1. Increasing pressure on corporations from Capital Markets
Companies do not just want to become more environmentally sustainable because they have realized how important it is to our planet or to demonstrate their sustainability efforts. The EU Taxonomy Regulation, which came into force in July 2020, is a classification system providing companies, investors, and other stakeholders a list about which activities are environmentally sustainable. It aims at preventing greenwashing as well as helping companies act more environmentally friendly. The EU taxonomy is also considered an enabler to extend sustainable investments. Investors and financial institutions are thus increasingly aiming at investing only in companies if they fulfill specific sustainable criteria.
Thus, more and more companies commit to obtaining their power demand 100% from renewable energy sources by 2030. However, the recent Covid-19 crisis shows the challenges to fulfill decarbonization targets while protecting corporate liquidity. The Boston Consulting Group (2020) stated in their quarterly “Q2 2020 COVID-19 Investor Pulse Check” that already 51% of surveyed investors said they considered it important that corporates fully pursue their ESG agenda and priorities as they navigate through the crisis. Therefore, corporates need to quickly connect profitability-related targets with a solid ESG target scheme to maintain access to capital markets.
2. Access to renewable energy instruments
Companies willing to operate economically sustainable are entitled to access renewable energy markets. There are several instruments a corporate may apply to reduce their so-called Scope 2 emissions, which are emissions directly depending on a firm’s electricity consumption. However, all these instruments have their specific risks, which have to be managed carefully.
These instruments include unbundled renewable certificates (so-called energy attribute certificates, short EAC), which certify that the corporate buyer has purchased a certain amount of electricity generated from a specific renewable energy resource, either dependently or independently from an existing physical electricity supply contract. Except for European markets, certificates cannot be transferred from one country to another, so corporates with load in various countries are exposed to national certificate price risks (e. g. EAC price inEurope are between 0,50 -1,00 EUR/ MWh, while Chinese Green Energy Certificates are currently priced above 100,00 USD/ MWh).
Another measure for companies to go green are corporate PPAs, long-term electricity contracts directly closed between corporate energy buyers and owners of renewable energy plants. Utilities and energy traders are excluded from this contractual relationship. However, these traditional electricity intermediaries continue to play a crucial role as they usually act as the balancing responsible party of these contracts. The corporate buyers need to show an investment grade (equivalent) creditworthiness to qualify as offtakers under these long-term agreements. Think RE has analyzed more than 800 corporates across Europe with its Green Energy Scoring. The results indicate that less than 20% of corporate buyers are qualified to enter PPAs on a standalone basis. The residual number of companies suffer from a lower bankability, inducing a more expensive financing structure behind these PPAs. This is also confirmed by studies like, e. g. “Power in Europe” from S&P Global Platts (2019).
Moreover, companies may engage in direct investments by directly becoming a shareholder of renewable energy assets like a wind or solar farm. However, this alternative may significantly influence the accounting and capital structure of the corporate. In addition, direct investments commonly require market licenses which allow to be directly connected to electricity markets. The most efficient opportunity depends on the corresponding market design and the individual economic stability of the corporate itself.
3. Country-specific market layouts
A corporation’s access to renewable resources also depends on where it is located. Electricity markets are nationally regulated markets. National legislations and regulations have a major influence on whether or not the company has direct access to renewable resources. In China, for example, which has a state-regulated electricity market, it is difficult for companies to directly buy renewable resources. On the other hand, Sweden has a liberalized electricity market where customers have free access to directly source renewable electricity. Especially large international firms with load in various countries have difficulties realizing their global Scope 2 emission targets due to a heterogeneous regulatory framework on a national level.
4. Energy Cost and Cost Risk Management
Power prices, including prices for renewable energies, are expected to increase in the future. This is due to soaring prices for EU carbon allowances which are increasingly influencing power prices. S&P Global sees EU carbon allowance prices rise to a maximum of 89 €/mt in 2030, compared to a daily closing price of 24,30 €/mt in 2020. This sharp price increase however reflects EU climate targets to shorten the supply of allowances. In view of this scenario, corporations are increasingly under pressure to hedge their power prices now. Regarding point 2)and 3), the availability of hedging instruments depends on corporate- and country-specific parameters. This might expose corporates to higher market price risks due to a limited availability of appropriate hedging solutions.
As this outline shows, corporate offtakers on their way to reduce their carbon footprint face a number of different challenges. These challenges are driven not only by developments in the energy market and by national and international policy making but, to a growing extent, also by capital markets. Thus, it is an increasingly complex matter for companies to make the right decisions on their way to fulfill their ESG targets, especially in terms of electricity consumption.
What Think RE can do for you?
To draw a conclusion there are various ways for your business to reduce carbon footprint and every renewable project needs to be evaluated case by case. There is no standard solution but a variety of instruments to offset scope 2 emissions! We support you in choosing the right path for your corporate‘s sustainability strategy with multiple tools on our renewable energy platform RE Wave.