Energetics: The new world of renewable power purchase agreements and wholistic, strategic approaches

Imagine you’re a mid size property company, probably an unlisted private trust. You have about 30 buildings in your portfolio and you want to raise capital.

But the institutions you go to for funds want to know what your NABERS ratings are, or if you take part in the Global Real Estate Sustainability Benchmark, and if not why not.

According to Jamie Ayers, built environment sector lead for Energetics, the world is changing fast. More and more institutions and investors are driven by responsible lending practices.

More and more institutions and investors are driven by responsible lending practices.”

“That extends to a range of things, not just energy and carbon but broader sustainability such as the new legislation on modern slavery.

“For investors it’s a risk. They say, ‘I don’t want to bring anything to my portfolio that’s a risk’.”

Big property companies such as real estate investment trusts also want to signal big, sometimes dramatic change. Such as a goal to net zero carbon by 2030 or 2025 – sometimes even sooner.

They might want a nice big power purchase agreement for renewable energy to help them get there.

Where to start?

First things first, Jamie says.

“You need to understand the strategic objectives. ‘What commitments have you made or are intending to make?’

“Is it just keeping up with competitors? Do you have an emissions reduction target to meet? Are you concerned about your exposure to volatile energy markets and seeking to take back control of your energy spend? And where would a renewable PPA sit within your overall energy procurement strategy?

“The more we know the better we can advise.”

Advising for 35 years

Energetics, which was founded by Jon Jutsen in 1984 has one of the industry’s longest and best regarded track records in energy, sustainability and climate change risk management. Most of its clients are large corporates and they’ve stuck around for many years.

Jamie has a soft spot in particular for the property industry, which makes up about 60 per cent of the business. Most of the clients are large owners such as GPT, Woolworths and government agencies.

“I love the sector because they are ambitious and aggressive, but they are also happy to collaborate,” Jamie says.

The scenarios for strategy

When developing a tailored strategy, Energetics will typically set up three potential supply-demand scenarios looking out to 2035. They map the various forecasts for grid decarbonisation factoring in elements such as the scheduled closure of power stations and different timelines for transmission network augmentation as well as gas and coal commodity price projects. .

Next is to see what makes up the client’s emissions portfolio, in terms of scope 1 and 2 emissions, what can be done to reduce these, plus a look at all the efficiency opportunities and then what the internal rate of return on those efficiency projects needs to be.

Energy markets are volatile

A key part of their approach is helping clients navigate the volatility of the electricity market.

As Jamie says, “In advising on a whole of company strategy, we look at the different available options. Renewable PPAs are the hot topic but large energy users need to take a wholistic approach.

The days of going to the retailers every couple of years to see what price they’re offering are gone.”

“The energy contracts need to mitigate risk and manage opportunities, so rather than buy a three year commitment for a set price for black power you might go to progressive purchasing, which mean you buy parcels of energy over time, allowing you to track the market.

“You need to examine your capacity for demand response. You can also investigate the fit for your business of emerging ‘structured products’ which can be used to offer a hedge against energy market volatility.

“It’s a proactive risk management strategy that is better for the bottom line.”

Renewable power purchase agreements

If a power purchase agreement is needed, then Jamie’s team understands not everyone can straight up go to 100 per cent renewable. Some will need to stage it.

“There are lots of different contracting models and all have different financial implications, positive and negative and different levels of risk,” he says.

Even which provider you choose carries its own risk profile. (You want to make sure they’ll stick around for the duration of the contract, for instance.)

“We ensure that the PPA is tailored to your needs and appetite for risk. We can assess the contracts and run the procurement process.

The PPA can also be modelled as part of the process to a net zero science based target.

After a lot of factoring you end up with an electricity demand forecast and the more predictable that forecast, the greater the opportunity to negotiate a favourable deal.

PPAs can save you money or they can cost you money, it depends on the terms you negotiate, among other factors.

Brand value is a big plus, and so is budget certainty”

But even when PPAs cost more they can deliver a range of other benefits. Similar to insurance, they can be seen as a way of hedging future electricity price volatility if properly sized and negotiated. Brand value is a big plus, and so is budget certainty. This is especially positive for tenants who can share in benefits such as  market leading low greenhouse gas emissions performance.

If you invest in renewable Power Purchase agreements, you stimulate the renewable energy economy, according to Jamie Ayers of Energetics.

You can either take advantage of an existing wind or solar farm or enable another to get off the ground.

Purchase and retain or retire the LGCs (large-scale generation certificates) associated with the project, and your business can enjoy the sustainability branding benefits. We saw this with Sydney Metro North West and Monash University as both organisations purchased LGCs as part of the deals secured.

Most of the PPAs to date are for businesses or organisations with large scale energy needs.

But when the City of Melbourne created a buyers group in 2017 and aggregated demand, it demonstrated the opportunity for both smaller businesses and larger businesses who were interested in committing a small portion of their electricity load to a renewable PPA.

“It’s a great thing for the City of Melbourne. It means it’s greening their CBD,” Jamie says.

And it’s catchy. Other councils are beavering away on creating their own PPA buyers’ groups.

You can see where this is going.

As Jamie says, “You start big and then it filters down.”

Energetics has been tracking corporate renewable PPA deals across Australia since they took off in 2017. You can view the size of the deals, the states that are leading and the buying groups.