Energy as a Service: What does it Mean and How can Businesses Benefit From it?
Clean energy procurement is at a record high as corporations around the world are setting and seeking to meet renewable and sustainable energy targets. This has led to a dramatic rise in the volume of Power Purchase Agreements (PPAs) being signed by global corporations.
Energy as a Service (EaaS) is a similar concept to Software as a Service (SaaS), except instead of software management by a third party, it is energy management. At Diode Ventures, we deliver EaaS solutions through a PPA or lease, allowing our customer to realize the benefits of a power project with no capital outlay or asset ownership and management requirements.
So, what’s a Power Purchase Agreement?
A PPA is a financial contract between an energy asset owner who is generating and selling energy and a customer seeking to purchase energy.
PPA terms typically range from 10-25 years, and in our case, Diode remains responsible for the operation and maintenance (O&M) of the asset through its entire lifecycle.
What are the benefits of a PPA?
No upfront development and capital costs.Diode handles the upfront costs of developing the asset, including procurement and construction.
Potential energy cost savings. A predetermined price of the asset is established upfront for the contract term and may be fixed for the duration of the term.
Reduced risk. Diode assumes the responsibility for the development, construction and ongoing performance of the asset through the life of the contract term.
Tax credit advantages. Diode explores and leverages available tax credits and incentives to help reduce overall project costs.
Increased property value. Land and buildings with renewable energy assets tend to increase the property value.
Sustainable solution. The customer can achieve sustainability goals more efficiently and focus their time on their core business.
What are the available PPA options?
There are a couple options for PPAs: Physical and Virtual. Both options involve a long-term contract between an energy asset owner and a buyer; however, there are some key differences that buyers should make a note of.
Physical PPA (AKA Direct PPA or Retail PPA)
For a Physical PPA, power from the project is either contracted and scheduled directly to the customer’s load (the project and customer’s load must be on the same regional power grid) or power is supplied directly to the customer through distributed energy that is net metered on the same premise as the customer’s site. This second option is sometimes called “behind-the-meter” or “behind-the-fence”.
With a physical PPA, the energy asset owner (the role of Diode) builds, owns and operates a renewable energy project and sells the project’s energy and corresponding renewable energy credits (RECs) to the buyer as they are generated by the project.
At that point, the buyer is responsible for managing the energy, either to support the buyer’s own load or to sell it back to the wholesale power market. In the U.S., selling energy back to the grid requires a license from the Federal Energy Regulatory Commission (FERC). It also requires a sophisticated forecasting system to understand how much of the power needs to be kept for the buyer’s own load, and when any excess needs to be sold. Many buyers outsource scheduling to a third-party qualified scheduling entity.
Virtual PPA (AKA Financial PPA, Structured PPA or Synthetic PPA)
For a virtual PPA (VPPA), the customer receives the financial benefit and credit for renewable energy added to the grid from the project but doesn’t directly receive that power to their site. Also, the project and customer do not need to be on the same regional power grid. This settlement is typically done in regulated markets.
Unlike a physical PPA, there is no delivery of physical power with VPPAs. Instead, the energy generated is sold back into the wholesale power market at the current market price. In a VPPA, the seller and buyer agree to a “contract for differences” settlement to reconcile the floating market price the seller receives compared to the fixed rate the buyer pays. When the market price exceeds the VPPA rate, the developer passes the positive difference to the buyer; when the market price is below the fixed VPPA rate, the buyer pays the developer the difference.
A virtual PPA is beneficial for customers with multiple locations spread across multiple power grids.
What are the typical price options for PPAs?
1) Fixed Price. This is when the customer agrees to pay a fixed price ($/MWh) for the entire term of the PPA; meaning, there is no price escalation.
2) Escalated Price. The price the customer pays for the project increases at a predetermined frequency and percentage. This is typically an annual increase between 1--3.5% over the lifetime of the PPA.
How does a lease option work?
For a lease payment, the owner leases the energy asset to the customer. A lease option allows for a predetermined monthly price that does not fluctuate with the amount of energy produced by the asset. The lease payment can be fixed or escalated.
Which PPA or lease option is right for my business?
It takes an understanding of both the market, tax regulations, and a business’s needs to identify the right type of structure for a business. Regardless of PPA or lease structure, the Diode team can help navigate terms and terminology, and structure the best rate of return based on the business’s requirements.
Contact the Diode team today to discuss your energy infrastructure needs.