Microsoft’s renewables deal opens windows to increased risk management
A groundbreaking power-purchase agreement (PPA) for wind-generated electricity recently signed by Microsoft means future corporate energy buyers won’t have to go it alone in the sometimes-volatile renewable power markets.
The software giant this fall signed a PPA that included a novel attachment known as a volume firming agreement (VFA) that was created by Microsoft and a trio of partner firms. The VFA could become a standard feature of future PPA deals struck between green-energy producers and large corporations seeking power supplies that are stable regardless of how hard the wind blows.
“VFAs are intended to be a simple fix to a big challenge with renewable energy PPAs, namely that these deals expose the buyer to all the weather-related risks of power production,” Microsoft said in an Oct. 16 blog posting announcing the deal.
The main rap against wind and solar power are that while the fuel for generation is free, its delivery is completely dependent on the whims of Mother Nature. “The inherent intermittent nature of wind and solar means there are hourly issues to be addressed,” Microsoft said. “Put simply, the power needs of buyers are static, but the power from the project varies on a day-to-day, hour-to-hour basis.”
What VFAs do is bring another guest to the party, namely insurance companies that are experienced and skilled in making money on weather-related bets in the energy and agriculture sectors. These firms will cover Microsoft when the winds stall and they must step into the merciless spot market to cover their needs, or when the winds kick up and force the company to buy-up output that they may not require.
Lee Taylor, co-founder and CEO of REsurety, an analytics firm that measures the performance of U.S. wind farms, said the VFA arrangement means Microsoft’s energy traders will be working with a net as they procure wind power. “Every hour, Microsoft is going to have a gain or a loss depending on the wind in that hour,” he told Daily Energy Insider. “An insurer will guarantee that volatility (will be covered).”
And the stakes can be high. Microsoft currently manages a portfolio of more than 1.2 gigawatts of renewable electricity produced in six states and on three continents, thus being dependent on the fickleness of the wind is not for the faint of heart. “The VFA is a solution to that problem,” said Taylor. “As a result, Microsoft has a known cost for a known source of power, and it’s green.”
The effectiveness of the PPA and the VFA depends in large part on highly accurate predictions of the weather and how much power a wind farm produces in various weather conditions.
That’s where REsurety comes in. Taylor and his team pour over a constant stream of ‘big data’ from a variety of public and private sources that measure not only weather, but turbine performance and what is taking place on the transmission grid, all of which can affect Microsoft’s costs. “We need to translate it into actionable data very quickly,” Taylor said, adding that his staff uses proprietary software and large-capacity computing to update the real-time weather picture every 10 minutes.
REsurety and Microsoft developed the new VFA along with partners Nephila Climate and Allianz Global Corporate & Specialty, Inc.
The increased productivity of wind farms along with the increasing amount of generating capacity coming online contributed to levelized average prices for wind power contracted under a PPA to slip below $20/MWh in some locations, according to a 2017 report from the U.S Department of Energy’s Office of Energy Efficiency and Renewable Energy. That softening is projected to continue at the same time major companies are under political and social pressure to reduce their carbon footprint, which makes it reasonable to assume that renewable PPAs will become more popular and companies will be more in need of a VFA to have their back.
“As the market has matured, it’s become clear that other risks and complexities exist within the PPA structure that may inhibit their effectiveness as risk management tools,” Microsoft said. “The failure to simplify this complex process and mitigate the risk assumed by the buyer could endanger the corporate procurement market, causing it to slow or stall out completely.”
Taylor put it more simply: “There has been a huge adoption of risk-management programs, and it will continue as more renewables come online,” he said.
