Editor’s Note: This article was first published by the Environmental Defense Fund, an organization focusing on creating economical policies to support clean air and water; abundant fish and wildlife; and a stable climate. The article was authored by Jake Hiller and originally appeared here.
There’s a new way to approach energy risks that should interest business leaders who navigate today’s changing economy.
Is your corporate risk management strategy considering these three realities, and how to respond?
1. Energy prices are volatile and hard to predict
Energy prices fluctuate so knowing when to lock in the best price, and for how long, is a perennial challenge for businesses. Unless, that is, you consider signing a long-term Power Purchase Agreement with an energy provider that specializes in predictable renewable energy – or install your own clean energy infrastructure.
Both options will help you avoid that energy price roller coaster and likely save your business money over time.
PPAs have become mainstream in recent years as the renewable energy sector continues to expand; corporate PPAs grew 20 percent over the last two years to 5.4 gigawatts procured in 2017. Just this month, for example, an Illinois wind farm signed a $325-million contract to sell energy to Bloomberg LP, General Motors; and to 340 Starbucks stores through Constellation, an energy services company.
On-site renewable infrastructure is another option businesses use to hedge against energy risks. So far, Fortune 500 companies such as Target, Walmart and Apple have installed solar arrays or roofs at nearly 2,000 individual project sites in the United States to secure stable and lower energy prices.
Such investments are not limited to huge companies or brands. Increasingly, smaller companies are also making on-site installations to reduce uncertainty and bills.
2. Energy choices, competition go hand-in-hand
Knowing how to maximize the benefits of your energy choice requires a thorough analysis of your energy needs and appetite for risk.
A PPA procurement deal, which can last up to 30 years, gives a business a predictable power rate that will often beat the prices fossil-fueled sources can offer today. New and innovative PPA models are now opening up more possibilities for companies that opt for this solution.
By locking in the price, however, a PPA can preclude future savings should the price of, say, wind power drop significantly over the next five or 10 years. Such a structure may suit a company with few competitors that seeks stability, even if it means it won’t have access to lower prices down the line.
Those facing fierce competition, on the other hand, may seek to avoid a PPA, as would companies specializing in energy-intensive production where power prices have a direct impact on production costs. They would more likely want the option of regularly renegotiating their power purchase deals to take advantage of better rates.
Businesses for which a PPA is a poor fit may instead take the other route: a large capital investment in on-site renewables. In addition to shielding the owner from energy price volatility, such infrastructure investments can benefit from millions in federal and state tax credits and maybe generate new revenue by selling power back to the grid.
Even so, there can be some challenges.
3. Business needs and policies must be aligned
To this day, nine states still won’t let a company go directly to a third-party provider of renewable energy to negotiate a PPA. Thirty-one states don’t offer state tax credits for solar panels, and seven states have yet to let companies sell power back to the grid – to mention a few barriers.
If your company has offices or plants in any of those states, you may be out of luck – unless you get on the phone and start knocking on your utility’s and policymakers’ doors. That’s what companies such as Walmart are doing successfully to gain broader access to renewables.
Some of our largest brands are also trying to break down barriers to PPAs in Europe, where the market is largely untapped. The message for anyone struggling with limited energy options is that applying pressure on state and national lawmakers is good for business and our economy.
Because when companies manage risks, everybody wins.