Businesses should consider PPAs to meet green targets

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Andrew Horstead, risk analyst at Utilyx, outlines how organisations can benefit from renewable power purchasing agreements

The UK government assured the EU in its Renewable Energy Strategy that 30 per cent of UK electricity will come from renewable sources by 2020. This is a significant increase from the current level of just 6.8 per cent, and when you consider the barriers that are currently preventing renewable energy projects from being built - from planning through to investment issues - it seems a somewhat impossible challenge.

Unsurprisingly, according to Ofgem's ROC register, fewer than 90 large renewable projects were commissioned in the past two years. With larger projects struggling to get off the ground, it's becoming increasingly apparent that the future of renewable energy production could prove to be dependent on businesses' willingness to invest in small-scale generation. However, the trick for many organisations is simply knowing where to start.

If your organisation has a lot of land, there is the potential for you to consider on-site generation through a wind turbine or small biomass-station. However, even organisations with limited opportunities for on-site generation can still purchase renewable energy through a Power Purchase Agreement (PPA).

This kind of agreement involves an organisation buying a portion of its energy requirement directly from a renewable generator, such as a small scale wind farm, and there is no need for a direct connection between you and the energy source. Whether you choose to purchase one per cent, 10 per cent or even 100 per cent of your energy in this way there are some clear financial and environmental benefits that a PPA can provide.

Price certainty
A PPA agreement can be for any period of time e.g. from one day to 20 years, but is usually best as a long-term arrangement. With energy bills set to inevitably rise in the decades to come, PPAs are an effective way of locking out part of your organisation's energy spend. The price you pay today is likely to be the same in 20 years' time as the energy is generated from a consistent and freely available source that isn't subject to the same fluctuations and price spikes as traditional energy sources like gas and oil.

Even if wholesale energy prices were to drop, business users should still expect to see their bills go up as the non-commodity costs associated with energy use - such as green taxes and updating the grid - are still rising. With PPAs offering an element of price certainty for up to 20 years at a known price, small scale generation projects present a significant opportunity for businesses to take a long-term view of their energy needs.

Reduced impact on the environment
Thanks to legislation such as the Carbon Reduction Commitment Energy Efficiency Scheme and the introduction of a carbon price floor from 1 April 2013, carbon management now has a firm place on most boardroom agendas due to its impact on an organisation's bottom line. By purchasing energy from a small-scale renewable generator, organisations can be confident that they are reducing their impact on the environment, rather than relying on so-called traditional forms of energy such as oil.

Confidence in reporting CSR
PPAs are a very visible and tangible way in which organisations can confidently report on their environmental performance and showcase progress to the board, customers, employees and other stakeholders. But their benefit goes far beyond simply reducing an organisation's environmental impact. By entering a PPA, an organisation can effectively become responsible for an additional source of renewable energy in the UK. The long-term nature of the arrangement means that developers are more easily able to get the finance needed to realise the project as investors are confident that there is someone willing to purchase the energy. In this way, businesses can demonstrate a clear commitment to supporting the UK's shift to a low-carbon economy.

There's no doubt that UK businesses face challenging times ahead. With energy bills set to rise and new green regulations coming into force, it is increasingly apparent that effective carbon and energy management needs to become a part of an overall business strategy. Small scale generation projects may seem like a big step but, with energy prices set to rise, it's important that businesses take a long-term view of their energy options.

Andrew Horstead is a risk analyst at energy and carbon management firm Utilyx

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