Understanding Onsite Power Purchase Agreements (PPA)

If there is one topic that experts agree on, it would be that human activities are harmful to the global environment. Given our finite energy resources and the negative impact of pollution, it is not difficult to see why going green should be a priority for all of us.

Singapore has been making notable effort to go green, having “greened” close to 40% of its buildings in total gross floor area as of May 2019. Half of these are commercial buildings like the Schneider Electric regional headquarters in Kallang Avenue, which is a smart office fitted with smart building technologies that help reduce its energy consumption. Close to half of the energy consumed by the Schneider Electric building is sourced from renewable energy, and it aims to become 100% carbon neutral by year 2020.

One of the essential steps to running our world sustainably is to tap into renewable energy sources such as hydroelectricity, solar and wind power. Yet it isn’t always easy or possible for corporations to access renewable energy for their operational requirements.

Wind Energy PPA

What is an Onsite PPA?

Fortunately, organisations that want to do their part for the environment can turn to onsite power purchase agreements (PPA). Essentially a long-term contract between a corporation and a project developer, an onsite PPA will see the latter build, operate and maintain a renewable energy system for several years. In return, the company agrees to pay for all energy production at a fixed price for the entire duration of the agreement.

This arrangement offers clean onsite energy generation and works well for large retailers or organisations with access to the land or space required for renewable energy generation. Unsurprisingly, onsite solar PPAs are the most common option, with contract terms typically in the region of 15 to 25 years.

Is it Right For You?

Onsite PPAs offers long-term electricity price stability and cost certainty for planning purposes and leverages the experience of experts in the renewable energy field. Crucially, it allows corporations to externally finance renewable energy products without the need to allocate CAPEX. And because the developer is paid by the kWh of power produced, this incentivizes them to ensure that the renewable energy system is operated as efficiently as possible.

In the United States, onsite PPAs are popular with retailers keen to reduce their facility emissions – and who want to tap the reputational benefits of supporting renewable energy. Walmart, Target, Macy’s and The Home Depot are understood to have entered into such arrangements, according to Schneider Electric.

Solar Energy PPA

There are downsides of course, such as the long contract term length which may reduce flexibility to relocate corporate facilities or retail outlets. Moreover, contracted PPA electricity rate may be more expensive than the utility’s price. This will also not work in Asia cities such as Singapore and Hong Kong, though it may be viable in sub-urban parts of the region.

Getting Started

So how can an organisation get started with an onsite PPA? As with any major corporate initiative, getting the buy-in of key stakeholders and the board is an essential first step.

Get the necessary go-ahead to take a deeper look at the benefits, risks and possible deal structure. Other stakeholders that should be brought onboard would probably be representatives from finance, facilities, and risk management. Finally, it is important to engage the independent consultants who are familiar with onsite PPAs and has the experience to offer guidance for its eventual implementation.

To learn more about the next steps for onsite PPAs, check out this guide by the Retail Industry Leader’s Association (RILA) and Schneider Electric here (pdf).