By Tom Matzzie
As the CEO of an energy company with retail customers I am often approached with the offer by a solar or wind developer to purchase their power under a fixed price PPA for 10, 15 or 20 years.
Historically those long-term contracts are needed in order to lower the cost of the energy. It is a big risk for any company to commit to something for 20 years, even a company like mine with the mission to exclusively enroll customers for renewable energy.
In fact, staying stuck in the “long contract paradigm” is holding back hundreds of solar, wind and hydro projects from being built. Why? There just aren’t a lot of buyers who think in 15 or 20-year terms in the energy markets, and doing deals with those buyers takes 2-3 years. In some parts of the country the utility thinks in those multi-decade terms. But that model is increasingly rare, as the large vertically-integrated utilities have mostly been broken up over the last few decades.
In other states, there are renewable energy standards that require some amount of purchasing, but those standards are either under assault or maxing out faster than policy can respond. In some places, they discourage long-term contracts, as the markets RECs sell into are very volatile short-term markets. Policy makers need to move faster to develop these markets.
The Northeast and Mid-Atlantic region, which is second only to the West Coast in affinity for renewable energy, generally doesn’t have vertically integrated utilities. These markets are all served by distribution utilities and then the energy is bought and sold by competitive load serving entities—retail energy providers, sometimes called ESCOs, like my company Ethical Electric. Today, retail energy providers sell more energy than utilities. It is a fact that has largely been missed by the renewable energy markets.
But retail energy providers companies are historically allergic to any long-term risks because they can’t socialize losses into a rate base like a utility, and also because we compete for customers who could leave us at any time. The net effect is that there generally aren't a lot of long-term buyers for large, utility-scale renewable energy projects in some of the states that need it the most. Job creation suffers too.
At the same time, increasingly, the cost of solar and wind projects is so low that a 15 and 20 year contract isn't needed. These renewable energy projects offer retail energy providers an opportunity to buy power at an affordable price and build asset value over time—turning a sunk cost into an investment dollar. This would radically change the retail energy business model, putting these companies on the front lines of deploying new renewable energy. For the companies, they have the opportunity to reduce their exposure to volatile energy market prices.
But to make all of this work, lenders and investors need more experience in the market. They need to see what the risks are and understand the opportunity. This will take time. To accelerate job creation and the development of new renewable energy, there is an important role here for credit enhancement by governments. The risks are low, as this would be credit enhancement for deployment of known technologies. The opportunity is large—the United States could build a new renewable energy industry as large as the automobile industry, employing hundreds of thousands of people..
The West Coast and Midwest have successfully deployed many more gigawatts of wind and solar than the Northeast and Mid-Atlantic. They've benefited from the job creation and investment in a manufacturing base, while other states have languished. It is time to fix that in a manner that works uniquely with energy markets in the Mid-Atlantic and Northeast.
Now is the time to spark the beginning of another renewable energy boom that will reduce carbon pollution and create thousands of good-paying jobs. All that is needed are the right policies and the businesses to build that future. Businesses like Ethical Electric are ready. Now is the time for policy makers to step up.