Breakthrough in renewable energy supply agreements with MREP buying group launch

Author Andrew Tipping, Anita Stadler, Gilles Walgenwitz

Date November 2017

Energetics provided technical advice, stakeholder education and commercial due diligence services throughout the development of the MREP supply agreement. In this article we provide insights into this breakthrough deal.

Features of the deal

The renewable energy power supply agreement developed by the Melbourne Renewable Energy Project is an Australian first with 14 organisations coming together to purchase renewable energy linked to a specific project. Until this deal, Australia has seen group buying and renewable energy supply deals, but no one had signed a 10 year renewable energy Power Purchase Agreement (PPA) with a consortium of customers.

Key points:

  • Participants are: Bank Australia, NAB, Australia Post, Citywide, Moreland City Council, City of Yarra, City of Port Phillip, City of Melbourne, NextDC, RMIT University, The University of Melbourne, Zoos Victoria, Melbourne Convention and Exhibition Centre, Federation Square
  • The preferred supplier is Pacific Hydro through its retail arm, Tango Energy. 
  • Pacific Hydro is set to construct a 39-turbine, 80MW wind farm in north western Victoria.
  • MREP has committed to purchase 88 GWh of electricity
  • 96,800 tonnes of emissions reductions will be achieved each year of the 10 year deal.

The 14 members of the buying group come from different sectors of the economy; have different energy procurement goals and different contracting requirements. Following a highly consultative process, the supply contract developed is flexible in order to accommodate the needs of the participants, allowing members to take up options with varying degrees of price certainty depending on their energy procurement goals.

Under the deal, part of the customers’ retail costs are fixed and tied to the cost of generation, and part of the costs are variable and dependent on market conditions. The Large Scale Generation Certificate (LGC) price is also fixed for the term of the contract.

Pacific Hydro demonstrated that they were prepared to think outside the square and look at flexible contracting options. The fact that Pacific Hydro is the preferred supplier shows that 'tier 2' retailers can be more than competitive.

A risk managed approach

Renewable power purchase agreements offer greater energy cost certainty and substantial emissions reductions. Any organisation seeking a supply deal with a renewable energy generator can opt to secure a part of their load. They can spread their options. In the MREP deal we see the City of Melbourne purchasing 100% of its energy. On the other hand some of the larger customers are participating in MREP as a leading project to test the procurement model, with plans to continue to grow their renewable energy purchasing in the future.

“Andrew Tipping, manager at Energetics, a consultancy which advised on the deal, said it could take a landmark deal like this for others to follow suit and take a strategic view of their energy needs.” - The Australian Financial Review 23.11.2017

Corporate renewable PPAs are new to the Australian market, however they are rapidly maturing

Large energy users best suited to energy supply through a renewable power purchase agreement typically have a long term energy strategy. They also seek to address climate risk and have a view on the decarbonisation of the Australian economy. While on site generation options may best suit some businesses, long term corporate renewable power purchase agreements may provide organisations with improved electricity cost stability, a partial hedge against volatile energy markets and certainly substantial reductions in greenhouse emissions.

Corporate renewable PPAs are sophisticated contracting models. When selecting an energy market adviser, it is important to consider the following:

  • independence from counterparties (renewable energy generators and retailers)
  • an Australian Financial Services Licence to advise on contract for difference approaches, if applicable
  • ability to develop or access robust long range electricity price forecast models and price evaluation models capable of simulating market volatility on a micro scale (such as trading intervals, not only average flat prices per annum)
  • ability to develop evidence-based alternative future electricity market scenarios
  • ability to understand, assess and advise on mitigation strategies for risk associated with the development of renewable energy projects, including network related issues
  • ability to provide commercial due diligence services of generators to retailers
  • strategic decision support capabilities to ensure internal stakeholders are effectively engaged in what can be a complex, technical area.

You can read more in the Melbourne Renewable Energy Project's guide to buying off-site renewable electricityClick here to view.  

Energetics' experts can provide energy markets insights, independent technical advice and due diligence throughout the development of a corporate renewable energy supply agreement. Please contact one of the authors for more information. 

Read more about MREP and the supply deal here.