How to Futureproof a Renewable Energy Portfolio
Fast climate ambitions vs. long-term financial competitiveness – when it comes to green energy procurement, corporates and industry face pressure from two sides: their ambitions to become green, fast, and the imperative need to remain financially competitive in the long-term. Statkraft Originator Silvia Escudero Santos-Ascarza explains how both are possible: now and in the future.
Silvia Escudero Santos-Ascarza knows how companies can build a sustainable renewable energy portfolio to reduce CO2 emissions successfully. The originator, based in the Statkraft office in Madrid, answers questions about the challenges companies face and how to futureproof a portfolio.
Silvia, when you talk to customers or potential customers: Which reasons do they have for wanting to build their renewable energy portfolio?
I talk to energy procurement or utility managers and sustainability specialists from diverse industries regularly. As different as their work environments are, there are some recurring reasons that come up in most cases: Today, they are faced with increasing pressure to reduce their CO2 emissions, either from their internal stakeholders, their supply chain or from their end-consumers. Additionally, buying renewable power also requires a commitment to offtake the power in the long-term, typically 10 years. In a volatile energy market, some customers will look for long-term price-hedging to secure prices they can plan with. Customers whose end-product is very energy-intensive (here the power price will determine their competitiveness in the market) might look for a market-following hedging solution e.g. spot-indexed or with price caps. Of course, the overall driver is to decarbonise their operations and advance towards their sustainability targets.
And which challenges do they face in their ambitions?
The challenges are very diverse, as there is not just one way to achieve a goal. In a recent webinar of the Corporate Energy Series, I have for example talked to representatives from three different industries: telecommunications, cement-manufacturing and consumer goods. They outlined, among others, the following challenges: Their size and locations (small vs. large, decentralized vs. centralized, different countries and continents), their renewable energy ambitions (reductions in CO2 emissions or achieving net-zero), the alignment with the different climate reporting initiatives (RE100, science-based targets, CDP etc.) and the possible solutions to achieve them – from energy efficiency measures, to renewable energy procurement, on-site generation, and environmental certificates.
"In building their renewable energy portfolio, corporates operate in an area of tension between credible green solutions, fast climate ambitions and financial competitiveness. Statkraft supports them in finding the optimal solution for each step of their journey."
This sounds very complex. How can a company start its sustainability journey?
Companies who are now very successful in reaching targets and setting even more ambitious ones have started with a first step, many years ago. The first step is usually setting up a corporate sustainability strategy and clear targets to get there. This strategy will be the guiding compass along the journey. Many companies start by purchasing environmental certificates and then move to renewable procurement with PPAs be it onsite or offsite. As you can see the journey is a marathon, not a sprint. Even a long race starts with a first step. At Statkraft, we are both the developer of renewable energy assets as well as a provider of green energy solutions, ranging from green power purchase agreements (PPAs), environmental certificates to also flexibility and risk energy management. From this selection, we can find the best products for matching a customer’s requirements.
If companies are further along in their sustainability journey, what can help them go on?
For customers looking to step up their ambitions, moving towards and even beyond 100 per cent renewable energy, 24/7, is the next logical step. This can be achieved with a special kind of green PPA: For a 24/7 green PPA, consumer demand profiles and energy supply are matched around the clock, for example hourly or even quarter hourly. With a classical green PPA, fluctuating sources like solar and wind can only cover part of the load of a consumer on an hourly basis. The consumer will have to buy the rest of the power in the spot market and this energy will likely have a fossil fuel origin depending on the energy mix of the country at that specific hour.
With a 24/7 green PPA, Statkraft’s flexible hydropower can kick in in such situations and supply the rest to reach 100 per cent at every specific hour. With our hydropower portfolio, we are in a unique position to overcome an often-cited barrier to 24/7 green energy: the intermittency of renewable energy production.
How do you ensure transparency and traceability for the consumers?
The special thing about a 24/7 PPA is that the consumer can really tell for every hour or even quarter-hour how much of the volume came from every renewable energy power plant. The challenge is that Guarantees of Origin in Europe are monthly and do not offer the hourly or quarter-hourly granularity needed. In order to overcome this challenge, together with the independent German technical testing institute TÜV, we have a credible certification for this, and with Daimler, the parent company of the Mercedes Benz car brand, we have a success story to tell.
We are currently sitting in the Advisory Board of the EnergyTag, an independent and non-profit initiative to build a common market for hourly electricity certificates that enables energy users to verify the source of their electricity and carbon emissions in real-time.
Are your customers able to meet their sustainability targets by buying renewable energy in their country of consumption or do you see a trend for cross-border PPAs or financial PPAs?
Depending on the maturity of the market in question, physical PPAs might not be an option yet or there might not be enough volume in the market. It is also foreseen that French and German companies will have the strongest PPA demand in the future but might not be able to satisfy demand in own markets and will look at other markets to source renewable power.
We see a lot of international corporates that instead of closing 10 physical PPAs in each country where they have operations, simply close one or two financial PPAs in countries where they have competitive prices. This is the case for some Nordic countries like Sweden or in the South of Europe, mostly in Spain now. This means a move to more financial PPAs in countries where its most competitive to buy. Financial PPAs have the advantage that companies do not need to take care of the physical supply. They also help companies achieve renewable energy targets without compromising business flexibility. My advice is to look at it from a cross-country perspective just as you look at your business from a helicopter view. It’s the overall portfolio that matters.
We are living in very uncertain times. How do companies futureproof their renewable energy strategy?
When looking at futureproofing the strategy it is key to manage the volatility of the power market. Power is one of the most volatile commodities. These past months have been a great sneak-peak into what the future will look like in terms of volatility of power markets across Europe. In Iberia we have reached maximum pool prices of 121 €/MWh and minimum of 0,2 €/MWh and all of this in the month of January. This volatility will increase in the future due to increased penetration of renewables, carbon prices and dynamics in gas markets.
I am highlighting this because renewable procurement is of course a form of long-term hedging. And due to the increasing levels of volatility, there is a strong economic sense in long-term hedging. At Statkraft we see with our customers that some looking for fixed prices and others for more market following structures (e.g. to cap price exposure or spot-indexed products). Each company will have to look for the hedging solution that works best for their business.
You are currently working on the Spanish market. What is the situation there with regards to corporate PPAs?
2020 was a record breaking-year for corporate PPAs*, with 4 GW of capacity contracted across 12 European countries, with Spain leading the ranking with more than 1,3 GW announced. Companies across Europe are increasing demand for PPAs and we see this trend also arriving in Spain. Between 2019 and 2020 Spain installed a record 10,2 GW of renewable capacity, supported by a mix of bilateral PPAs and merchant unsubsidised projects. Going forward, a large share of the new capacity will be installed on the basis of the new renewable auction scheme launched in January 2021.
The auctions will be instrumental to achieve the national renewable energy objectives and will likely co-exists with PPAs and merchant projects. It is however important to note that the renewable capacity auctioned publicly is not eligible for physical PPAs, will not be linked to Guarantees of Origin and therefore will not be available for corporate PPAs. This combined with the fact that a large amount of international companies are looking at the Spanish market to close financial PPAs to compensate for their consumption in other European countries, will effectively reduce the available capacity for companies that are late-comers in the renewable procurement journey.
This sounds like an appeal for companies to start their green PPA journey?
It is! I would advise all corporates to really look for a credible partner for achieving their sustainability targets. We are always looking forward to learn from our customers: What are their ambitions, which challenges do they face? Through open discussions with our customers, we have developed our most innovative products so far.
About Silvia Escudero Santos-Ascarza
Silvia Escudero Santos-Ascarza is an expert for renewable power purchase agreements in Iberia. Before joining Statkraft as an Originator, she acquired extensive experience as Energy Advisor, Project Manager and Consultant in international projects for more than ten years. Silvia is a Frankfurt School of Finance and Management certified expert in Climate and Renewable Energy Finance and holds Masters degrees in Global Energy Management and European Studies.