Despite policy paralysis at a national level, the commercial strength of the renewable energy sector is undeniable.
However, the difficulty that many small businesses face is gaining exposure to these low wholesale prices, as they are often in heavily marked-up contracts with retailers which do not reflect the low cost of producing electricity currently.
A flawed system for small business
Traditionally, energy contracts are sold as massive, illiquid investments called Power Purchase Agreements (PPAs). These take the form of a contract between an energy generator and a customer to take a certain amount of energy at a certain price over a certain period of time. The floor price for these traditional power purchase agreements is usually around $2 million, meaning that they only make sense for energy retailers or very large consumers of energy.
Now recent advances stemming from the application of blockchain technology to energy contracts are set to change this. Blockchain creates a secure and unalterable record of energy transactions linked to an original PPA. This has the effect of transforming PPAs into fungible, partially liquid commodities rather than monolithic illiquid assets.
The blockchain solution
Energy generators and retailers who are have “tokenised” their PPA using blockchain are able to break the initial PPA into smaller strips that can be sold to smaller energy users while preserving the DNA of the original energy contract. These are known as “retail” or “virtual” Power Purchase Agreements.
There are several reasons this is a good idea for buyers and sellers of these new products. The first is that they provide smaller commercial and industrial energy users with exposure to the historically low wholesale energy prices that the renewable energy explosion has created. Where traditional PPAs are only available to large energy users spending more than $2 million a year on energy, virtual PPAs can be procured by those with energy needs of as little as $100,000 per year.
The digital nature of virtual PPAs also significantly streamlines the procurement process. The fact that these are created and transacted online means that the traditional PPA process, one which usually takes months or years to settle and necessitates the involvement of expensive specialist consultants, can be standardised so that digital contract architecture facilitates speedy, user-friendly settlement, even when multiple counterparties are involved.
Good for the environment and the community
For small-business owners whose marketing budgets are dwarfed by those of their multinational competitors, direct energy procurement can provide a powerful way of both advancing their sustainability agendas and connecting with the communities they serve.
The fact that virtual PPAs contain an unalterable and verifiable link to the original energy project that generated them can be useful to purchasers in several ways. From a cost-savings perspective, it provides a path to carbon neutrality without having to purchase carbon offsets for energy use. Since all energy purchased by the customer is verified as having been generated by zero-carbon sources, it simply isn’t necessary.
In addition to this, businesses with a strong connection to a particular geographic location can choose to procure from projects in their area. With the Covid recovery prompting strong “buy local” sentiment among consumers, a virtual PPA with a local project that provides employment and income to people in your area can be an effective marketing tool to capitalise on this sentiment.
Small-business owners are used to having to innovate to compete with larger corporates. They have learned to use their agility, connection to the community and lower sunk costs to maneuver quickly and effectively. With technology disrupting the way businesses buy energy, this is an area where small-business owners can get ahead in a difficult economic climate.
Kaspar Kaarlep, Founder and CTO, WePower