Accelerating Energy Transformation in an Uncertain Environment
Insight Sourcing - Part of Accenture
Accelerating Savings & Procurement Performance.
As reviewed in our last newsletter article, the Energy Transformation journey is already underway for most organizations, but hurdles in the pathway are slowing progress.?In the current environment, the foremost hurdle is the looming threat of economic recession. The prospect of a forthcoming recession forces commercial and industrial decision-makers to balance sustainability and energy management objectives carefully with financial considerations.
Let’s start by acknowledging that climate change has arrived. Recent scorching temperatures, potentially the hottest ever recorded, have triggered severe heat waves across the Northern Hemisphere. Europe, including Italy and Spain, is experiencing record-breaking highs, accompanied by dry conditions fueling wildfires in Greece and on La Palma, a Canary Island. Greenhouse gas (GHG) emissions are the driving force behind these unprecedented temperatures. Thus, the urgency for commercial and industrial sectors to reduce their GHG emissions is underscored by current weather patterns.
As a global business leader, your organization’s commitment to sustainability sends a strong message to consumers, business partners, investors, and policymakers. However, it is essential to note that pursuing sustainability goals does not mean disruptive, costly commitments to zero-carbon energy sources. Rather, it involves a balanced strategy that considers financial, energy, and sustainability objectives carefully.
We believe that reducing the carbon intensity of commercial and industrial energy use involves the development of a holistic energy procurement strategy. Such a strategy minimizes costs, maintains acceptable risk tolerance for energy price volatility, ensures supply reliability, and includes the appropriate levels of clean energy procurement. This ensures that the overall average carbon intensity of procured energy sources is in line with sustainability goals.
It is important to balance these objectives, particularly considering the current economic headwinds. Doing so ensures you can continue progressing your energy transformation journey in an uncertain environment. This approach is about balance—not swinging between carbon minimization and cost minimization based on the prevailing economic wind.
In an uncertain environment, one important tool in the energy transformation toolbox is the Virtual Power Purchase Agreement (VPPA). A VPPA is a contractual arrangement where a company agrees to buy renewable energy credits associated with a specific amount of electricity generated from a renewable energy project. Instead of physically receiving electricity, the company supports renewable energy development and claims environmental benefits. This is a purely financial transaction. VPPAs allow companies to increase their renewable energy usage and reduce their carbon footprint, regardless of their physical location. VPPAs are one of the keys to a balanced energy management approach because they offer several economic and financial advantages for organizations that value energy price stability and have a low risk tolerance.
By locking in long-term energy prices, VPPA off-takers are protected against sudden spikes caused by market conditions or regulatory changes. In uncertain economic times, energy prices may become more volatile due to supply and demand shifts. VPPAs act as a hedge, providing certainty and shielding businesses from future price fluctuations. With VPPAs, companies secure prices for a portion of their energy consumption, reducing reliance on market rates and gaining predictability in energy costs.
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Furthermore, VPPAs offer a way to reduce exposure to volatile energy markets and regulatory risks. By purchasing renewable energy credits (RECs) from a renewable energy project, the organization effectively transfers the risks associated with renewable energy development, operational performance, and regulatory changes, to the project developer. This allows the organization to focus on its core business operations with reduced exposure to energy-related uncertainties.
VPPAs also exemplify sustainability commitments, showcasing a dedication to carbon emissions reduction and renewable energy support. They enable organizations to claim additionality, exhibit environmental leadership, bolster brand reputation, and attract conscientious customers and investors. VPPAs can also serve as a regulatory compliance tool, assisting organizations in meeting renewable energy goals and adhering to jurisdictional standards. By engaging in VPPAs, organizations secure compliance without the need for direct investment in physical renewable energy infrastructure.
To be clear, however, in the context of a hedge, absent an offsetting transaction, VPPA off-takers are exposed to downside energy price risk. Thus, to optimize your VPPA strategy, it is important to assess market insights and intelligence. For example, examining VPPA pricing trends is essential because rising prices lead to thin financial settlement margins and greater market risk. Understanding global energy market fundamentals is essential because increasing global dependence on natural gas impacts natural gas and power prices. Additionally, staying abreast of changes in power markets is important because transmission additions, thermal power plant retirements, or changes in available renewable energy supply can significantly impact real-time power prices.
In today’s uncertain environment, investing in energy transformation and sustainability through clean energy procurement strategies like VPPAs allows organizations to thrive, navigating economic uncertainties while unlocking risk mitigation, cost reduction, and sustainable growth opportunities. Financial and energy transformation progress will be the reward for organizations that take thoughtful action in today’s uncertain environment.