Until recently, Power Purchase Agreements, or PPAs, were something relatively few companies had ever heard of, and still fewer were interested in acquiring them. Now, they form a vital part of a company’s eco-armory.

Around 15 years ago, many companies could have put any green-sounding statement or series of platitudes on their Environmental, Social and Governmental (ESG) webpages, pepped it all up with a little carbon offset and bingo: they could consider themselves as green as the next multinational. 

But as environmental awareness grew, and people started doing the sums on how long trees had to be in existence to genuinely deliver the carbon offset, it became clear that such gestures would no longer cut the mustard, let alone cut any carbon emissions.

Then, around 10 years ago, Renewable Energy Certificates (RECs) made their way onto the ESG agenda. RECs mapped out how much renewable energy was being created, and these certificates became tradeable items that started generating revenue for genuinely green projects.

From merely words, RECs suggested payments and real actions, with solar farms being set up on the back of those payments. They focused on the energy production and not the carbon.

Buying RECs (see my earlier article on this) meant you were able to claim, with some justification, that you had used green-equivalent energy.

But as time wore on, some of the people in the energy community started to feel that RECs, too, were some kind of greenwash.

Depending on how you saw their accountability and philosophy, they could be a great thing, a step in the right direction or, as some maintain, deeply misleading.

As this recent Times article (below) shows, there is no doubt that energy commentators in the media now openly question the inauthentic nature of the ubiquitous REC.

 Eighty pence per megawatt-hour isn’t very much to call a carbon-rich, sulphur-laden output of fossil-derived energy “green”. It smacks of what arch climate sceptics like Nigel Lawson in the UK term “carbon indulgences”, an analogy with how the church in the 16th century accepted money for pardons of sins committed.

And so in the last few years, many companies have looked to something more authentic that will help them differentiate themselves from the carbon-intensive industries of old.

Leading this quest has been Google GOOG . Perhaps unsurprisingly, it has two things that have helped it concentrate the mind around this issue.

Firstly, a truly massive budget with which to attack the problem.

Secondly, it has had to manage an awkward truth. Running a car may be an obvious act of carbon emission, but looking up the route you plan to drive on Google Maps is a carbon-intensive process, too. As more of our activities have shifted to the cloud, more and more carbon is being released, making the cloud a highly carbon-intensive place.

Taking CO2 out of the cloud

In dealing with this issue, Google set about taking on green energy by means of Power Purchase Agreements (PPAs).

These are long-term agreements with power producers that guarantee the provenance of the electricity a company is buying.

In many cases they are used to set up and maintain large solar power plants in places like Bridgeport, Alabama, and Clarksville, Tennessee, to deliver huge amounts of electricity. Where possible, Google co-locates its data centers near these solar farms to reduce any transmission headaches.

The signs are that where Google has gone, others are surely following.

A large university, a big water plant, a metropolitan area, or anywhere with big buying power may be tempted to create a PPA; one that guarantees the energy is not just “green lite”, but is genuinely green.

There can be no doubt that the claim is many times more persuasive than relabeling fossil energy green with the help of a cheap REC.

But, as ever with the story of green energy, things are never quite as simple as they seem.

The original PPAs

The idea of buying electricity directly from the generation station itself isn’t new. 

PPAs started when big consumers of electricity would buy their electricity in three-phase form, for industries like aluminum smelting, which consumed truly eye-watering amounts of energy for blast furnaces to melt blocks of aluminum ore. 

Such industries found they could save equally large sums of money by going straight to the producer and cutting out the retail layer.

These arrangements certainly work if you are smelting aluminium. They require taking on a large part of the responsibility of measuring and managing your usage, because as a PPA owner or offtaker, you take on the responsibility of balancing the grid.

In fact, in Australia, one of the main functions of aluminium smelting is precisely this: as a tool to balance the grid, and for this reason the industry receives a lot of cheap electricity. Of course, due to the nature of the production process, the power cannot be turned off for more than 4-5 hours otherwise the liquid aluminum solidifies and wrecks the plant infrastructure.

So a PPA isn’t just a bulk order of your favorite type of electricity. It’s a partnership with the grid whereby you enter into a symbiotic relationship with the generator system. 

It takes a long time to sort out the procurement contract, and the costs of creating the contract are not insignificant, either. Typically, accounting and advisory firms will take a number of months to hammer out a deal that gets signed off by both parties.

But the evolution of a PPA in the modern carbon-conscious economy is an interesting development, and it brings a very strong statement of environmental intent to any company that wants to use one.

Take the following example: Breweries in the US spend in excess of $200 million on their electricity every year. Not surprising when you think of the processes involved. 

Heating up liquids, chilling them, compressing air, refrigerating the final product – all of that takes energy. And many of their drinker customers like their beer maker to show wholesome credentials on carbon. So it makes sense for a brewery to build or sponsor some renewable energy resources, like a wind farm or a solar farm, or both together.

A wind or solar farm might provide a large percentage of the brewery’s power, and instead of paying an electricity bill every month, the brewery can create an investable amount of money that funds the building of their own solar and wind farms in the first place. 

In this case they would have invested in a physical PPA because they own the generating asset. They could, of course, pay someone else to own the generating assets and make their arrangement a financial commitment rather than a physical one. 

A deal like this would be called a financial or virtual PPA (see earlier article), as opposed to a physical one.

So far, so simple.

But as we’ve learned, that power needs to be backed up by a baseload component. In Google’s case, it’s nuclear. (Though they tend to refer to this somewhat euphemistically as carbon-free thermal). 

If you’re a brewery in Western Australia, it would be coal-fired power. Whatever it is, you’ll need something that will drive the plant, the factory or the office in the dark winter months when there is no wind. That component comes as a cost because it’s usually the electricity everyone else wants, too, at that particular time, and there are various ways to secure it for when that time comes.

Buying the baseload for a PPA

Delivering to the PPA when the power from your wind farm isn’t producing the kilowatts, calls for an arrangement known as sleeving. 

Rather like BYO (bringing your own bottle to a restaurant), you won’t, of course, pay for the bottle you’re taking along, though you might pay a corkage charge for using the restaurant facilities. You might also need to buy an extra bottle from the restaurant at full price if you don’t judge the quantities correctly. 

Sleeving arrangements are almost always necessary because few organizations have the necessary battery storage to manage through the shortages.

But whatever the nature of the contract, it’s clear PPAs allow you to sponsor real renewable energy and claim a strong standard of green energy consumption.

PPAs trickle down

Like many services that were once the preserve of big corporations, over recent years PPAs have been gradually working their way down to smaller and smaller types of organizations.

It’s not uncommon for a company with a much lower turnover than could ever normally qualify for a PPA to become interested in acquiring one. After all, why should only the big companies have the cleanest energy?

Thanks to the advent of blockchain technology, it’s possible to accommodate this. 

The process is simple. You take the big contract that is a PPA and you simply split it, or “tokenize” it, into smaller units. This means there’s effectively no limit on how small the units of energy or the length of time can be. And because there’s now a secondary market for PPAs, you can on-sell your power agreement after your company’s circumstances change.

The other development is that the provider of green energy no longer has to be a recognized solar or wind farm. It can be a collection of rooftops in a peer-to-peer energy sharing scheme.

The brewery discussed above can even create a tender with its local neighborhood to supply a micro PPA. There can be benefits in kind, and a variety of bells and whistles that make such an agreement an attractive proposition, even possibly a go-to solution in the future. 

While these forms of arrangements are just in their infancy, it’s possible we’ll be seeing much more of it in the coming years.

But a few things are certain. Green energy has come a long way since the days of the platitudes and carbon offset, and the tokenized PPA – for the moment at least – looks set to be the way forward.

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