The energy transition must accelerate for the world to reach its emissions reduction targets and mitigate climate change. Governments are critical enablers of the energy transition; nevertheless, all organizations can make this transition happen faster.
As we are working to electrify our equipment and processes to reduce fossil fuels consumption (80% of worldwide emissions come from fossil fuel), it is essential to ensure that the electricity we consume is as low carbon as possible.
This article reviews different electricity energy or power procurement strategies to reduce your carbon footprint and energy costs. Corporations and individuals can apply these strategies to reduce their carbon (GHG) emissions and energy bills.
These strategies include quick wins and more advanced ones that require time and effort to implement. Today, in many countries, some electricity suppliers offer a 100% green electricity supply. If you don’t use such supplier(s) for your home or your business, that is where you need to start! Shifting to one of these green electricity suppliers is a simple action that drastically reduces your carbon footprint.
What is Energy procurement?
Energy procurement is the process of identifying and selecting the supplier(s) of your energy according to your needs. Along this process, you will investigate and evaluate different options in a value/price analysis.
Many different criteria can influence your decisions when you select suppliers and solutions for your energy needs. Below is a non-exhaustive list of these criteria:
- Characteristic of the items supplied
- Duration of the contract(s)
- Pricing structure: fixed vs. variable part
- Pricing variability over time (exposure to external factors)
- Security & Quality of supply, Service Level Agreement terms
- Relationship with supplier
- Set-up, Termination, and shift cost
- Capex and cashflow requirements associated with contract(s)
- The total cost of the contract
The proposed energy procurement process ensures that effective decarbonization is at the core of the decision and is suitable for all climate-conscious companies. This framework helps you select the right solutions to reduce your carbon intensity and increase your financial savings.
For companies with multiple locations and facilities, they have to define local and global energy procurement strategies.
Which information do I need before starting the energy procurement process?
Before starting the process, it is essential to know well your energy/power requirements. To do so, energy consumers will typically collect the following information:
- All meters reading for the last 12 months
- All energy bills for the previous 12 months
- All current contracts with your energy suppliers
- Carbon intensity of present energy consumed
- Identify all future changes in operations that can impact your energy requirements in the future (change in volume of activities, new production line or equipment, energy efficiency program, move to EV fleets, local generation investment, etc.…)
With this information, you can define at the global and local levels your energy demand curve(s). Energy demand curves will represent the typical consumption of your facilities over a given time. As your energy needs vary from day to day, week to week, and month to month (here), you may have to work with different curves to get a good picture of the situation.
The energy demand curves are essential tools. Indeed these curves will be used to evaluate your total energy costs and the total carbon intensity of your consumption.
For example, for electricity, both the price and carbon intensity of electricity vary over time. This curve should be pretty granular to have a good analysis. We recommend, if possible, to get 15 minutes interval data for daily curves. But it is not always easy to get granular data for the carbon intensity of the electricity you consume.
You may also gather some financial data that will help you in the creation of your plan. Here are some propositions:
- Capex budget for the next five years
- Credit rating assessment
What is an effective energy procurement strategy for emissions reduction?
We break down the problem into smaller tasks to create effective energy procurement strategies step-by-step. It is easier to address them one by one.
Below is an overview of a proposed framework for your energy procurement strategy. It may seem quite extensive, but it is possible to run only a subset of these initiatives.
Some companies have important energy bills and carbon emissions. For them, it is imperative to tackle these issues professionally. High carbon emissions are a liability for your business. The future will not be kind with carbon polluters.
The company’s energy consumption is only responsible for a part of its carbon emissions. Other activities happening along its supply chain will impact its overall carbon emissions. Nevertheless, it is often the easiest part to act upon as a company.
Today in most countries, the energy your buy from the grid is carbon-intensive. The utilities rely mainly on gas or coal to produce electricity instead of renewable energy assets. So one of the most effective ways to reduce your carbon footprint is to aim at a 100% clean energy supply for your business.
What are the elements constituting an effective energy procurement strategy?
Electrification program: replacing equipment that runs on fossil fuels with equipment that consumes electricity is a great way to reduce your emissions while benefiting from a lower total cost of ownership. It is not always possible, but more and more industrial equipment leverages heat pumps or batteries to operate instead of gas or fuel. Companies with fleets may also shift to plug-in hybrid and electric vehicles.
Energy Efficiency / Energy performance contract(s): an energy efficiency program allows you to reduce your company energy consumption for the same outputs. Energy efficiency projects can take multiple forms (change of equipment, change of processes/operation procedures, change of control system), but they will translate into lower energy demand (peak and total). An Energy performance contract (EPC) allows you to outsource the management and execution of this project(s) to a third party (called an Energy Service Company). This ESCO will typically be remunerated as a percentage of the savings realized by the project(s); this partner may also provide the financing for the project. It can be an attractive solution for a company as it lowers its OPEX without any CAPEX investment. It is also possible to implement a master Energy/Carbon Performance contract (ECPC) with a company that drives the complete Energy Procurement process on your behalf.
Local power generation program: you can now produce your electricity on-site by using solar technology, but also wind turbines, or hydro turbines, or waste-to-energy system. If you own your building or expect to remain at the location for more than 10/15 years, this is most likely a quick win for reducing carbon emissions and energy costs. These projects are relatively easy to implement, and often your bank can finance them. As a consequence, they will quickly translate into lower OPEX for your organization. You can also outsource such a project to a third party (renewable energy developer or an ESCO) that will provide the technical solution and – if required – financing if you sign a power purchase agreement (PPA) or a lease contract. It is common to install an asset with a capacity representing up to 60% of your average power consumption.
Nevertheless, it would be best if you tried to increase this number whenever possible. You can align your energy generation curve with your local demand curve or reduce peak power demand by on-site energy storage. You then reduce the amount of energy that you will purchase from third parties or the local utilities. Note that some decarbonization projects are a mix of energy efficiency and local generation. Waste heat recovery systems are popular in continuous process industries and effectively reduce your energy and carbon footprint.
Power Purchase Agreement: it may be impossible for you to produce locally all the energy you need. For example, you don’t have enough space at your facilities or rent your building, and the owner does not want to make such an investment. In such a situation, you can buy electricity produced remotely, especially for you with a long-term energy supply contract named Power Purchase Agreement (PPA), by partnering with a clean energy developer. Again, I encourage you to discuss with the potential suppliers how they can align the generation curve associated with the proposed PPA with your demand curve. Indeed, this is the best way to reduce the actual carbon footprint of your operations effectively. It is not always financially viable to do so. Still, in many cases, it is possible to drastically improve the alignment of these curves by using a mix of technologies (solar, wind, storage, others). Recently, some suppliers have started proposing round-the-clock PPA, also called 24/7 PPA or load-following PPA. These contracts ensure that an organization receives 100% low carbon energy according to its instant requirements. Investing in your power generation is an effective way to protect yourself from future energy price increase and keep your costs under control. Most PPA will translate in only OPEX changes for your organization. It is also possible for you to invest your CAPEX in the generation asset(s) to even further lower the cost of the energy produced for you. Power Purchase Agreements come in all forms and sizes. We have seen projects from a few hundred KW peaks to a few hundred MW peaks. I also recommend asking the supplier about the clean energy certificate associated with your power generation projects or PPAs. Please ensure that you are the beneficiary/owner of these certificates when you purchase green energy. If you do not, the asset owner may sell these certificates to another organization to offset virtually their carbon footprint (yes, they can do this! It always feels to me like a double accounting practice).
Electricity Supply Agreement: at this stage of the process, you understand the quantity of clean energy you can not produce yourself and need to source for the network. You should select a supplier that guarantees you a 100% clean energy supply to reduce your carbon footprint.
Flexibility or Virtual Power Plant agreement: You have secured a clean energy supply for your business at this stage of the energy procurement process. But in fact, you can still do more to reduce the overall carbon footprint and energy cost. You can do this by turning your facility into a virtual clean power plant. When there is a very high demand on the electricity network and not enough clean energy supply, the energy consumed is the most carbon-intensive. It is also the time when power is the most expensive. At peak demand, Utilities use stand-by assets ( gas, coal, or even oil) to provide the electricity required to balance the grid. Your company can help reduce this peak demand by providing flexibility to the grid. You provide this flexibility by voluntarily decreasing your energy consumption for a short time to reduce the instant power demand on the network. It is a common practice for buildings (here) and industrial companies (here). Utilities/Aggregators also offer flexibility programs for residential electrical HVAC systems (you can find an example here with Nest or a European community-based initiative). By enrolling in such a Demand/Response program with an aggregator or a utility, you can generate revenues and contribute to the grid’s carbon emissions reduction.
At this stage of the Energy procurement process, you have evaluated all options to reduce the actual carbon footprint of your facilities and operations. As a company, you can take other actions to reduce further your carbon footprint. You can engage with your partners along your supply chain to reduce their carbon footprint, or you can (re) design your operations, products, and services for them to be more carbon efficient.
There are still two parts of the process that can further reduce the financial costs and risks associated with your energy supply. These instruments are a bit more complicated to put together. Energy consumers mainly use them with an energy bill of at least 10-20 million dollars.
Energy finance optimization instruments: Some of your energy supply contract(s) from this energy procurement process may expose you to market volatility. When a local electricity spot market exists, then electricity market prices also fluctuate over time. The variation of the underlying commodities prices or the currency exchange rates may also affect your energy bills. If your energy costs are not fixed by your contract(s), you can put hedging mechanisms to protect yourself from these variations. We recommend you work with professional specialized financial services firms with a good understanding of the commodities market to do so. Most of the hedging facilities have a maximum of 5 years horizon, but some actors can extend it to 10 years. Such an instrument can be interesting if your organization performs a significant investment in energy-intensive equipment with a long payback. Here is a document that details some hedging solutions for the European electricity market.
Carbon taxes and reporting optimization instruments: If you have completed all the previous steps of the energy procurement process, you should now have a good understanding of your current and future carbon footprint. More and more countries have compliance obligations with carbon taxes mechanisms or emissions trading systems (ETS), and more and more companies are reporting voluntary their carbon emissions to the public. For these reasons, your organization may want to optimize further its carbon reporting and the associated carbon tax or costs. You can take two main types of actions to reduce the carbon emissions you report or the financial costs associated without taking concrete decarbonization actions: use carbon offsets and use carbon hedging instruments. Carbon offsetting allows you to buy carbon credits and deduct them from your reported carbon footprint. But purchasing carbon offsets (either on voluntary or compliance markets) does not reduce your actual carbon emissions. When you buy offsets, your company is exposed financially to the price of a ton of carbon. Here again, you can use hedging instruments to protect your company from carbon spot price volatility.
The outcome of the energy procurement process
Once you complete the energy procurement process, you may have to report its outcome to your team and present your strategy.
I recommend you gather the following information to do so:
- Strategy and list of actions
- Capex plan
- Opex plan
- Carbon emissions forecast (actual, for compliance, and reporting)
- Net Present Value / IRR of the savings actions implemented
- Net Present Carbon Savings / Yearly Carbon Savings or the activities implemented (for actual emissions)
- Monitoring plan
- Contracts and Service Level Agreements
We hope many of you will share this information with your procurement team and engage them in a decarbonization effort. At Positive Energy Ltd, we help project developers finance renewable energy, energy efficiency, and energy storage projects to support these decarbonization initiatives.
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