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| Author | Jessie Cai |
| Updated | March 03, 2023 |
Over the past decade, many companies have obtained renewable energy through signing power purchase agreements (PPAs) to decarbonise their operations. However, power purchase agreements are mainly led by large enterprises, while small and medium sized enterprises (SMEs) have been left out as many SMEs lack the human and financial resources to sign such deals. As a result, aggregated PPAs have emerged and gained popularity in Europe and the U.S. in recent years, allowing a group of companies to sign PPAs in collaboration and purchase clean energy directly from the supplier. This mechanism has also taken off in Taiwan since last year. The Bureau of Standards, Metrology and Inspection (BSMI) of the Ministry of Economic Affairs (MOEA) and RE100 have both expressed their views on the introduction of the aggregated PPA mechanism in Taiwan, and the BSMI is planning the public version of such agreement, indicating that the mechanism could bring greater flexibility and help solve the renewable energy supply shortage in the Taiwanese market. However, it remains to be seen whether aggregated deals is suitable for Taiwan.
Brand-driven aggregated PPAs
Cases of aggregated PPAs in Europe and the U.S. show that supply chain acts as the driving force. Brand owners adopt green education initiatives and the aggregated PPA mechanism to reduce Scope 3 emissions. One example is Walmart's Project Gigaton launched in 2017. The program aims to reduce supply chain emissions by one billion tonnes by 2030. Once a supplier joins the program, the partner power company will help guide the supplier through the overall renewable energy market and available procurement options. If there is a need to procure renewable energy in collaboration, the power company will use an aggregated approach to help suppliers collectively develop an aggregated PPA. In Europe, there has been an aggregated PPA platform that provides buyers with matching services through a database of buyer consumption profiles, renewable energy targets and demand, ultimately helping buying groups negotiate prices with sellers. Companies can also use the platform to help their supply chains access renewable energy and follow up on progress in their renewable energy efforts.
Aggregated PPAs may not be the best solution for Taiwan in short term
Currently, aggregated PPA is not suitable for Taiwan's market environment because it requires a large number of buyers with the same urgency for renewable energy. It could be difficult to use aggregated deals to address the shortage of renewable energy supply in Taiwan, as the difference in sources of pressure, targets, and timeframes can create significant time costs. Even though Walmart's project involves more than 4,500 manufacturers, creating an aggregated PPA still took a great amount of time.
Moreover, the fact that the aggregated PPA only provides a single procurement mechanism does not help solve the finance problem. In general, the credit rating of SMEs cannot match that of large enterprises, making it riskier for suppliers to enter into a contract with a group of SMEs than with a single company. The problem of not being able to procure renewable energy remains unsolved as SMEs are less likely to obtain financing.
Since most solar farms in Taiwan have a manufacturing capacity of less than 10 MW and a growing number of Type 3 to Type 1 [1] rooftop solar facilities are entering the market, SMEs can obtain renewable energy directly without aggregated PPAs. It can be found that the main purpose of introducing aggregated PPA in Taiwan is to allow offshore wind power to enter the free market for all enterprises, especially SMEs with renewable energy demand of 10 million kWh or more. Such a mechanism could address two problems that offshore wind farms would encounter. First, since few companies have demand that matches the capacity of an offshore wind farm, both supply and demand would remain unfulfilled if only the existing PPA mechanism is available, which allows a wind farm to make a deal with only one buyer. On the other hand, the bid price for Phase 3 offshore wind is set at $0, meaning that wind farms must ensure that there will be no residual power. An aggregated PPA could provide a solution, as long as there are no credit rating issues.
A silver lining: Intermediation
Once offshore wind farms are connected to the grid between 2025 and 2026, offshore wind energy will become the main source of renewable energy in Taiwan. Therefore, the accessibility of offshore wind power to SMEs is a key factor in determining the future price of green electricity. As the public version of aggregated PPA is being finalized, many companies have turned their attention to becoming a broker for offshore wind power. The idea is to place a middleman between offshore wind farms and renewable energy buyers, who will sign a PPA with wind farms and then distribute electricity to consumers, so that SMEs can access offshore wind power without barriers. To become such a broker, a company must possess a robust cash flow [2] , a certain level of credit rating, and the ability to assume all the risks involved in the broker's role.
Solutions in face of challenging market environment
How can SMEs address this situation? Should they simply wait for the aggregated PPA mechanism to become operational or for offshore wind power brokers to emerge in the market? In fact, it is not the case. To develop more solutions, SMEs need to grasp the carbon reduction and renewable energy goals of their competitors and upstream and downstream suppliers. This will allow them to gauge the level of urgency and determine whether their targets are set properly. Then, they should review their renewable energy procurement options, which may include self-consumption, signing PPAs, or obtaining unbundled renewable energy certificates [3] . By doing so, they can calculate the cost-effectiveness of various portfolios.
InfoLink projects that the supply and demand of Taiwan's renewable energy market will not balance until after 2027. However, if supporting measures are not put in place or matured after offshore wind power is connected to the grid, the supply shortage may persist for a longer time. This estimate can be used by companies as a basis for their renewable energy procurement strategy to achieve their short-term goals.
[1] Since Taiwan only allows Type 1 power plants to sell green electricity, Type 3 plants need to switch to Type 1 if they wish to do so.
[2] Typically, offshore wind farms require buyers to pay a year's worth of electricity as a proof of solvency.
[3] Despite the inconsistency of renewable energy demand among companies, InfoLink does not recommend long-term purchase of unbundled renewable energy certificates as a primary procurement strategy.