In recent years the topic of renewable energy aggregation has dominated industry insider conferences and hallway conversations, as many look to lower the barrier of entry for first-time buyers. For those that are new to renewable energy and looking to better understand the need and components of an aggregation strategy, here's an overview.
Energy aggregation is when a group of companies or local institutions partner together to buy energy from a single developer, or multiple developers, at smaller volumes while retaining the economic advantages of a high-volume purchase.
The term is widely used to describe bulk purchases of renewables from wind, solar and hydro-power projects. Unless an organization has the finances and energy demands of a large company like Microsoft, Apple or IKEA, purchasing renewables isn't a viable option without aggregating a group of smaller buyers together to sign a power purchase agreement (PPA).
Energy aggregation is the alternative for companies looking to purchase renewable energy on a smaller scale, especially as 48 percent of the Fortune 500 have committed to clean energy targets. Here at LevelTen, we often break-up this term into two separate definitions as they apply to each side of the transaction - project aggregation and buyer aggregation.
Project aggregation is creating a portfolio of projects, similar to the idea of a mutual fund, which blends a diverse range of renewable energy projects together.
This method allows buyers to transact with less risk and get access to a higher value product in one transaction, instead of buying into different projects across multiple transactions. Think of project aggregation as investing in an index fund versus a single stock, reducing the overall risk of a renewable energy purchase.
Buyer aggregation on the other hand references when several non-utility buyers combine their efforts and increase their buying power to access more projects.
While leading energy buyers like Google and Amazon purchase a wide-range of projects with greater regularity due to their massive energy needs, superior financial standing and familiarity with the procurement process - the vast majority of buyers do not have this luxury. Aggregating smaller buyers together allows them to access a similar range of projects as a larger entity would and at an affordable price.
Looking Beyond Corporate Buyers: Another Type of Energy Aggregation
In addition to corporations collaborating to purchase renewable energy, community choice aggregation (CCA) is another type of energy aggregation program gaining momentum. Community choice aggregation is also known as community choice aggregators, government energy aggregation, municipal electricity choice, community energy aggregation, community solar or wind programs and municipal energy aggregation.
CCA programs allow residents and local institutions - like municipalities, hospitals and universities - to bid as a group on renewable energy projects. For example, East Bay Community Energy is a CCA in Alameda County, California serving as the utility to residents and businesses in 11 cities like Albany, Berkeley and Oakland.
Acting as an alternative to sourcing energy from the incumbent utility servicing a region, the goal is to pool a group's buying power for greater savings on renewables.
The Key Benefits of Energy Aggregation
One of the primary benefits of aggregation is the cost savings since multiple companies partnering together can contract a much larger project than an individual member alone.
A group of buyers have greater buying power, providing them access to larger projects and a more diverse range of options to suit their needs prior to contracting a PPA. Selecting a larger project that takes on the demands of multiple partners, reduces the energy pricing as a discount for buying the commodity at a higher volume.
Risk management is the other key benefit of aggregation as investing in a portfolio of energy projects with partners limits a company's exposure to associated risks.
Whether these risks are developmental, market-related or operational, each can stall the progress of a project's construction or reduce its output once completed. If a project never makes it to commercial operations, which many don't, the financial burdens could significantly disrupt a buyer's progress toward buying clean power.
Aggregation diminishes these risks to a portfolio's execution as the consequences are distributed to each buyer in the group limiting the financial downsides per partner. Investing in a portfolio of multiple energy projects helps to ensure it consistently provides the agreed upon load and diminishes the impact of a project underperforming or potentially going offline entirely.
The Challenges of Energy Aggregation
The most common challenge of an energy aggregation program is coordinating the stakeholders from each company to meet their particular requirements and approvals. These inconsistencies in procedures and the nuances of each partner have the ability to stall the already lengthy process of completing a transaction to purchase energy.
LevelTen specializes in streamlining this process through data, technology and standard best-practices across the process - particularly with contract templates - to account for each party's needs.
Matching supply with demand is another challenge to the energy aggregation approach as project developers often want to sell the full output from their project, not a portion. Advisors well versed in aggregation will work closely with developers to express the value of a group purchase and the reduced risks of the portfolio approach for both parties.
The credit of smaller buyers is another challenge as developers weigh the financial risks of working with a company based on their credit rating to determine their energy pricing. Most companies participating in a portfolio have below investment grade credit, which is why some developers associate a risk premium selling to these organizations and others avoid transactions at this level altogether - deeming these deals too risky.
Solving for the credit needs of smaller buyers often involves bringing in an intermediary like an investment grade credit entity to back a buyer, reducing the risk for developers.
An Example of Energy Aggregation in Action
This partnership between Google, AkzoNobel, DSM and Philips on joint wind projects in the Netherlands is a prime example of a successful energy aggregation program.
According to a case study by the Rocky Mountain Institute, these distinct companies aggregated their electricity demand to form a partnership known as the Dutch Wind Consortium. This group has executed two PPAs to date, one on October 2016 for a 102 megawatt (MW) wind park, then again in December 2016 for a second 34 MW wind park project.
The consortium's ability to work together not only reduced energy pricing per project but saved time and resources as the second PPA was replicated from the first for a streamlined contracting process.
Selecting the right companies was crucial to the success of this buyer group when navigating the PPA process, which is why it's important to choose partners that:
- Share similar goals and are committed to sharing the workload.
- Align culturally with shared values and passions to ensure collaboration.
- Command credibility in their industry because of their strong reputation.
One technique that helped the consortium navigate energy procurement was assigning specific tasks to each partner aligned with their experience and expertise. As part of their agreement, AkzoNobel handled communications, DSM and Google managed legal tasks and Philips oversaw accounting.
This approach of dividing responsibilities to support the long-term success of their energy aggregation program kept all partners engaged and invested in the success of the endeavor.
Despite energy aggregation having many layers and potentially appearing complex to a first-time participant, it is undoubtedly a foundational component to ensure renewable energy procurement reaches scale.
What to do next?
- Partner with like-minded organizations buying renewables with the assistance of LevelTen's wholesale market experts, contact us.
- Credentialed renewable energy buyers and developers can request access to the LevelTen Marketplace to see what projects are available.