Energy Generation Agreements: Explained for Businesses
As the world transitions to renewable energy sources, more and more businesses are considering entering into energy generation agreements. These agreements are a form of power purchase agreement (PPA), which allow companies to procure energy from renewable sources at a fixed price for a certain period of time.
But what exactly are energy generation agreements, and how do they work? Let’s take a closer look.
What are energy generation agreements?
Energy generation agreements are contracts between a renewable energy generator (such as a wind or solar farm) and a buyer (often a business). Essentially, the buyer agrees to purchase a certain amount of energy (usually measured in kilowatt-hours) from the generator at a set price over a certain period of time (often 10-15 years).
These agreements allow businesses to secure a predictable price for their energy needs, while also supporting the development of renewable energy projects. They also typically come with a fixed or predictable inflation rate, which protects the business from unpredictable fluctuation in energy prices.
How do energy generation agreements work?
Energy generation agreements are typically structured as either physical or virtual PPAs. Physical PPAs involve the physical delivery of energy from the renewable generator directly to the buyer, while virtual PPAs involve the generator selling the renewable energy credits (RECs) associated with the energy it generates to the buyer.
In a physical PPA, the renewable generator agrees to deliver a certain amount of energy to the buyer’s local utility grid. The buyer then pays the generator a fixed price per kilowatt-hour for this energy, regardless of the current market price of electricity. Physical PPAs are often used by large industrial and commercial customers who are looking to purchase a significant amount of energy, and who have the infrastructure in place to directly take delivery of the energy.
In a virtual PPA, the renewable generator sells the RECs associated with the energy it generates to the buyer, rather than delivering the energy directly. The buyer then sells these RECs on the open market, while still purchasing energy from their local utility at market rates. This allows the buyer to offset their energy usage with renewable energy credits, while still supporting the development of renewable energy projects.
Why should businesses consider energy generation agreements?
There are several benefits to entering into an energy generation agreement for businesses. First and foremost, these agreements allow businesses to secure a predictable price for their energy needs, which can be particularly beneficial for businesses with long-term planning needs.
Additionally, energy generation agreements can help businesses meet sustainability goals and improve their corporate social responsibility efforts. By purchasing renewable energy, businesses can reduce their carbon footprint and support the development of renewable energy projects.
Finally, energy generation agreements can provide financial benefits for renewable energy generators, which can help to spur the development of new projects. This can lead to increased job creation and economic benefits for communities where renewable energy projects are located.
Conclusion
As the world continues to shift towards renewable energy sources, energy generation agreements are becoming an increasingly important tool for businesses. By entering into these agreements, businesses can secure a predictable price for their energy needs, while also supporting the development of renewable energy projects. With the potential for financial and social benefits, energy generation agreements are worth considering for businesses looking to reduce their carbon footprint and support sustainability initiatives.