Operational Cost Optimization: The Strategic Role of PPAs Amidst the Rising Energy Prices

Visionary companies adopt renewable energy and PPAs to secure stable and competitive costs, ensuring a sustainable advantage in a volatile and uncertain global market.

Currently, companies’ operating costs (OPEX) are being affected by external factors such as climate-induced disasters, geopolitical tensions, and escalating international logistics costs. 

Companies operating in nations heavily dependent on hydroelectric power face particularly acute challenges during drought periods. Brazil’s experience in September 2021 serves as a stark illustration: the country endured its most severe drought in nine decades, precipitating a 52% surge in electricity costs. More recently, in April 2024, Colombia witnessed the El Niño phenomenon driving average energy prices to 988.59 pesos per kWh (≈ $0.256 USD/kWh), a nearly fourfold increase from the 2023 rate of 231.53 pesos per kWh (≈ $0.060 USD/kWh).

While climatic events often have localized impacts, geopolitical tensions engender global repercussions. The conflict in Eastern Europe, which erupted in early 2022, catalyzed supply chain disruptions, inflationary pressures, and energy price volatility. Russia’s position as a key supplier of oil, gas, and metals, coupled with Ukraine’s significant role in global wheat and corn production, pushed oil prices beyond USD100 per barrel. This surge reverberated through electricity markets, substantially impacting operational costs across industries worldwide.

Since the beginning of this year, rising tensions in the Middle East have been driving up oil prices. On August 7, 2024 U.S. West Texas Intermediate (WTI) crude futures surged by 3.1% to USD 75.47 per barrel, while Brent rose 0.6% to USD 78.53. According to a World Bank analysis, if the conflict in the region intensifies further, prices could double, pushing per-barrel costs to between USD 140 and USD 157, as global oil supply could drop by 6 to 8 million barrels per day.

This situation is causing concern among companies about a new spike in prices impacting their operating costs, but they could adopt an alternative that many have already embraced in 2022: Signing long-term renewable energy Power Purchase Agreements (PPAs). 

A BloombergNEF report revealed that global PPA contracts surged by 18% in 2022 compared to the previous year, achieving a record 36.7 GW, of which 24.1 GW we agreed upon across the Americas, reflecting robust growth in both the U.S. and Latin American markets.

PPAs offer buyers the strategic advantage of locking in energy rates for extended periods, providing enhanced cost predictability and granular control over energy consumption patterns. Therefore, PPAs present an effective hedge against energy market price volatility. 

Moreover, PPA prices often prove more competitive than average daily energy market prices. For instance, the consulting firm Pexapark reported that in July 2024, European PPA contracts averaged 50.1 euros per MWh, while Spain’s average energy market price, as reported by energy operator OMIE, stood at 57.1 euros per MWh for the same period.

Modernizing Consumption and Aligning with Environmental Commitments

Corporations are focusing on modernizing their energy consumption profiles by strategically electrifying their operational processes. By transitioning from fossil fuel-based infrastructure to electric alternatives powered by PPAs, companies can optimize demand management, stabilize costs, and reduce their carbon footprint. 

Electrifying operations also leads to reduced costs, including maintenance saving, as electric equipment is generally more efficient than conventional systems, according to a report by PwC. An example of this is that electric heat pumps are three to five times more efficient than natural gas boilers, and electric vehicles are 4.4 times more efficient than gasoline-powered cars.

In Latin America, CO2 emission reduction can yield tangible operational cost benefits which directly contributes to lowering operational costs. Some countries in Latam have implemented carbon taxes as part of their climate change mitigation strategies. For example, Chile introduced a carbon tax in 2017, initially set at USD 5 per metric ton of CO2; Colombia has applied a similar tax since 2016, charging approximately USD 5 per metric ton of CO2 emissions from fossil fuels, although companies can offset this cost by purchasing carbon credits from national projects. Mexico introduced a carbon tax in 2013, targeting CO2 emissions exceeding a set threshold, with a cap of 3% of the resource’s value. Mexico is also developing an emissions trading system (ETS), which has been in its pilot phase since 2019.

In Brazil, a voluntary market exists for trading carbon credits, where companies with voluntary corporate emission reduction goals buy and sell credits. Argentina is implementing a similar scheme.

By strategically increasing renewable energy consumption, corporations can capitalize on tax incentives while enhancing their reputational capital in an era where climate change mitigation is a global imperative. 

It is important to highlight that reducing CO2 emissions is of critical global relevance, as the acceleration of climate change is advancing at an unprecedented rate. Experts warn that global warming is already on the verge of exceeding the 1.5°C increase since the pre-industrial era, a temperature set as the maximum in the Paris Agreement.

This is why the majority of Latin American and Caribbean states committed, at the most recent climate summit (COP 28), to reducing emissions. Another guideline set by COP 28 was the adoption of a holistic approach to combating climate change, actively involving companies in decarbonization efforts through sustainable practices and the development of environmental, social, and governance (ESG) policies.

As a result, one of the most effective options is the integration of renewable energy sources through power purchase agreements (PPAs). These contracts provide a competitive advantage not only from a reputational standpoint but also by stabilizing costs and reducing expenses related to compliance and voluntary carbon markets.

 Leveraging Battery Technology for Enhanced Efficiency and Grid Stability

Power Purchase Agreements (PPAs) not only offer substantial cost reductions and financial predictability but also deliver a critical advantage: supply reliability. This is accomplished through the implementation of Battery Energy Storage Systems (BESS), which energy corporations are integrating into existing renewable infrastructure, either through hybridization or as independent grid-interactive installations (stand-alone).

This type of investment is crucial to managing the variability of renewable energy sources and ensuring that power providers can deliver uninterrupted and dependable supply to their clients. 

A prime illustration is Atlas Renewables Energy storage’s projects in Chile in 2024. On one hand, the company committed to supply the state-owned mining company Codelco with around 375 GWh per year from 2026, over a 15-year period. On the other hand, Atlas also signed a 15-year contract with fuel distributor Copec, through its energy marketing subsidiary, Emoac, to reinject approximately 280 GWh annually into the grid.

BESS technology is considered one of the key solutions for addressing the challenges of consumption optimization and waste reduction. These sophisticated systems enable the capture of surplus energy during low-demand periods for subsequent release during peak consumption, thereby mitigating price volatility and improving the reliability of the power grid.

The versatility of BESS technology positions it as an integral component in various applications, including peak load management, self-consumption optimization, and emergency power provision during supply interruptions. 

The deployment of battery storage infrastructure is necessary to achieving flexible and resilient energy networks and represents a cornerstone of renewable energy generation, consistently supporting global energy demands.

Conclusion

Energy price volatility, precipitated by external factors such as natural calamities or geopolitical tensions, can substantially impact corporate operating expenses. Consequently, it is imperative for enterprises to engage in Power Purchase Agreements (PPAs) with renewable energy providers to stabilize costs at competitive, long-term rates.

This strategic mechanism enables companies to hedge against dramatic energy price escalations and incentivizes the electrification of consumption patterns by phasing out fossil fuel-dependent infrastructure. Such initiatives not only facilitate superior demand management but also yield significant reductions in CO2 emissions. These contributions are crucial, not merely for enhancing corporate reputation in an era of heightened climate consciousness, but also as a proactive measure to mitigate exposure to carbon taxation. Several nations, including Chile, Colombia, Mexico, and Brazil, have already implemented carbon pricing mechanisms, and whose steps are being followed by Argentina.

Furthermore, corporations now have access to innovative PPA structures backed by renewable sources and backed up by battery storage systems, ensuring constant power supply at predetermined rates. This arrangement is particularly advantageous for energy-intensive industries requiring uninterrupted power supply.

PPAs are an effective solution for achieving sustainability goals and reducing carbon footprints. They stand as the preeminent alternative for realizing the sustainable transformation to which companies are increasingly committing. These contracts enhance predictability, ensure price stability, and guarantee reliable energy supply—all critical factors for the sustained development and growth of any enterprise.

This article was created in partnership with Castleberry Media. At Castleberry Media, we are dedicated to environmental sustainability. By purchasing Carbon Certificates for tree planting, we actively combat deforestation and offset our CO₂ emissions threefold.