The widespread adoption of off-site PPAs is, at least in part, due to a variety of key benefits. Foremost of these is that off-site PPAs enable buyers to purchase far more electricity than can be produced by relying on on-site resources. Moreover, off-site PPAs allow cities to enable new renewable projects to be built without incurring large upfront expenditures and, in some cases, provide immediate and long-term cost savings.
Despite benefits such as these, many local governments today are still reluctant to sign off-site PPAs because they are perceived as novel, long-term contracts with considerable financial risk. But this perspective is both incomplete and inaccurate. To be sure, these contracts do involve some risks, and local governments should seek to understand these risks and the available solutions to mitigate them.
However, in focusing exclusively on the new risks imposed by off-site PPAs, many local governments overlook the financial risks they are already exposed to. They may also fail to see how integrating PPAs into their energy procurement strategy might create a more robust approach.
Below we explore why business-as-usual electricity purchasing is inherently risky and how off-site PPAs can provide more certainty and reduce risk when paired with well-established and emerging strategies.
Most large electricity consumers, including local governments, traditionally purchase electricity through wholesale market contracts or at a retail rate determined by their utility and state regulators. Both of these strategies can have financial risks that can impact local government budgets.
Local governments purchasing wholesale power typically do so to access lower prices and save money. However, as the recently extended electricity spike in Texas illustrates, relying on wholesale market purchases can result in significant short-term price fluctuations and financial risks. And while local governments can use financial contracts to protect themselves from these short-term spikes, these financial hedges can increase costs and are typically short-term contracts. This leaves cities exposed to the risk of long-term, systemic increases in electricity prices.
Local governments purchasing at a retail rate are similarly exposed to long-term price increases that might result from a variety of systemic changes. These risks are currently not top-of-mind for many US consumers. The United States has enjoyed relatively stable electricity prices over the past few decades, with commercial prices generally increasing about 2 percent per year since 2000 (roughly in line with inflation). Electricity prices could conceivably increase due to a variety of political, economic, or other forces over the coming years, though.
On the political front, an introduction of a carbon tax, cap, and trade, or restrictions on fracking could all drive up the cost of fossil fuel generation. Alternatively, accelerated adoption of electric vehicles could significantly boost demand for electricity, which could similarly increase prices. In addition, force majeure events—such as hurricanes, extreme colds, or wildfires—could knock out key pieces of grid infrastructure. This could lead to temporary or long-term price increases for utility customers, which was illustrated dramatically, and tragically, during the recent cold snap and blackouts in Texas.
The above possibilities are not predictions but rather examples of potential systemic risks that could increase electricity prices in the United States over the coming years. Local governments that continue to purchase electricity in their business-as-usual manner at prevailing prices are essentially putting all their eggs in one basket and betting that electricity prices will not rise.
https://rmi.org/renewable-ppas-are-the-opposite-of-risky-business