing the cost burden on other utility customers who are not subscribers. The bill credit is intended to reflect the incremental cost benefit renewable energy provides to grids.
Pros
Green tariff programs bring clean wind and solar projects to an energy buyer’s region, boosting the buyer’s reputation with the local community. Organizations also may be seen as early adopters of renewable supply in regions with limited supply or that historically have been served by utilities slow to act.
Depending on the program and its structure, green tariffs can also deliver electricity bill savings and/or lock in a fixed price to hedge brown power costs, resulting in greater cost and risk protection. Some green tariff programs also offer flexible sizing and frequent ability to revert to other tariffs.
A green tariff program is a direct transaction or arrangement between an organization and its local utility. Typically, enrollment is simple, and it won’t significantly change the way the two entities interact.
Cons
Green tariff programs may not provide the same potential cost savings relative to other renewable energy solutions (e.g., PPAs), and they tend to be more subject to regulatory approval processes (which can introduce an element of uncertainty).
Green tariff programs also differ across utility service territories, each with its unique benefit/risk profile, so the mechanics of the program can be inconsistent.
Eligibility
Energy buyers must be located within the service territory of a utility offering a green tariff program.
Best for
Green Tariffs are most suitable for energy buyers seeking flexible, easily implemented in-region solutions to address their sustainability needs.
Onsite Solar
What it is
Onsite solar is a contract to install solar panels on an energy buyer’s rooftop, grounds, or carport structures. The contract with the solar developer can be structured for the energy buyer to own or lease the panels, or to buy the energy and RECs generated by the panel array over time. As energy is generated by the panel array, the energy buyer receives a credit from their utility or retail supplier, the value of which is dependent on local policy.
Pros
In certain markets, onsite solar can provide economic savings, a strong visual impact of the buyer’s commitment to sustainability, lower dependence on grid power usage, and support local renewable energy development.
Cons
Onsite solar requires site-by-site engagement and analysis and can typically only be used to address a small portion of overall energy usage (with lower returns to scale relative to offsite solutions). Furthermore, the installation may have size limitations, and it may impact facility operations (e.g., carport installs temporarily impact parking availability).
Eligibility
Onsite solar is possible in all 50 states, but its success depends on the current cost of power and the state regulatory policy, which could determine the size of system you’re able to install and the level of credit you receive.
Best for
Onsite is a good option for energy buyers with significant land or rooftop availability and a strong desire to display a commitment to sustainability for employees, customers, and local stakeholders. The states with the most advantageous policies and economic viability for onsite solar include most of New England; DE, MD, NJ, NY in the northeast; IL and MN in the midwest; and AZ, CA, and CO in the southwest and west.
Community Solar
What it is
Community solar enables the flow of renewable energy to multiple energy buyers. An individual buyer subscribes to a portion of production from a community solar asset at a fixed discount. In return, the local utility compensates for the electricity produced by the community solar asset and added to the grid in the form of ‘bill credits.’ These ‘bill credits’ have a monetary value typically based on the basic service rate of the utility. On the surface, community solar is very similar to a green tariff program. However, buyers should note some key distinctions:
- The primary counterparty is a solar project developer, not the local utility. This adds a layer of complexity, as the buyer must sift through and choose potential providers on their own.
- Program cost is discounted from the utility bill credit, essentially guaranteeing savings.
- The local utility (not the buyer) takes ownership of the RECs produced by the buyer’s share of production.
Pros
Community solar enables small-to-medium size commercial buyers to purchase renewable energy (with no renewable energy attribute) from an offsite local asset while ensuring guaranteed savings over the duration of the contract. Community solar also enables customers with non-solar-ready facilities to access renewable energy.
Cons
Project RECs are not transferred to the customers but are instead transferred directly to the local utility. This means the buyer cannot make the claim of using this renewable energy. Also, customer subscription is typically capped at a certain percentage of the project size (e.g., customer may not subscribe to more than 40% of a 5 MW Community Solar project), limiting scale of enrollment.
Eligibility
As of May 2024, community solar is available in 41 states, with 19 states and Washington D.C. implementing official policies and programs to encourage more community solar. The Solar Energy Industries Association (SEIA) expects the gigawatts produced through community solar to double over the next half decade. Additionally, $7 billion of federal funding has been allocated to developing community solar in communities in all states and territories, including in Tribal Lands, through the the Biden Administration’s Solar For All program.
Best for
Community solar is a good option for buyers that are impacted by a lack of access to renewable energy, including in particular low-to-moderate income customers, American households and businesses who rent, live in multi-tenant buildings, or have roofs that are unable to host a solar system. Companies and organizations who subscribe to community solar projects also save on renewable energy, leaving funds free to invest in other decarbonization initiatives.
Structured Retail
(Also known as renewable retail)
What it is
Structured retail is a long-term agreement with a retail electricity supplier to supply an energy buyer’s sites with renewable electricity from a designated renewable energy project. The retail electricity supplier executes a PPA with a renewable energy developer and passes through some of the benefits and risks to the energy buyer.
Pros
This approach can allow energy buyers to source a local large scale renewable energy project, contract for renewables in a similar way to current energy purchasing, and buy renewable and non-renewable energy through a single contract and counterparty. Similar to a utility tariff, you may also be able to access renewable energy at a smaller scale and a shorter term length than with a PPA.
Cons
Adding a retail electricity supplier (effectively a middleman) between the buyer and the renewable energy project limits the buyer’s potential for savings and can rack up surprise fees without competitive sourcing of both the retail electricity supplier and the renewable energy project.
Eligibility
This approach is available in deregulated markets that allow energy buyers to choose their retail electricity supplier. States that currently allow retail electric choice include CT, DE, IL, MA, MD, ME, MI, NH, NJ, NY, OH, OR, PA, RI, and TX. Retail choice is also available in some locations in CA and VA.
Best for
This is a good choice for buyers in deregulated markets looking to contract renewables in a manner similar to their current electricity purchasing strategy.
Renewable Energy Certificates (RECs)
What it is
RECs are an instrument used in North America that attests the possessor owns the environmental attributes generated from a renewable energy resource, with one (1) REC being equivalent to 1 MWh or 1,000 kWhs. Upon production of renewable energy that is then fed into the grid, a REC can be retired (thereby ensuring the owner’s rights to its environmental attributes) or it can be sold on the open market to other entities who wish to reduce their emissions. RECs tend to be a core part of any renewable energy solution as they allow buyers to make environmental claims. The sale value of RECs is dependent on the market in which it’s generated; markets with renewable portfolio standards (RPS) typically value RECs at a higher amount than markets without said mandate.
Pros
RECs are an efficient, flexible, scalable method to address scope 2 emissions. Buyers may wish to purchase RECs up to a certain amount and for a certain block of time.
Cons
RECs are attributed to an asset that’s already in operation, and the buyer cannot make additionality claims (meaning, the deal is done, and a REC is attached only to renewable energy that has already been added to the grid). Furthermore, REC prices, which are wholly driven by supply and demand for environmental attributes, have significantly increased over the last 18 months.
Eligibility
Any energy buyer with load across the U.S. and/or Canada is eligible to purchase RECs to address their emissions.
Best for
REC purchases are most suitable to buyers seeking a bridge solution in the short-term to address their sustainability needs while they assess the market for viable long-term solutions.
The advisory team at Coho has deep combined experience in the renewable energy space and can help you make the best decisions for your organization’s unique needs in North America. We’d love to run through this “menu” with you and discuss how to maximize your company’s energy portfolio and reach your sustainability goals.
Coho, an ERM group company, is registered with the U.S. Commodity Futures Trading Commission as a commodity trading adviser and is a member of the National Futures Association (NFA ID: 0542152). Information in this article is provided for general informational purposes only and should not be considered legal or commodity trading advice or as forming the basis of any advisory relationship with Coho. Trading in commodity interests and financially settled energy contracts, such as virtual power purchase agreements, can be complex and involves risk of loss that can be substantial. At a minimum, you should consult with your own legal and accounting advisors in considering whether to enter into any such contract.
