Thursday, 30 June 2016

4 Reasons Corporate PPAs Still Make Sense with Low Natural Gas Prices

Author: John Powers has sold more renewable energy to companies than anyone working today.

In recent months, natural gas prices have hovered at historic lows.  As a result, some commercial and industrial (C&I) buyers have been reluctant to commit to long-term renewable energy contracts in the form of power purchase agreements (PPAs), despite the fact that low gas prices have not translated into lower electricity costs.  PPA contracts typically require a term length of 10-25 years, far longer than most of the supply contracts C&I buyers are accustomed to.

While low natural gas prices are attractive in the near term, there are four compelling reasons why renewable PPAs are still a better choice for C&I buyers, both now and in the long run.

1. Price volatility

Energy is the most volatile commodity in the world.  The spot price of natural gas can swing widely in a matter of moments depending on supply and demand and, largely, the weather.  Just last week, the Wall Street Journal reported that gas prices have risen 34% since May thanks to summer demand.  These rapid, unpredictable changes in natural gas prices can have dramatic consequences for C&I organizations, whose electricity budgets must react accordingly.  Historically unstable gas prices present a considerable source of operational risk.

History shows natural gas prices are volatile, and often unpredictable

Renewables like wind and solar, on the other hand, incur little to no fuel costs and display no such price volatility.  C&I buyers who enter a PPA can expect to see a slight variation in electricity pricing throughout the duration of the contract, reducing operational risk and securing a more stable energy price over the life of the PPA.  This has the potential to save C&I buyers millions of dollars in costs.

2. Price parity

Although fossil fuels like natural gas have historically been less expensive than renewables, wind and solar prices have become competitive with — and in some markets even cheaper than — natural gas prices.  These prices are expected to continue to decline over time as technologies improve and benefit from economies of scale.  A new report from IRENA predicts that wind power prices will drop dramatically over the next 10 years, decreasing 26-59% globally by 2025.

The attractiveness of renewables is further bolstered by the fact that they are available indefinitely, whereas natural gas supplies are almost certainly finite.  As these resources become scarcer, prices will inevitably rise.

3. Policy support

Mounting international, federal, and state policy commitments to carbon neutrality, such as the Paris Agreement and U.S. Clean Power Plan (CPP), will constrain the ability of natural gas to meet future U.S. energy needs, with the potential to impact both price and availability of conventional generation.  Eventually, the gas rush will come to an end.

As part of the Paris Agreement, the U.S. has committed to net-zero greenhouse gas emissions by 2100, which will require a significant shift away from fossil fuels between now and mid-century.  While natural gas may have played a role in stabilizing emissions to date, its success will be short-lived due to methane leakage.  The global warming potential of methane is at least 20 times more potent than carbon dioxide and the EPA now believes that methane leakage from fracking is more prevalent than previously believed.  Additionally, natural gas still emits approximately 50-60% of the greenhouse gases that coal emits — too high for the commitments set by the Agreement.

There are also legislative challenges to fracking at the state and local municipal level that vary by region.  Rising concerns over the safety of fracking — including its role in producing man-made earthquakes — have the potential to result in additional policy constraints that could affect future natural gas extraction.

4. Environmental commitments & social responsibility

Many C&I buyers have publicly agreed to reduce their carbon emissions or improve their performance on climate change.  These goals are best accomplished through the purchase of renewable energy.

C&I buyers must also consider the impact of their facilities on the communities in which they have a license to operate, and specifically the impact of fossil fuel generation on human health.  In 2012, air pollution from fossil fuel combustion played a role in the death of 7 million people worldwide, leading the WHO to declare it the single greatest environmental risk.  In Europe alone, the costs of pollution-related illnesses and deaths surpassed $1.6T in 2010.  By contrast, U.S. wind installations in 2015 are estimated to have resulted in the savings of $7.3B on public health.

Bottom line

While attractive in the short-term, low natural gas prices should not derail renewable energy purchasing by C&I buyers.  Wind and solar outperform natural gas in price and stability and are essentially carbon-free.  C&I buyers that want to save money and meet environmental commitments are more likely to achieve their goals using renewable energy PPAs than relying on gas as a long-term energy solution.  

The recently extended renewable energy Production Tax Credit (PTC) and Investment Tax Credit (ITC), along with growing availability of renewable energy projects in need of creditworthy off-takers, makes it an opportune time for C&I buyers to consider PPAs.  Buyers who move now, while others hesitate, will have access to the best projects with the most favorable terms.  Contact us today to speak with one of our industry experts.

The post 4 Reasons Corporate PPAs Still Make Sense with Low Natural Gas Prices appeared first on Renewable Choice Energy.

No comments:

Post a Comment