RECs, PPAs, and the growing market for green power purchasing

While the economics of green power purchases vary greatly depending on the renewable technology involved, location, incentives, and the size of the purchase, it could provide a pathway to rapidly increasing investment in renewable energy while allowing data centre operators to meet their environmental objectives. However, questions remain as to whether renewable energy certificates (RECs) and power purchase agreements (PPAs) are all they appear to be.

With the recent IPCC report outlining the stark reality that human activity is among the primary causes of global warming, companies are beginning to enter the renewable energy market under pressure from customers, leaders, and stakeholders who want to see them adopt more sustainable practices.

For data centre operators constructing their own source of renewable energy can be an extremely costly method of reducing CO2 emissions as well as adding complexity to their operations. Instead, energy providers sell RECs and PPAs to incentivise investment in renewables, as well as increase the sustainability credentials of the buyer.

Differences between RECs and PPAs

Both RECs and PPAs are essential in green power purchasing, but there are fundamental differences between the two.

RECs offer a way to track – and lay claim to – not just the amount of renewable energy that is generated and sold, but also the positive environmental attributes associated with that energy. A Level10 Energy blog post from May 2020 states that, for every megawatt-hour (MWh) of renewable electricity generated and sold to the wholesale market, an associated REC is created which includes information about the type of renewable resource and where it was generated, along with a date stamp, emissions profile, and a unique identification number.

However, RECs are directly tied to existing renewable energy projects, which transmit energy to grids which cannot identify the source of the electrons being transmitted. Some of the electricity may come from a renewable facility, but this is mixed with electricity generated via burning fossil fuels.

To go ‘100 per cent renewable’, it is possible for companies to purchase enough RECs to cover every megawatt hour (MWh) of energy that they purchase from their utility company or retail electricity provider – much more practical than covering their facility with solar panels to generate enough power to meet their needs.

Alternatively, PPAs directly impact the supply of renewable energy, consisting of contracts between an energy buyer and the developer of a renewable energy project that has yet to be built. In the contract, the developer guarantees a fixed price for the energy that the buyer consumes, as well as provides credits for every MWh of clean energy that is generated and sold. PPAs are long-term contracts, typically spanning 12 to 20 years, enabling the project developer to secure long-term financing to build the project.

PPAs are the most effective way of developing the renewable energy market via financial incentive, says Flemming Sørensen, vice-president of Europe for Level10. Despite this, he argues that RECs are not without their uses.

“RECs are a decent instrument for a company’s transition period, a temporary solution until something more meaningful is possible. Taking on PPAs is a vastly different activity to what some companies are used to doing, and sometimes it is useful for them to trial RECs before diving in to large financial contracts.”

The impact of renewable energy purchases

One of the biggest sectors to have adopted green power purchasing en masse is big-tech. Companies such as Apple, Google, and Facebook operate hundreds of data centres which consume vast amounts of electricity for IT and cooling, and, without some form of intervention, would contribute huge amounts of CO2 to the atmosphere as more fossil fuels are burned to meet the demand for energy.

Green power purchases, typically in the form of PPAs, are an effective way of providing money for the development of renewable energy sources. While tech companies have pioneered the movement, other industries are beginning to get involved in an effort to be part of the renewable energy revolution and mitigate for their own pollution. Consumer goods companies, such as breweries, and heavy industries like steel and cement, sign huge green energy procurement deals to hedge the cost of electricity, which is fixed at a certain price over long periods of time.

Small and medium-sized companies are also getting in on the act, with new financial structures emerging that make PPAs more accessible to them. One of the ways that Level10 Energy is able to support smaller businesses make green power purchases is via aggregation. This is when the resources of multiple companies with similar demands are pooled together to increase the likelihood of attracting better energy deals.

The boom in demand for green power purchases is having an enormously positive impact on the renewable energy market.

“The demand for power purchases is incredibly high at this moment, and developers must be clapping their hands with joy, as they are able to begin projects which, five years ago, would have had to be shelved because there were no homes for them,” says Sørensen.

“Over time, the cost to construct solar and wind assets has fallen dramatically – particularly in the solar industry, where it is now feasible to construct facilities at any scale in Northern regions. In the UK, Denmark, Sweden, and Finland, PPAs are now available for solar energy, which was beyond the realms of imagination in the not-too-distant past.

“The supply is becoming more diversified in terms of its footprint, and it is also certainly growing.”

The ‘greenwashing’ controversy regarding RECs

RECs, however, remain a source of controversy in the energy world. In a report for the Uptime Institute, David Mytton, a researcher who specialises in sustainable computing, argues that RECs are considered low quality products because they cannot credibly be used to back claims of 100 per cent renewable energy use. This is because, while these claims refer to the annual matching of renewable energy bought to equal the energy used, the power grid carries electricity generated by many different fuels, the proportion of which shifts over time and with region.

Widely used RECs, he concludes, are likely to be dismissed as ‘greenwashing’ if they are the main or only component of a renewable or low-carbon energy strategy, with the low cost of RECs relative to the overall cost of electricity increasing this risk.

Christian Hurlimann, CEO of renewables at the MET Group, agrees with this assessment, and says that in order for RECs to be more effective, they should be priced substantially higher than they are at present. He argues that if the price for RECs was increased, the drive to install more renewable energy power plants could be accelerated.

“RECs should financially ensure that power plants can be operated based on renewable energy resources. Today, often the investment decision to develop and construct a power plant based on renewable energy sources does not consider the selling of RECs, since the price is too low and they do not provide enough incentive to facilitate the expansion of renewable energy power plants.

“At the cost of less than one dollar per MWh, companies can easily offset their climate pollution at low costs and ‘wash themselves green’.”

Additionally, power plants who have to comply with stringent ecological requirements would also benefit from higher REC prices to cover the costs of ecological compensatory measurements. This would address concerns from critics, who assert that RECs are generated irrespective of the quality of the environmental added value or whether they consider all relevant ecological requirements – for example, installation of fish bypasses in rivers in case of run-of-river hydro power plants, or the strict protection of bats and birds for onshore wind farms.

Sørensen, however, offers a different viewpoint on the controversy surrounding RECs. He points out that the Carbon Disclosure Project (CDP) acknowledges RECs as valid proof of carbon emissions reduction. Communication, therefore, is key to avoid accusations of greenwashing.

“If you advertise to the world that your business is using green electricity, or that your actions are adding new renewable capacity to the grid, when in reality you cannot guarantee these things, that is when issues occur. Understanding the difference between PPAs and RECs – and communicating your purchase clearly – is essential.”

As a result of concerns over how energy companies market their ‘green’ electricity tariffs, the UK government have recently announced a review which will consider whether there is currently sufficient clarity around where energy comes from. Whether this is a sign of the start of greater scrutiny over power purchasing remains to be seen.

“The RE100 might have criteria for the impact of certain products – such as rewarding higher marks for direct investment and PPAs, and lower marks for price regs and varying qualities price,” reasons Sørensen. “But that is not to say that a company cannot, for example, purchase Norwegian hydro power certificates to cover their consumption from a huge German chemical plant and get that squared away with the CDP.

“I think there are a lot of voices that would like to see that changed, or at least become more transparent.”

A key driver for change

Whatever the current thought process surrounding how effective RECs are, it is clear that power purchasing is here to stay. According to the Renewable Energy Buyers Alliance (REBA), energy deals completed by large energy buyers in the United States accelerated from 1.53 gigawatts (GW) of power in 2016 to 10.63 GW by the end of 2020.

“There is no alternative in order to introduce a market-based instrument for environmental added value of the electricity generated from a renewable energy resource, and to provide a financial incentive to such power plants,” concludes Hurlimann.

Sørensen agrees. “If we want to have any chance of reaching 2050 targets, businesses need to take action as soon as possible, because the situation is not going to solve itself.”

The benefits of the power purchasing market, it seems, far outweigh the concerns people may have. With the addition of regulations to increase transparency, green power purchasing can be a primary driver for change, at a time when it is so desperately needed. 

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