Power purchase agreements (PPAs) come with some risks regardless of whether they're purchased by a municipality or a corporation, but that doesn't make them inherently riskier than business as usual, according to a new risk mitigation report by RMI.
Municipal governments have shown increased interest in PPAs since 2018, according to Steve Abbott, a principal in RMI's urban transformation program. But a lack of familiarity and concern about risk management may prevent some local governments from pursuing PPAs, he said.
While local governments haven't adopted PPAs at the same rate as corporations, the offsite generation agreements could offer municipalities some unique benefits over and above the advantages that made them popular among corporate energy purchasers.
Although one in three Americans now lives in a city, town or state that has pledged 100% clean energy, municipalities haven't made use of PPAs at the same rate as corporations. Governments have, however, begun to move in that direction in recent years; offsite PPAs have facilitated the procurement of 90% of renewable energy purchased by local governments since 2015, according to RMI.
PPAs function in more or less the same fashion regardless of whether the agreement is purchased by a corporation or a government, according to Ryan Shea, a senior associate in RMI's urban transformation program. So they come with some of the same risks in both scenarios — for instance, prices could drop and the purchaser could find itself locked into an above-market electric rate. The project might not generate as much power as anticipated, or the power may not be available at peak demand. These risks may deter some cities and towns from entering into a PPA.
However, in the process of authoring their recent de-risking report for RMI, Shea and Abbott said they found some areas in which municipalities could benefit from entering into a PPA, above and beyond what some corporations have gained.
For example, local governments tend to prefer physical PPAs that not only deliver power to homes and municipal power customers, but also create local jobs and stimulate the economy, Abbot said. When power projects are located in the same market as the purchaser, the risk of large price discrepancies that can occur when corporations procure power from PPAs located far from the company's headquarters decreases, he said.
"The context, risk and rewards will vary with any city, but we want to counter the narrative that buying short-term contracts is always the best way to go," Abbott said.
The freeze in Texas and subsequent price hikes that took place earlier this year is one example where entering into a local PPA could have helped cities save money, Abbott said.
"If you're making purchases on the spot market as many organizations do, that is when you're going to be most hurt by an extended emergency situation," Abbott said.
The report also points to novel strategies used by municipal governments to address challenges unique to using PPAs in a government context. Local governments may lack budgetary flexibility, Abbot said, which can make adapting to the monthly variability of a PPA difficult. To get around this in Arlington County, Virginia, officials created a unique contractual mechanism that sets a new rate each year. This means any credits or deficits are taken into account annually, which makes budgeting simpler. Arlington County was among the first municipalities in the U.S. to purchase a virtual PPA that does not deliver power directly to the purchaser, Abbott said.
"When done right, offsite PPAs should not be viewed as more risky than business as usual," Shea said. "As long as you understand the risks of the strategy that you're focusing on and understand what you would like to mitigate, it can be a win-win scenario."
Editor's Note: This story has been updated with the correct link to RMI's report.