Energy Procurement | December 21, 2022

The Basics of Energy Procurement

In this blog, we’ll give you a foundation for understanding energy procurement in the United States and how it can differ from state to state and between different energy sources.

At a high level, there are two types of energy markets serving electricity and natural gas distribution, regulated and deregulated. The basic difference between the two is that a deregulated market allows for competition within energy supply, while in regulated states, utility companies can hold a monopoly on market.

In regulated states, one power company can have purview over how energy is generated, the transmission lines carrying power from the source, as well as the distribution lines that then bring that energy to consumers.

Regulated

A regulated electricity market has a utility company or companies that own and operate all electricity. From power generation to the meter on your house or business, the utility has full responsibility and control. The utility owns the infrastructure as well as transmission lines, selling power directly to consumers. In a regulated state, utilities use electricity rates set by the state’s public utility commission. This kind of market could be viewed as a monopoly due to limitations placed on the choices for consumers. Conversely, its benefits include more stable pricing and certainty over the long-term.

Deregulated

A deregulated electricity market, sometimes called a choice market, features competition between those buying and selling electricity, allowing them to invest in power plants and transmission lines. Those who own the generation of electricity sell it wholesale to retail suppliers. These retail suppliers set their own prices for consumers. This can be referred to as the “supply” section of your electricity bill. This can benefit consumers by empowering them to compare rates and services of different suppliers. Different contract structures such as fixed, indexed, or hybrid, give the consumer some control over their energy procurement and its inherent risk.

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Electricity and Natural Gas

Aside from the physical differences between these two power sources, the mechanics of their procurement are extremely similar. The key difference is that markets that are regulated or deregulated can vary between the two. For example, in Texas, while the electricity market is deregulated, natural gas is regulated. It is advisable to work with an energy broker to understand your options in any given market.

On-Site Renewables

The renewable energy market is as big as it has ever been and growing every year. According to the International Energy Agency (IEA), annual renewable capacity additions broke a new record in 2021, increasing 6% to almost 295 GW and renewable capacity is expected to further increase over 8% in 2022, reaching almost 320 GW.

Currently, tax incentives for installing solar are as big as they have ever been, too.

Producing and storing power at your facility can offset your needs from the grid and even create the potential for selling some of the energy produced. Different jurisdictions across the U.S. have different rules for selling power back to the grid, however, so it is advisable to work with an energy consultant to navigate.

That said, there are a few ways to add on-site production to your buildings.

  • Ownership – You pay for all equipment and labor, then own, operate and maintain the solar asset, be it rooftop or ground mount. The cost is high, but you’ll realize the financial incentives yourself and usually experience a payback period of fewer than 10 years.
  • Lease – You engage a third-party solar developer or financial institution and lease the solar asset. In this scenario, you would usually have no out-of-pocket expenses, but the leaseholder realizes the financial incentives from the energy produced.
  • Power Purchase Agreement (PPA) – This option generally includes a third-party solar developer who pays for, then owns, operates, and maintains the asset. In this case, the building owner, again, has no out-of-pocket expenses, but simply agrees to a PPA contract, and purchases the energy produced at a fixed cost for 15-20 years. The developer again enjoys the available financial incentives.
  • Storage – Storing solar energy is becoming increasingly common and important considering the demands on the U.S. power grid. According to the Solar Energy Industries Association (SEIA) “Energy storage can smooth electricity prices through arbitrage, manage evening energy ramps, mitigate the risk of curtailment, provide black start capability, provide backup power and more.” While few states offer viable incentives for storing power at this time, decreasing costs and increasing adoption are likely to change that in the near to mid-term.

In any of these instances, you could be the off-taker for the energy produced, using it on site to power machinery, lighting, HVAC, and so on. This is both an opportunity to offset the cost of traditional power and mitigate risk in a volatile energy market and one to offset carbon emissions at your facilities.

Or you could be selling the power back to the market so someone else can use it. This can be a significant financial offset to traditional energy procurement, even with little guarantee of green electrons flowing to your facilities.

Before installing any solar, you will need to consider the viability of your real estate assets for receiving solar. Roofs need to be large enough and in good enough condition to receive solar arrays and, along with ground mount systems, need to have unobstructed line of sight to the sun for a reasonable amount of time each year. A solar expert can help you navigate these concerns and ensure you’re set up for long-term success.

Off-Site Renewables

As only some buildings are solar-capable, producing power on-site may not be an option. Buying renewable energy that has been generated elsewhere is common and often an easy way for organizations to begin moving toward their sustainability goals.

Renewable Energy Certificated (RECs)

Sometimes referred to as renewable energy credits, a REC is market-based instrument that represents the property rights to the environmental, social, and other non-power attributes of renewable electricity generation. RECs are issued when one megawatt-hour (MWh) of electricity is generated and delivered to the electricity grid from a renewable energy resource. RECs are not an offset of carbon emissions but a way to certify that renewables have been generated and used somewhere on the grid.

RECs can be purchased in a few ways:

  • Direct Purchase – You may purchase RECs unbundled from other energy contracts from RECs generators and consultants/brokers.
  • Retail + Renewable – Or you may purchase RECs bundled with state or regional RECs with the requirement ~10,000 MWh per year of usage. This applies to deregulated markets only.
  • Green Tariffs – You may also purchase RECs from your local utility but this requires direct discussion with a local account manager and pricing tends to be higher than market rate.

Virtual Power Purchase Agreement (VPPA)

VPPAs are financial instruments that enable the construction of new renewable energy plants by guaranteeing the long-term purchase of the energy produced by the plant, enabling the developer to access funding for construction. The off-taker receives the RECs from the project.

In a VPPA, there is a fixed price the buyer will pay for every MWh produced. Then, for each MWh produced, the buyer receives an Energy Attribute Certificate (EAC) which officially certifies consumption of that renewable energy.

Identifying Risk in Your Energy Spend

With these many possibilities for buying energy of different types and different ways, making informed choices can feel daunting. An energy broker can help you define your goals, understand the markets available to you, vet your options, and work toward a procurement strategy that optimizes your spend.

If you missed our last post, the first in this series, you can check it out here.

In our next post, we’ll dig into where to look for risk in your energy spend.