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[Episode #37] – Corporate Buyers of Renewables

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Although it’s not widely talked about, one of the hottest sectors buying renewables now is the corporate sector. Fortune 500 companies are buying solar and wind power, and renewable energy credits, at a record pace. But why? What’s in it for them? What are the economic risks and rewards of going to the extra trouble to buy green power? How do arrangements like “virtual power purchase agreements” work? How do we manage balancing between wholesale markets in a future of strong interstate corporate procurement? And what’s the outlook for corporate buying of renewables? Our guest answers all of these questions and more in this wonkilicious episode, guaranteed to keep CFOs on the edge of their seats.

Geek rating: 6

Guest: Erin Craig is a Managing Director of Origin Climate, a San Francisco-based company that helps implement renewable energy and emission reduction projects to fight climate change. At TerraPass (now Origin Climate), Erin led the organization's expansion into carbon offset project origination and renewable energy services. Prior to that, she helped develop design standards for energy efficiency, hazardous constituents reduction, labeling, and end-of-life management at Sun Microsystems. She was a founding member of the IEEE's Electronics and the Environment task force and chaired the Electronic Industries Association’s Environmental Committee. In the early 1990s, Erin was responsible for eliminating ozone-depleting substances at Apple Computer. She has an MS in Technology and Policy from MIT, a BS in Geophysics from Stanford University, and a Six Sigma Master Black Belt from Sun Microsystems.

On the Web:  www.originclimate.com

Recording date: February 1, 2017

Air date: February 22, 2017

Chris Nelder: So let's bring her into the conversation now. Welcome Erin to the Energy Transition Show.

Erin Craig: Thanks. I'm happy to be here.

Chris Nelder: So your work at Origin Climate is largely oriented around helping corporations figure out how to buy renewable energy to power their operations. And it seems that corporate procurement is really the new hotness in renewable energy now. Google made headlines back in December when it announced that it expects to reach 100 percent renewable power sometime this year for both its data centers and its offices globally. Amazon Microsoft Facebook Wal-Mart Dow Chemical Apple Computer lots of other companies in the Fortune 500 are actually buying significant portions of their electricity from solar and wind farms now. And according to RMI's Business Renewable Center nearly two thirds of the Fortune 100 and nearly half of the Fortune 500 companies have set ambitious renewable energy or related sustainability targets. So let's start with the basics here. What's in it for these Fortune 500 companies why would they do this when they can just buy local grid power wherever they are?

Erin Craig: Right so their goal doesn't have to do with making sure that they have electricity. So as you said this is not a reliability play or anything about the electrons. This is really for these companies it is part and parcel of what they are coming to see as their responsibility in the large as a corporation. And as we'll talk about this and lots of other things that play into it. And there's no one single motivating factor that all of the companies would put at the top of their list but certainly among them is a real desire to act in a manner that is more sustainable than they had in the past. And you know there's competitiveness with each other that comes in. And certainly the importance of electricity in particular and its impacts on climate change plays a big role. But really just like companies are coming out and taking stands on whether it's immigration or LGBT rights or you know all other kinds of things that might not be seen as central to their business, climate change is one of those. And this is one of the things these companies are doing to try to mitigate their impact.

Chris Nelder: OK. So it's very much about being a good corporate citizen, responding to the climate change challenge, corporate image that kind of thing. I have to assume there's also a lot more to it which we'll get into here in a minute. But you know it struck me and I guess this was actually prompted by something that you said earlier when we were kind of prepping for the show that this is not really a new idea that in the past a lot of hydro dams for example were built to power aluminum smelters because they require very large amounts of power and even coal power plants were built to support steel foundries were they not?

Erin Craig: That's absolutely right. You know decades and decades ago it was more the availability and the guaranteed reliability of power that you fly over the country and you still see now, giant industrial facilities that oh look there's a coal plant right next door and it's no coincidence. And some of the dams up and down the Eastern Seaboard you know just series and series of dams were built to support aluminium smelters and other kinds of high demand facilities. And at that time certainly not a coal plant but not hydro plants either. They were being built for any reason having to do with sustainability, but really it's access to that amount of power and you can think of, in particular, the tech industry but other high demand users today as well as kind of the new industrialists in that way. Right now, this is their their inputs of production. And so they're doing what they can not only to make sure that they have them available to them which is less a problem now than it was before but that they also meet their requirements and the sustainability of the supply from an environmental standpoint is part of those requirements. The cost is another part which of course is part of the equation here too.

Chris Nelder: Yeah. Yeah. I want to spend the majority of this discussion talking about different ways that corporates can buy renewable power, but first I want to clarify some terminology. So your company hopes to create a market in carbon credits. Are carbon credits the same thing as renewable energy certificates or are there some important differences there?

Erin Craig: Yes so there are some important differences. Let me start with renewable energy credits or RECs. Now that's a term of art that is more or less American, just to be clear. A renewable energy credit is a right to talk about an electron as being generated by a renewable power source. And that right is you know it's imaginary in many ways and it was created because people decided it was important and it has nothing to do with the electricity and its function but it has to do with being able to talk about and to claim and to account for a certain electron as being renewable and having some responsibility for that renewable generation. So that's a renewable energy credit. It's a traceable attribute of electricity that says it was generated from a renewable power source. A carbon credit is a reduction or a change in the greenhouse gas emissions that comes from someone deciding what a baseline practice is, intervening in the baseline practice in such a way that emissions are reduced, counting them up and taking every tonne of those emissions avoided or emissions reduced and calling that a credit. And so they have you know as I've explained them I don't even think I used any of the same words in either one but carbon credits have an implication built into them that they wouldn't have happened in the normal business as usual case. Renewable energy certificates do not have that implication. So many renewable energy certificates come from resources that have been around a long time and they don't have any implication about what would have happened or should have happened in some other case. It's just that it comes from renewable energy.

Chris Nelder: Gotcha.

Erin Craig: So one of the ways to generate carbon credits is with renewable energy projects because a renewable energy project can be one of those ways that you intervene into the baseline case and say I'm going to build myself a renewable project and I'm going to count up how much greenhouse gas emissions I'm backing off in my grid and those credits that that quantity of greenhouse gas emissions would otherwise have been emitted, and I'm going to count those up and call them carbon credits. And there are in the US and elsewhere there are renewable energy projects that generate carbon credits. Those projects do not generate renewable energy credits because the right to claim it as renewable has been sucked up into the carbon credit. So there are times when the credits are overlapping. You have to choose one or the other. But you can get carbon credits for all kinds of things that have nothing to do with energy.

Chris Nelder: Interesting. You know I don't think I ever really knew that distinction before so that's helpful. So then your company actually creates a market in carbon credits?

Erin Craig: Yeah that's one of our businesses, to originate carbon credits and we do that with dairy farms and some industrial digesters and other sorts of methane generating resources primarily. The business that I run and the work that I do with corporations is separate from that and it's our consulting business where we help companies with renewable energy. You know there was a nexus between the two which is how our renewable energy consulting business got started which is that a lot of methane projects are dairy farms and they have digesters that generate electricity. And our dairy farms sell some of that electricity. You know some of it they behind the meter, but some of it they sell to the grid and they were getting terrible prices for their electricity. And we at the same time were selling carbon credits and renewable energy credits to lots of corporations and we knew that something as charismatic and as important these dairy farm digesters which they were kind of on the bleeding edge of dairy farm technology which is an ironic thing to say, but they are. And so we were just sort of astounded that there was this market failure that wasn't connecting these corporations that wanted to have a role in environmental stewardship and these dairy farms who were trying to actually do that and couldn't get connected with the corporations that wanted to help make those things happen. So we started to do some renewable energy work with our corporate customers to try to make that happen for them.

Chris Nelder: So your corporate customers may be buying actual renewable energy that they're helping to originate in one fashion or another or they simply may be buying the carbon credits that are being generated by a facility like this dairy farm or maybe both.

Erin Craig: Yeah I mean it started exactly that way. As it has evolved, we have the two sets of customers are almost entirely distinct which is to say we have a group of customers who buy carbon credits from us and we have another group of customers for whom we help purchase large quantities of renewable energy. And although we thought there was going to be a big overlap in our business over time as it turns out there isn't. And the vast majority of our carbon customers are entirely different from the customers who we help with renewable energy.

Chris Nelder: That's interesting. Can you characterize like why a company would fall into one camp or another?

Erin Craig: Well so first of all the population of companies that want to buy renewable energy is much larger, at least here in the U.S. right. Companies that are interested in purchasing or increasing their purchasing of renewable energy. It's been certainly growing a lot over the past few years. But even before that the participation in utility green power programs and other sorts of renewable energy opportunities was much more broadly utilized than - in the U.S. - the purchase of carbon credits. So on the one hand we just have a much much larger population and on the other hand we have some very steady very large buyers that we work with. Some of those buyers of carbon credits actually also buy renewable energy we just don't happen to consult with them on it. Again this is sort of ironic, being an American and I work a fair amount in Europe, but for a good period of time and maybe we're entering into another one now, you know climate change like people had an allergic reaction to those words and having their company associated with action on climate change. And it just was not in fashion. And so at that time, many companies adopt mobile energy goals because that's a no regrets kind of goal. It doesn't make a political statement to adopt a renewable energy goal in the same way that it does a climate change goal. Or I guess I should say the same way it did. So we certainly have a large population of companies in the US that are establishing renewable energy goals, as you mentioned. And underneath it of course it's about climate change but that's not what their goal says. And so for those companies, renewable energy is what they do. It's really the companies that are focused on climate in a larger way that buy carbon credits.

Chris Nelder: Interesting. So at least in their minds there's an important difference in the kind of image that the company is projecting depending on whether it's just buying renewable energy or actually buying carbon credits.

Erin Craig: Yeah I think that's right.

Chris Nelder: Interesting. So let's talk about the way that these companies actually buy this power. I mean obviously it's impractical for these large corporations to actually install enough wind and solar capacity on their own campuses to provide all their power. So they have to buy it from somewhere. And as I understand it there are three main ways that they can do that. The first is they can simply buy carbon credits as we were discussing. Two, they can work with local utilities to actually enter into a PPA a power purchase agreement with a contractor who's going to build a wind or solar firm within that utility territory or prompt those utilities to buy power from a window or a solar farm for the corporation's use. And then three, they can enter into what's known as a virtual PPA where they're actually buying power from a wind or a solar farm that's located somewhere else, maybe even in a different state. And then there's this multi-party financial arrangement that goes between with the notion that the power generated anywhere could be considered to be consumed by the corporate customer. So do I have that about right? Are those mainly the three primary methods?

Erin Craig: Yeah I would add one more. Just add a little flavor. So the first one you talked about was buying carbon credits. As we just talked about most companies what they would do is buy renewable energy credits. And so that's the means of purchasing renewable energy which is still I would think the most popular in terms of number of companies doing it and number of megawatt hours sold and it is the longest standing. People have been doing that for a decade and more.

Chris Nelder: Well it's pretty easy isn't it? You just call somebody up and say hey give me some RECs. You don't have to go through this whole rigmarole of working with your utility on finding some EPC to build a wind or solar farm and all that other stuff, right?

Erin Craig: That's right. And also it's available. That option is available to companies of many sizes that were simply not able to do any other option. That is the option that is available to them.

Chris Nelder: Yeah you have to be a certain size to support a wind farm.

Erin Craig: That's right. That's right. So that's the first option. The second one is working with your utility in one form or another. And you described that very well. There's a number of implementations around the country about how to do that. But yes you can work with your utility and have them engage in large renewable project that benefits you or perhaps you and some other customers as well. The one that is sort of a criss cross between the virtual PPA that you mentioned and the utility deal is in those parts of the country that are deregulated where you don't have to buy power from your utility, you can contract with a renewable resource directly. You don't need to have the utility in between and it can be a physical not a virtual power purchase agreement but you can only do that in those places in the country that are deregulated so that you don't need to go through a particular utility in order to get your power. And so you know in those parts of the country a lot of companies will do that.

Chris Nelder: Interesting.

Erin Craig: And then finally the last one you mentioned which is the virtual power purchase agreement which sort of releases every aspect of location like you don't any longer have to be tied. That's the fourth one.

Chris Nelder: Right. So let's talk about that a little bit because I think this is something that probably a lot of people who aren't directly involved in this world don't understand and it is a little bit complicated so let's dig into the virtual PPA a little bit. How are these things structured? Like how do they work?

Erin Craig: Yes so let's talk about it from starting with a solar resource or a wind resource. So a company decided - we can talk about later why. But the company decides I want renewable energy. And so they look around the country and go to conferences and learn all about it and decide that the best way for them is to buy renewable energy in a place where the resources are great. So that might be a wind farm in Oklahoma or Texas or a solar project in California or someplace where the resources are really strong. And they negotiate with the owner of the project that will be built. These are almost always done before the project is built and certainly before comes online. So they negotiate a purchase price and that purchase price is usually a power purchase agreement price, a PPA price. It's a per megawatt hour price. So you know we can just say $30 for some generic price per megawatt hour that a corporation will agree to pay for the energy. And they buy that energy from that wind farm. Let's call it a wind farm, they buy it for $30. What they're receiving is the electricity and the renewable energy credits all bundled together. They, usually with the help of the owner of the wind farm, they usually don't do it themselves. They actually immediately upon generation, they sell the electricity. So they own it for a fraction of a microsecond and then they sell it to the market immediately, leaving themselves just with the credit. The renewable energy credit. So they've paid the owner of the wind farm $30, the megawatt hour gets generated, it gets sold immediately and whatever the market price is for that megawatt hour gets returned to the corporation. So if they spent $30 on the megawatt hour and the market price that that moment was $35, they get $5 back. If they ended up paying $30 in the market price was $20, then what they have done in essence is paid $10 for that renewable energy credit.

Chris Nelder: Right. So in this case the corporate buyer is actually taking a fair amount of market risk. They're taking the same kind of market risk that a merchant generator would take.

Erin Craig: That's exactly right. Indeed that's the whole point which is they are they are stepping in to take the merchant type risk so that the project owner can finance the project because the project owners generally speaking can't finance a project based on merchant risk. And what the corporation gets for that is they get the renewable energy credit for one thing, which is sort of the commodity they walk away with but they also get the opportunity to lock in whatever their power purchase agreement prices, whatever their agreement with the owner is, over a long period of time. And in some versions want to contract for a very long period of time with a relatively flat pricing structure so that over time if fossil fuel prices rise then you actually benefit from that because the market prices will lift. Whereas your price will not.

Chris Nelder: Sure.

Erin Craig: So that's something the corporation brings to this equation is first they bring this... I won't say appetite, because I won't say they're happy to take this risk but they're willing to take this risk because of what it accomplishes. But they bring to the table the ability to sign a long term contract and it's that ability to sign a long term contract that helps make the economics look palatable.

Chris Nelder: And that's what creates the market pull for an EPC to go out and develop a project.

Erin Craig: That's right. That's right.

Chris Nelder: All right. So just so I'm super crystal clear on this now, the corporate procurer or buyer in this case would strike a PPA with the owner of the wind farm or the solar farm. And then they're also entering into some sort of an agreement with whatever the utility is that's local to that wind or solar farm that's actually going to buy the power from them.

Erin Craig: So these virtual PPAs, pretty much without exception. And I say pretty much so there must be some exceptions. But they're signed in places where the power markets are liquid and nodal, which means that they aren't actually selling to a utility. So the power literally gets sold to the ISO, to the grid manager. So there is no electricity PPA associated with this energy it is getting just sent directly to the grid at whatever the market price is during that hour.

Chris Nelder: OK. So they're basically then functioning again as merchant generators, selling it into the wholesale market.

Erin Craig: That's exactly right.

Chris Nelder: OK. And so does the local ISO have an obligation I guess to buy it? I mean I guess...

Erin Craig: Yeah.

Chris Nelder: ... they would have to because it's some sort of a PURPA qualifying facility etc..

Erin Craig: So because these are nodal markets the ISO has no obligation to buy but the market price is determined by a bidding function. And so whoever owns the resource decides what price they're willing to sell at and bids it into the market. For renewable resources they almost always are going to bid in at zero dollars. I mean you don't have to pay me all, I'm going to go ahead and generate. And sometimes they'll actually bid in negative prices so that they earn their production tax credit which they don't get unless they generate a megawatt hour. And so although there's no obligation for the ISO to buy it, if you have these resources that are willing to generate at a zero dollar price, well they're going to be pretty high in the loading order so they will get sold.

Chris Nelder: Right. Right.

Erin Craig: So there's not a whole lot of risk of there not being any buyer for the power that you're selling.

Chris Nelder: OK. So the corporate entity then is once again buying the power from the wind or solar farm under a PPA with a fixed market price over a known duration and then they're selling that power as soon as it's generated via an auction mechanism into the wholesale market. So Apple in Cupertino is buying wind power in Oklahoma, selling it to the wholesale market in Oklahoma, but then they're consuming the power in Cupertino. So are they doing a deal there with PG&E as a part of this whole structure or is that just...?

Erin Craig: So that's a great example and this is a decision that the companies make when they enter into these agreements. So one of the things a company needs to decide is do they care about where the resource is relative to their load? A very popular place to do a virtual power purchase agreements is Texas because in the Texas power market first of all it's inexpensive to develop wind in Texas and the resources are great. So you have a lot of wind blowing and the development costs are relatively inexpensive and you've got a nice liquid power market. So unless you have a lot of load in Texas - which some companies do - but if you don't have load in Texas essentially what you're doing is you're participating the Texas power market and then taking that renewable energy credit and applying it - just the credit - to your loan which is somewhere else. And there's no change to how you buy power for your load at all in that circumstance. All you're doing is you're taking that renewable energy credit and you're applying it on top of whatever electricity you buy.

Chris Nelder: So how does this applying the credit thing work? Is this just an entry on a balance sheet somewhere?

Erin Craig: Essentially yes. And corporations do it different ways but these credits are tracked on registries so they're actually traceable and have serial numbers and the registries you can transfer one to another. And some corporations who are active in many power markets will have you know a master account and they'll push all of their credit into the account and once you applied it to your load you do what's called retirement, which is literally you take the credit off your balance sheet into your retirement account. And most of the companies who are doing these kinds of deals because they want to demonstrate their sustainability they don't want to be greenwashing and they want to demonstrate that they're doing the right thing. Most of them have these transactions and their credit audited by a third party kind of like an accounting audit so that their energy use and their credit retirements demonstrated and verified to match so that they are retiring all the credit they should be for their load.

Chris Nelder: That almost sounds like a potential application for the blockchain.

Erin Craig: OK. So you got me. I don't know what the blockchain is.

Chris Nelder: That's OK. It's what Bitcoin uses.

Erin Craig: Oh! Yeah. OK.

Chris Nelder: Every unit of account has a serial number if you will.

Erin Craig: That's right.

Chris Nelder: It's in a public ledger that everyone can see and it can be tracked and traded and so on.

Erin Craig: Right. And that is actually the idea here. It's to make it as transparent as possible you know that these companies are actually doing these transactions and taking those credits and retiring them against their load. Some companies though, they don't want to do it that way you know which is to say they really prefer to make sure that wherever their renewable resource is, it has some geographic relationship to their load. And there's both some sustainability reasons for that and there's also economic reasons for that. And so some companies don't do deals in Texas for their load in Massachusetts. They do deals in Massachusetts for their load in Massachusetts. And that's one of the things that companies have to decide when they enter into these kinds of transactions.

Chris Nelder: OK. So getting back to kind of the dollars and cents side of this thing. Because the corporate buyers actually taking market risk they could actually wind up paying more or less than grid power would cost them.

Erin Craig: That's correct.

Chris Nelder: OK. So you know I wonder how the risk side of this works. So in a virtual PPA it seems to me there's different ways the risk could be allocated and hedged by the various parties along the way. Like if a solar farm doesn't produce as much power as it said it would in the PPA... You know what happens? Or what happens if a transmission line fails between the solar farm and the wind farm and its connection to the transmission grid to the wholesale market? Or what if a corporate buyer doesn't make its payments? I mean how does all that stuff work within the virtual PPA?

Erin Craig: Right. So those are definitely risks that are allocated out. So let me just walk through a couple of the ones you said, because some of those are actually less of an issue. So most of the resources that we're talking about, wind and solar resources, you don't know how much they're going to generate. And these virtual PPAs are usually structured as unit contingent PPAs which means that you agree to buy however much it produces and it may be you're agreeing for a 90 percent of the production or 50 percent of the production or some slice of it but you're agreeing to buy whatever it produces with the knowledge that it might be more than average one year less than average the next year. You know and that's part of which you sign up for. So from just weather standpoint, it being cold or hot or not windy or cloudy or what have you... That variability is part of what you sign up for. And because most of these companies are doing this in large part to the virtual PPAs to acquire the renewable energy credits that then they apply to their mode. If it's a few too many or a few too few It's not a tragedy. They can apply them to other loads, they can store them for the next year. You know on the margin it's not a super critical distinction.

Chris Nelder: And it's just a notional thing anyway right? Like they could bank them forever or if they had to.

Erin Craig: Well you know there are some watchdogs and some rules about that and certainly a company isn't going to want to contract for something that is way more than they expect to need, partially because it puts money at risk that they don't need to. And partially just because you know they hope that they have a better sense of what their future is looking like. But having said that, as you said, you know on the margin if it's a few too many are a few too few, it's not a huge deal either way. So that kind of variability, the companies all walk in knowing that that's what they're buying into. So that risk isn't allocated so to speak it's something that the companies bear. But the other risks you talked about... So what if a transmission line breaks down and the facility can't generate or what if the wind turbines are broken? There are definitely other kinds of risks that happen to grid power sources all the time that do need to be specifically discussed and then, you know outlined in the power purchase agreement to say okay if this happens I don't pay you or if this happens then we split the value. Each of the major risks are actually outlined and then specifically allocated. So for example if the facility isn't able to generate because something broke, then the facility isn't generating and if the facilities isn't generating, no power is being generated, and the power purchaser doesn't have to pay anything. In some circumstances after a period of time if the facility is still not generating you know damages start to accrue. But in general that risk of you know what if something goes wrong either with the immediate transmission line or the interconnection that's - as it should be - that's the owner's risk. They need to make that whole.

Chris Nelder: OK. That all makes perfectly good sense but now I'm wondering how the grid balancing is done in a virtual PPA situation from ISO to ISO. So let's say you had a bunch of new corporate campuses are suddenly going to be built in Silicon Valley and they're all going to buy 100 percent of the power notionally to power those campuses from wind farms in Texas. Isn't that basically going to create a glut of power on the Texas grid and drive its wholesale prices down to very low levels, possibly unsustainable levels, while creating a much higher demand on the PG&E grid over in Silicon Valley and driving up the wholesale prices there?

Erin Craig: Right so.

Chris Nelder: And then how does everybody do their balancing? Right?

Erin Craig: Right. So let's talk about those separately. Meaning the balancing and what happens to the grid when you get a bunch of new demand and a bunch of new generation? So that demand on the grid, you are 100 percent correct, if everybody decided to build a new corporate campus in the Silicon Valley there would be a huge spike in demand there. That would have to be addressed on the California grid. Sources would have to supply it here. And if simultaneously those same corporations said I want renewables and I think I'm better off if I built my renewable facility in Texas and so they all said great, walk over to Texas, plop a bunch of new wind farms over there... Then yes that is exactly what... you know the Texas grid is really big but let's just say yes if you dump more resources onto a grid where there is no new demand, supply and demand says the prices will fall. That is the equation. And they would rise in California if these forces were large enough. But I'll just say that that isn't just corporations might cause that to happen. Here in California where in general demand is flat, our new renewable portfolio standard, which you know believe me I'm all for it but it's increasing the requirements for renewables up from 33 percent to 50 percent which is a big target. And if your demand is flat and you're requiring a very large quantity of new renewables to come to the market, well you are going to drive the energy prices down. And especially if they're all solar resources that are going gangbusters on a nice sunny April Sunday when the power really isn't needed. So yes....

Chris Nelder: Not only that you're going to actually be putting some other generators out of business probably.

Erin Craig: You may or you may actually earn them a ton of money if they are able to compensate for you as your generation falls off and the need picks up in the later afternoon.

Chris Nelder: Yeah yeah.

Erin Craig: So yes, I mean if these forces are large enough and right now I would be first to say they're not large enough but if the forces were large enough and you had huge demand in one part of the country and huge added generation in another part of the country because of the demand for renewables you know first of all it doesn't get balanced at all. I mean Texas grid and California grid, you know never the twain shall meet. So the Texas grid would get more renewables.

Chris Nelder: Well there's no link between the Texas grid and the rest of the country.

Erin Craig: Exactly. Right. And so. So you can dump as much new generation there as you like and it's not going to affect the ability to supply power in California.

Chris Nelder: Yeah, but doesn't that start to feel like sort of a beggar thy neighbor potential there, right? You know where we're suddenly driving wholesale prices down to five bucks a megawatt hour in Texas?

Erin Craig: Well that's one of the reasons why some corporations don't want to do it that way. You know some corporations feel pretty strongly that if they are impacting with their demand a particular grid. You know a grid area or an ISO that their renewables ought to be on that grid. You know for those reasons and others as I say there's an economic benefit to that too. So that the price they're paying for renewables and the market price... that those two are better correlated and if they're on the same grid.

Chris Nelder: Well I guess this would be a good time to point out that if we had a big networked HVDC grid like we discussed in episode 29 that really spanned the country, then you would actually be able to probably do some balancing between ERCOT and the California ISO or any other ISO.

Erin Craig: Right. And there are some major transmission projects that are putting a toe into that world. And just as you know the PJM grid if you look at it and the MISO grid, if you look at it on a map you know it's not exactly contiguous and it's not exactly logical and that's because transmission owners decide they want to be part of it. And so you know that there are advocates for big transmission as the way to make sure that everywhere has the power that they need and that is much of it as possible is renewables and there are the advocates for big distributed energy right such that you don't need all that transmission. I think most people believe that the answer is yes to both.

Chris Nelder: OK. So let's leave some of those technical questions aside for a minute here and just talk about sort of what's the value proposition for a corporate buyer? So I mean it seems to me on unless they're really sold on the idea of buying green power for whatever reason, I would imagine that a conventional corporate comptroller or a treasurer would look at the idea of a virtual PPA as again really taking on quite a bit of risk for you know sort of not entirely clear possibly dubious benefit of being able to claim that it's being a good corporate citizen and that they would just see buying grid power as a much lower risk option without needing this green component or this wreck. So how does a renewable power champion within a corporate convince his or treasurer to take the leap and buy a virtual PPA in a wind or a solar farm?

Erin Craig: Well the first thing to remember is that all of these companies are paying for electricity already. It's just usually buried in some facilities budget and not at the attention of the CFO level and those utility bills are not stable no matter how they're buying their electricity those bills can also be quite variable. So it's not the case that they are in a nice stable position today with their electricity buying and that this transaction is going to perturb that in some dramatic way. That are already you know granted not on an hourly basis you know in most cases but they are already participating in an electricity market that imposes on them variable costs on a monthly basis. And so for the companies especially those who have load that they are trying to address on their own grid, because it helps them this way. If you buy into a virtual PPA that gives you this fixed price of the resource that you've agreed with the resource owner and then you sell that power into the market at the same moment that you're selling that power into the market over there where your facility is, you're buying power. And so if you're selling and buying it at the same moment on the same grid even if it's hundreds or thousands of miles apart those prices are really correlated. And so in an ideal world they cancel each other out. The price you're buying at and the price you just sold for. So those two cancel each other out and you're left with the PPA price is the price you're paying for your energy. So you've taken at least a component, you know your energy bill is a lot more than the cost of your electricity but you've taken that component of your energy bill especially in deregulated places and you've hedged it. You've said for this part of my bill, I've got a valuable resource that I'm selling at some price that is related to the price that I have to buy at anyway and to the extent that those two are near each other or cancel each other out over time then you're left with your PPA prices which you pay for energy and you've actually stabilised. You know you have taken on risk. You've stabilized your prices as opposed to making them more variable.

Chris Nelder: Right. OK so let's talk about that because you know I would think that if I were a CFO and I were thinking about entering into a contract like this the most important question for me would be not just what will the wind or solar power cost that I'm buying on this PPA? but what will it cost again relative to the wholesale grid power price? Because that's what I have to resell it at. And that cost, the cost of grid power in most of the US is really heavily leverage to the price of natural gas. So since a typical PPA might have a 25 year life, like if you're a corporate buyer how do you model the future of natural gas prices for the next 25 years and figure out if this is a good bet for you to take? I mean especially since the history of natural gas prices shows that it's very highly volatile. You can't predict its price over a period of time reliably, certainly not for 25 years. Whereas a solar or wind PPA would actually give you a firm fixed price. So I wonder how this looks to the corporate buyer. I mean in Google's white paper on achieving 100 percent renewables and we'll link to that in the show notes, they say "ensuring that we have a cost competitive predictably priced electricity supply is an important part of running our business in a sustainable way." Okay fair enough but what's not predictable is the price that they turn around and sell that power for.

Erin Craig: Right. Right. So there are a few things bundled up there. So Google has been pretty careful and they're an example of one of these types of corporations that are pretty careful to try to match where they are investing in these renewable resources and buying them versus where their load is. They try to do those reasonably close together. So for them you know when they say a predictable power price one way to get that - not the only way but one way to get that - is to engage in the wholesale market so that you are selling power from your wind farm and buying power for your facility at more or less the same price and your predictable price then becomes your PPA price. But like you said that's happening on an hourly basis. But before you decided to do that somebody had to look at the forward price and go well I think it's gonna work out. I think over this period of time the prices are indeed well enough correlated or B) if they're not, and many of the people who sign virtual PPAs, you know they're trying to earn RECs for their nationwide or even worldwide electricity load. And so this notion that it's a hedge becomes very weak right. That's not the main reason they're doing it. And so for those companies, the decision they have to make isn't is this a good way to stabilize my power price? The decision they need to make is this type of investment, is this type of expense worth what I'm going to have to pay for it? And you said it's a dubious benefit. I don't actually think the corporations look at it that way. I don't think they see it as a dubious benefit. I think they see it as a pretty powerful benefit if you pardon the pun because it's not just a soft halo, you know especially in the B2B world. They have customers asking for it. This is being pushed up supply chains in a way that's pretty hard nosed and they have you know sort of everyday people asking for it. It really is something that they think they really believe benefits their business. So that's not to say it benefits them an infinite amount which is why you have to say OK if this is a benefit to my business what am I willing to pay for it? So one of the things we do and other companies like us is help companies try to understand that equation. What is it going to cost you? The approach we take is we look at worst cases. We push power prices down like the wholesale power price. We say let's just assume it's really bad and it stays there so that they have an appreciation for how much money. You know they're going to write checks every quarter or every month. How much money can those checks be? And over what period of time? and ask the company is that worth it to you and only they can make that choice. But if they say yeah we think it's worth it then it's worth it. And what we've presented is the worst case.

Chris Nelder: OK, but what are they doing about hedging their risk for natural gas prices? Hiring a natural gas analyst or what?

Erin Craig: Yes. So some of the companies don't do anything. You know which is to say they accept the risk and if it turns out badly for them they write checks. You know just like they write checks for RECs. If they're going to buy RECs, what are they doing? They're writing checks. So some companies simply, they don't hedge the risk. The risk is what they took on. They knew they had to take it on and they do it. Some companies decide that you know I took on this risk so that they would get the resource built and transfer the risk from the wind farm owner to me, but I don't want all of it or I don't want to keep all that risk for all these years and so you can do financial hedges right. You can actually hedge the price that you're selling at just as if you were a power trader. The risk that you're taking and the money you're spending, it needs to start to get pretty pretty large before... Today. Let me say today. There are some new products coming to market. But today you're starting to get down into a path that's pretty complicated in terms of whether or not you hedge this risk. You know it's kind of like the first time a corporation decides they want to hedge currency risk. They didn't think they were in the currency business but then suddenly like well we're doing business all over the world and currency varies a lot and it's affecting our earnings and maybe we ought to hedge it. Right so. So companies do sometimes reach that threshold and say Yeah I think it's worth it to spend some more money to make this a little bit more stable. But some companies don't. And they just write the checks or take the money as the prices go.

Chris Nelder: I'd imagine if I were a Fortune 50 and this was a big part of my power procurement, yeah I'd probably be hiring a couple of natural gas analysts and I'd probably be playing in the futures market for natural gas to try to hedge my risk.

Erin Craig: Well you know and some surprising companies have done that. A number of years ago and I don't want to speak for them now because I haven't spoken with them about it in a number of years but Safeway right the supermarket they were one of the first companies to sort of see the possibility of hedging their energy prices. Not for sustainability reasons but because electricity... big supermarkets are of a terribly thin margin. They are not big profit businesses and they were seeing power prices as a huge variable factor sitting under utilities. That was not good for them. So they actually hired some power traders and did some very sophisticated things in the power markets in order to hedge their risk. So certainly there are companies that do that, but also if you look at those Fortune 50 companies they can actually afford the risk. And so remember if you hedge it you're paying somebody else to take it. And some of them look at it, cost it, and make the decision that you know what we're going to self-insure that.

Chris Nelder: That makes sense too.

Erin Craig: Right. Right.

Chris Nelder: That's perfectly fair. OK so even though corporates are buying renewable energy to power their operations there are still as we discussed they're still ultimately depending on their local utilities to smooth out the variability of whatever wind and solar might be on their grid and delivering firm reliable power, which all the customers need, especially the high tech companies operating data centers. I mean I think they need like you know five nines reliability or whatever. So I assume that at least some of them are probably also using fuel cells to provide reliable backup just in case if they have a natural gas supply particularly like at a data center. So what's the latest thinking on this? Like if the local utility is using natural gas generators for example to maintain full time power supply, but the corporation wants to say that it's using green power what can they do about that? Or is that something they want to do anything about or are they just saying you know what local grid power composition is going to be whatever it is we're leaving that up to the utility we're just going to concentrate on buying our RECs and using these virtual PPAs to say that we're buying green power?

Erin Craig: Well I think companies are doing an all of the above strategy, you know and different companies choosing different pieces of it. But I don't know of any large power buyer who is not pressuring their utility to get more green power. And you know because at the end of the day a utility's job is to provide power and a utility's job we all hope is to help serve their customers and if their customers want green power then they should figure out a way. Right?

Chris Nelder: Especially their really big customers.

Erin Craig: Exactly. And so all of the parties that we work with and certainly all the big buyers that I know are definitely working with or trying to work with their utilities to make that happen. So that's definitely an effort that's going on. It won't surprise you to hear that utilities aren't always the fastest acting actors in this space. And so you know the companies and the companies are growing. Some of them very quickly. You know they work with their utilities they try to make change. And at the same time they go sign power purchase agreements because they can. And that's much faster in many cases than working with their utilities.

Chris Nelder: Well on that point I wanted to discuss what I think is a really interesting case and that is the example of Switch and the casinos in Nevada, who are trying to now deregulate the state's retail power markets which I think is a really interesting little case in point here. So can you tell our listeners a little bit about that case and what the implications of that might be?

Erin Craig: Yes so just in general so the state of Nevada is prior to this sort of case of these actions that are coming about just now is a vertically integrated utility power market. So it is not inside an ISO. So it doesn't have a liquid public power market and it is also a place where there was really just one utility in the whole state. I mean technically it's two utilities but they're both owned by the same holding company. So it is a place where the one utility is literally the only game in town.

Chris Nelder: It's a captive market.

Erin Craig: It's a captive market.

Chris Nelder: Owned by Berkshire.

Erin Craig: Owned by Berkshire Hathaway. Right. And in many states where that is also the case there are reasonably simple ways that at least some generators can step away from the utility and decide to buy their own power. That is also possible in Nevada but the way that the rules were passed made it first of all very onerous. I mean some places it's easy to do that, at some places it's very onerous. In Nevada the rules made it very onerous and there was like one mine in the year 2000 who did it. So it's not common. So you know a couple of years ago when the casinos and Switch were looking at wholesale power prices and how they could buy power on the wholesale market and the availability of a lot of renewable power and solar resources, prices coming down. So they look at that equation and they look at their power costs under the utility and the fact that utility was not offering them renewable energy solutions and they just said well tell you what I'm going to dredge up that old law and I'm going to go ahead and opt out. And gosh, it was 18 months ago now two years ago now several of the casinos and Switch filed applications to opt out. And the PUC in Nevada hadn't had an application like that in more than a dozen years. And you know I'll just say I think they were pretty honest about the fact that they were not well equipped to decide it because you have to you have to break up all the cost and you have to decide which cost will have to be paid and which cost can they opt out of and what percentage of the invested resources are they going to still have to pay for? When you're unbundling a bundled utility, it's hard and they hadn't had to do it in a long time and the PUC wasn't really able to make a determination for Switch, who was the first one in line. And so they denied their application and later the casinos came down the line and they started to approve the casinos' applications. And so perhaps not surprisingly, this did not sit well with Switch who couldn't get back in line and didn't get approved. And I'll also note that when they approved the casinos' applications it came with fees that cost you many dozens of millions of dollars.

Chris Nelder: I'm trying to remember... I think MGM paid like a 60 million dollar exit fee or something.

Erin Craig: That's correct. And so Switch decided that a political solution was in order. And not just Switch. I mean Switch and a large...

Chris Nelder: Switch is a data center operator, right?

Erin Craig: That's right. They're a data center operator. And they're headquartered in Las Vegas so they're a Nevada company. And so they and a bunch of other large power users and others just decided that it was time. You know it's been a dozen years or more since a state decided to deregulate itself and they decided that it was time that the forces were all aligned and that not only they, the big power users, but also the consumers, the residential and household power users, could really benefit from there being competition in the marketplace. So they put an initiative on the ballot this past November and it passed with I want to say 70 something percent voting yes.

Chris Nelder: Wow.

Erin Craig: So you know it has to be a constitutional amendment in Nevada, so that doesn't mean it's done. There's more process wheels that have to turn. But that's where it's headed.

Chris Nelder: That's fascinating you know I haven't quite heard the story laid out this way before. It sounds to me like what you're saying that or implying is that if the Nevada PUC had approved Switch's application to leave and you know go do its own thing that maybe it wouldn't have come to this point where Nevada was now forced to deregulate.

Erin Craig: Well I mean you say forced to deregulate as if that were a bad thing. I think I think maybe...

Chris Nelder: I don't think it is but...

Erin Craig: Who knows? I mean you know...

Chris Nelder: Yeah it's a counterfactual. Who knows?

Erin Craig: I mean and none of the companies were happy with the fees. I mean the fees are very large. But having said that you know maybe in the future it would have rolled out differently had they made a different decision. But it's hard to say.

Chris Nelder: Fascinating fascinating situation. Can you imagine what you know we fast forward a couple of years let's say this all goes according to plan. The Nevada casinos start suddenly being buyers of vast amounts of basically utility scale solar farms that are now cropping up in Nevada to satisfy their power and they become some of the biggest champions essentially of energy transition. I mean who would have imagined that outcome just a couple of years ago?

Erin Craig: Yeah no kidding.

Chris Nelder: The casinos, really? OK.

Erin Craig: Well you know casinos if you think about it are pretty funny unique kinds of power demand centers because they are 24 hours a day in Las Vegas. You know they generate a lot of heat. I mean you know the HVC demands are large. So maybe it's just a confluence of that. You didn't see it happening in... Well New Jersey is already deregulated so yeah. I mean you've got great solar resources you've got solar power prices coming down you have a vertically integrated utility with no overt incentive to serve those needs. And it all just embroiled together.

Chris Nelder: And you have a lot of open desert with just an amazing solar resource and there's nothing there. Except desert.

Erin Craig: Yeah.

Chris Nelder: OK. So I'd like to wrap this up with a little bit of an outlook so what are you seeing in terms of the pipeline of corporate scale renewable plants let's say for the next five years or so? And is corporate procurement of renewables in your opinion likely to be an ongoing enduring approach that is actually going to spread around the world or is this kind of a thing of the moment in the U.S.?

Erin Craig: So it's already spreading around the world. And if we go back I would say companies have been in renewables you know at least in the form of RECs for a long time. And what I see now is an evolution. It's not a new thing that companies have decided they wanted renewable power. That's been going on for quite some time. What they are doing now is reflecting a level of sophistication and scale and their ability to do that I think comes from you know partially ISOs exist now and partially there are these liquid power markets but also the cost of renewables has dropped. So I think it's going to continue. What I hope happens and I think what a lot of us are working towards is to make it more accessible. There's a giant chasm between buying a REC, which as you said is super simple to do and signing a power purchase agreement for 25 years for 100 megawatt wind project right? There's a giant chasm between those two in terms of both cost and effectiveness and risk and there are all kinds of innovative things going on right now to try to figure out what is the way that we can offer renewable energy to companies that want it in a way that's meaningful and at the same time you know respectful of what they are as companies. The kinds of risks they can take, the kinds of commitments they can and ought to make versus the role of utilities and the role of ISOs and the role of utilities commissions and our RPSs and trying to understand how all of that plays into creating this future. Right now it's definitely a lot of individual actors doing what they can and a lot of folks you know like myself and others trying to figure out what is the way to make this easier and more differentiated in terms of the different things you could do depending on your company's profiling needs.

Chris Nelder: So am I hearing you that there's maybe people that are trying to figure out how to make sort of a middle range market in this stuff?

Erin Craig: Oh definitely. I mean so you know there's lots of us trying various ways to take what was until let's say two or three years ago a market place them looked like big utility issues RFP for resources, IPPs respond to RFP, resource gets built. That was what the market looked like. And now we've got all these companies like well I don't need a whole resource, I need a part of a resource or maybe I'm not sure which resource I want and maybe I want it in Texas and maybe I want it in Virginia. And you know that's not what the renewable power industry is used to responding to. And that's not how power purchasing is... Well that's not how the industry grew up. So there's a lot of things, a lot of pieces that need to move around to make sure that this demand gets satisfied in a way that makes sense for the buyers and makes sense for the sellers in a new kind of way. And so there's lots and lots of people trying to figure out exactly what that is. And we all agree that if it stops at the Fortune 50 then we've done something wrong.

Chris Nelder: Well that makes perfect sense. Yeah I could easily imagine a role for some intermediary entity to say tell you what I'll buy 100 percent of the output from your new 100 megawatt plant and then I'm going to slice and dice it and sell it to 100 companies that just want one megawatt.

Erin Craig: Right. And that's definitely one of the models that's emerging.

Chris Nelder: Yeah. Fascinating stuff. Well listen, Erin. I really appreciate your taking the time to be on the show and to explain all this corporate procurement mumbo jumbo to us I think it's just a fascinating little corner of the market. It's really exciting to see the corporate community stepping up and being a big part now in energy transition.

Erin Craig: Yeah I'm excited to be part of that myself. And thanks so much for the invitation.

Chris Nelder: Terrific. Thank you so much.

Erin Craig: All right.