The purpose of this Guidance Note is to support asset managers, property managers and facilities managers in developing a renewable energy procurement strategy.
Renewable energy generation is central to the mitigation of climate change. Increasing renewable energy provision will help minimise the rise in global temperatures. As a result, this can help to reduce the prevalence and severity of extreme weather events, such as flooding or droughts, for example, which can have material impacts on local communities and built assets.
The UK has made significant strides in decarbonising the grid, predominantly through the displacement of coal by gas. Increasing renewable energy provision will enable this decarbonization to continue.
Renewable energy initiatives undertaken by the UK government, such as the feed-in-tariff and contract for difference schemes, as well as demand from customers wishing to reduce their carbon footprint, has led to an increase in the generation of energy from renewable sources. This increase in demand for renewable energy will lead to greater grid coverage of renewable energy and a reduction in the carbon intensity of utilities.
It is important that renewable tariffs have been subject to the requisite chain-of-custody audit that confirms generator to end-user provision, so that companies claiming their energy is renewable have supporting evidence.
In March 2021, the UK Green Building Council released their guidance for renewable energy procurement, which requires three key elements to support decarbonisation:
As combusting any gas, irrespective of the source, will result in CO2 being emitted, this Guidance Note focuses predominantly on electricity. However, as the green gas market mirrors the renewable energy market, and so the principles set out in this Guidance Note are also valid for green gas.
The procurement of renewable energy does not currently deliver a meaningful financial benefit. Typically, Energy Attribute Certificates, which verify that a unit of electricity was generated from a renewable source, carry a value which is added to the price of delivered energy. Despite this, the cost of carbon is increasing over time, and in the longer-term, renewable energy may prove a cheaper source of power, particularly as the marginal cost of renewable energy is zero.
The inclusion of renewable energy as part of a company’s energy mix is, primarily, to contribute towards its decarbonisation strategy and, where relevant, to support its net-zero commitment.
Renewable energy procurement is part of a number of prominent reporting schemes, such as CDP, GRESB and EPRA. These schemes score participants on their renewable energy sourcing. As a result, robust procurement practices will enhance scores, which in turn benefit brand value.
Where commercial real estate funds are included in Environment Social Governance Exchange Traded Funds, renewable energy procurement can support client investment.
The table below summarises the key activities associated with renewable energy procurement, and highlights where asset managers, property managers and facilities managers are likely to have a responsibility or specific interest.
1. Decide on the procurement route
2. Procure the chosen solution
Asset managers are primarily responsible for the procurement of renewable electricity for a property, or portfolio. However, it is important that asset managers engage with occupiers to understand how commercial real estate can contribute towards their renewable energy needs.
The ability to procure verifiable 100% renewable energy should be considered against other commercial outcomes. If a supplier is able to offer this tariff, but cannot, for example, consolidate billing, then there is a potential resource and environmental impact of handling and storing large quantities of both paper and data. If the commercial and operational terms do not justify the solution, then carbon offsetting may be considered as a more preferable solution.
Procuring renewable energy involves two primary areas of consideration:
There are two primary routes to securing a robust renewable energy tariff:
A Corporate Power Purchase Agreement (CPPA)
A CPPA gives the end-user control over the source of their power. Unless the physical infrastructure supports a private wire arrangement (whereby a cable or pipe connects the generator with the end-user), the contractual structure will be tripartite.
This will require an agreement between the generator and the end-user (to purchase the power), one between the generator and supplier (allowing the supplier to bill on behalf of the generator and pricing in third-party charges and balancing risks), and one between the supplier and the end-user to confirm the supply and payment of the power consumption.
100% Renewable Energy Guarantee of Origin Certificate (REGO) backed supplier tariff
A REGO is a UK specific type of Energy Attribute Certificate which removes end-user choice over generation source but is simpler than a CPPA.
Only a contract between the supplier and end-user is required, as the supplier will have made contractual provisions for the generation source themselves. REGOs are allocated in arrears by the supplier based on end-user consumption.
Note that the green gas equivalent tools are CGPAs (Corporate Gas Purchase Agreement) and RGGOs (Renewable Gas Guarantee of Origin Certificates).
There are pros and cons to each solution, which are listed below:
A CPPA requires a wholesale supplier contract structure, which involves an end-user having capacity for in-house, or outsourced, commodities trading.
This is because you will need to be able to ‘sleeve’ the energy offtake from a generator into your supply contract, i.e., handle the transfer of money and energy to and from a renewable energy project on behalf of the end-user
When tendering a supply contract, it is important that the end-user includes sleeving provisions within the specification, such as example contract terms or written acceptance of sleeving solutions.
Once the framework is laid out within a supply contract that facilitates the inclusion of CPPAs, it will be up to the end-user to source a preferred generator.
Options to source preferred CPPA generator:
CPPAs typically run for a period of 5-15 years, with the shorter agreements reserved for low investment, swift payback solutions such as solar photo-voltaic. Prices are usually set for the duration of the contract term and are often index linked.
In order to better adjust to market conditions, it is recommended that negotiations with generators take place to explore opportunities for price reopeners (in the event, for example, that the commodities market crashes and the agreed CPPA price represents poor value) and supplier guarantees (should the portfolio not be able to honour the contract in future).
A 100% REGO-backed tariff provides greater flexibility in the choice of supplier and supply contract structure than a CPPA. This is because REGOs can be offered through both wholesale and retail contracts. That is., whether energy is procured independently of the supply contract, or whether through an all-inclusive solution.
As only a few suppliers offer exclusively green tariffs, other supplier’s tariffs can be compromised by the inclusion of brown energy in an overall supplier mix, and the utilisation of unbundled REGOs. That is, where the REGOs are procured independently of the utility. Rather than restricting competition to those few suppliers that offer only renewable energy tariffs.
Questions to ask when tendering for REGO-backed tariffs:
It may be that a blended solution provides the most pragmatic approach, with the CPPA covering a percentage of the portfolio or asset baseload, and the renewable tariff covering the remaining consumption.
This is particularly important to consider if there is concern about portfolio turnover, and it is important to remember that a significant asset sale could result in an inability to consume agreed volumes. Whilst CPPAs can support volume tolerance clauses, energy suppliers have greater flexibility than generators.
‘Additionality’ requires that the procurement of a renewable energy credit must contribute to additional, rather than existing decarbonization.
The requirement for additionality is designed to maximise renewable generation in the UK through prioritisation of CPPAs and/or Supplier Tariffs predicated solely on consented (but unbuilt) schemes.
However, additionality doesn’t account for partial financing options, where a scheme has been built utilising short term Power Purchase Agreements as collateral, with the understanding that these will be displaced by future CPPAs once they come to an end.
Equally the use of REGOs as an income stream is considered by investors. REGOs unclaimed from existing schemes, if additionality is pursued, could result in more unbundled REGOs finding their way into supplier offerings.
Critically, end-users should consider whether optimising existing generation has a role to play in their decarbonisation strategy, and tailor their specifications appropriately.
The following Guidance Notes contain related information: