The most common way to lower your climate footprint is to enter into an electricity purchase agreement that contains a green certificate (Guarentee of Origin, GO). It is a straightforward solution and can be purchased for prices very close to market prices. On paper, these certificates can ensure that your company buys electricity that is renewable. In this blog post I will, however, argue that there is an alternative which gives companies greater certainty that more green energy is added to the overall mix of electricity.
For most companies, particularly in the service and production sectors, most of their CO2 footprint is derived from the use of electricity. This is also the case for many industrial companies that use electricity in a large number of processes. Very few companies produce their own electricity, so instead they buy it and get it delivered from the electricity grid. When a company itself is not responsible for producing the electricity they consume, an electricity agreement suddenly becomes interesting.
Green certificates fail to support the green transition
Today, it is possible to buy electricity contracts marked with green certificates thereby promising green electricity. However, this way of buying green electricity is far from perfect. It is not certain that the company contributes to the green transition via these types of electricity agreements, as the certificates do not guarantee that new facilities producing green electricity will be built. This is partly due to:
a) that there is a significant surplus of certificates in the market, which is reflected in a very low price for the certificates. This does not create sufficient incentive or financing to establish new renewable energy plants.
b) that there is no guarantee that new green energy plants will be built. The green certificates that are sold come from plants that have already been set up, and there is no requirement that the earnings go towards establishing new green plants. Purchasing green certificates, therefore, has the rather sad effect that all the other customers who buy their electricity from the regular electricity mix simply get more black electricity than they got before, since no more green electricity is added to the system.
c) finally, the price of certificates is far from high enough to build new renewable energy plants.
PPAs ensure the green transition
Fortunately, there is a better and safer alternative which ensures that your company gets green power in the power outlet. This is a PPA, which stands for Power Purchase Agreement. Typically, a PPA will contain a plan for the establishment of a quantity of green power corresponding to one's annual electricity use over a period of 10-15 years. This will then be settled at a fixed price. In this way, a PPA ensures that as much new green electricity is supplied to the electricity system as the company uses.
One of the advantages of a PPA is that developers of wind farms and solar cells can finance a large part of their projects with debt capital, which can be either impossible to obtain or disproportionately expensive if the project relies solely on the market price of electricity, which is highly fluctuating.
By entering into a PPA, the developers can thereby gain access to more and cheaper debt capital, and with lower total financing costs, the project can often be completed at a lower price than the average market price for electricity.
PPAs are, however, not that widespread, and it may be due to the complexity of purchasing PPAs, as well as the fact that there have been a number of less good examples of Danish companies purchasing PPAs. In these cases, elements of the PPA have not been sufficiently explained or analysed, why these companies have ended up paying a higher electricity price than they had expected based on the PPA price on the contract.
When purchasing a PPA it is therefore important to:
- reach out to an adviser with previous experience from preparing a PPA, and who has a technical and overall understanding of the electricity market as well as legal expertise. This of course comes with a cost, but for large companies the right advice will quickly pay for itself since PPAs typically run for 10-15 years.
- ensure that the procurement is anchored in the organisation so both ESG, procurement and management are involved.