An Investigation of Power Purchase Agreements for the ...

An Investigation of Power Purchase Agreements for the University of Michigan:

A Path to Carbon Neutrality

Composed by: The PPA Task Force, part of Students for Clean Energy

Student Members Jared DeGroat Grant Dukus Grant Faber

Catherine Garton Sophie Lutz Sarah Lynch

Timothy Spurlin David Stimson

Rui Zhong

Advisers Professor Adam Simon, Department of Earth and Environmental Sciences

Susan Fancy, University of Michigan Energy Institute

TABLE OF CONTENTS

EXECUTIVE SUMMARY

1

INTRODUCTION

2

DIRECT VS. THIRD-PARTY OWNERSHIP

5

OVERVIEW OF POWER PURCHASE AGREEMENTS (PPAs)

7

OTHER INSTITUTIONS UTILIZING PPAs

17

CASE STUDY: OHIO STATE UNIVERSITY PPA

19

OPPORTUNITY COSTS AND OFFSETTING VOLATILITY

21

PROJECTED ELECTRICITY COSTS FOR U-M

24

STUDENT SURVEY

26

RECOMMENDATIONS AND THE PATH FORWARD

27

EXHIBITS

29

SOURCES

34

EXECUTIVE SUMMARY

This report explores the use of power purchase agreements (PPAs) as an option for the University of Michigan to increase its usage of renewable energy. PPAs are becoming increasingly popular for large entities such as corporations and universities to increase their usage of renewable energy in easy and profitable ways. Our report starts by outlining the background of the university's greenhouse gas emission goals and position as a leader in sustainability.

We then discuss why third-party ownership offers benefits to entities who are not specialists in energy development and for whom it would be difficult to purchase renewable electricity generation assets. We explain what PPAs are, how they work, and various financial models we created regarding different types of PPAs that U-M could engage in. This is followed by examples of other institutions, most notably Ohio State University, who are engaging in and benefitting from PPA arrangements. We also discuss U-M's current and past electricity usage and expenses in order to find the volatility of past electricity prices and show how much price volatility U-M could avoid using a PPA. We calculate the savings U-M could have had if it had signed a similar PPA to the one OSU signed in 2012. We then discuss projections of future electricity prices to demonstrate that locking in electricity prices now with a PPA could lead to substantial savings over time.

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Next, we discuss the results of a student survey we conducted and discuss our finding that a great majority of students at the university support the move to renewables. Finally, we outline what we believe to be U-M's most viable options and pathways for moving forward with entering into a PPA that could offset up to 100% of U-M's emissions and create substantial savings in the process.

INTRODUCTION

The University of Michigan prides itself on being the Leaders and Best. As a community of engaged citizens and scholars, everyone at the university holds their actions and ambitions to high standards and set goals that they meet with resolve. One of these goals is to build on the university's legacy of environmental responsibility. Acknowledging the role of CO2 in climate change, U-M pledged in 2011 to reduce its greenhouse gas emissions by 25% by the year 2025, using 2006 levels as a baseline.1 Unfortunately, in the last decade, the university has made little measurable or sustained progress toward that goal. U-M emits almost 700,000 metric tons of carbon dioxide each year, which is well above the goal of 510,000 metric tons as shown in the following graphic.2 Only about 2.6% of U-M's current electricity usage comes from renewable sources.3 This percentage is well below that of its peer institutions, such as Stanford (53% renewable), Northwestern (50% renewable), and even Ohio State University (17% renewable).4 While each university is very different in its operations and it is difficult to contrast them in comparable terms, there is a clear trend of advocating for increased usage of renewable energy to cut emissions, enhance marketing, better protect the environment, and potentially create savings.

Tyler Fitch, a student in SEAS, created the following graphics to demonstrate that U-M must take action beyond relying on the additions to the Central Power Plant (CPP), Energy

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Management Program (EMP), and Michigan's Renewable Portfolio Standard (RPS) in order to meet the 2025 goal. His conclusion from his research was that, "If the University of Michigan doesn't continue to act past what it's already doing, it will not reach its goal of 25% reductions from 2006 levels by 2025. By the same token, the University is not on track to meet the US's intended contribution to the Paris Agreement."5 U-M must take further action in order to meet its own stated 2025 goal and to fully support its contribution to the Paris Agreement that President Schlissel signed in 2017.6 This contribution is reflected by the green line - RCP 2.6 - in the bottom graphic. RCP 2.6 is a Representative Concentration Pathway, which is a measure of the concentration of greenhouse gases used by the Intergovernmental Panel on Climate Change (IPCC). This concentration trajectory is the goal of the Paris Agreement as it is the only scenario that limits subsequent increases in mean average global temperature to below 2?C. Therefore, RCP 2.6 represents humanity's best chance at limiting the severe effects of anthropogenic climate change.

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Fortunately, U-M has a profitable and proven opportunity to be a leader in curtailing greenhouse gas emissions. Renewable energy technologies and financing structures already exist that could transform U-M's energy portfolio. Clean energy technology has already proven to be cost competitive with fossil fuels in a wide variety of applications. Communities all around the world have realized this and are making significant strides in their use of green power. 40 U.S. cities, including large metropolises like Atlanta and San Diego, have committed to using 100% renewable electricity, and five have already reached this goal.7 125 large corporations (shown at the source link) have also made this pledge as part of the RE 100, a global initiative of influential corporations committed to using 100% renewable electricity.8 Such commitments and achievements demonstrate that it is eminently possible and financially feasible for large institutions to transition to using more renewable electricity.

Seeing this as a critical opportunity for our university to act on its emissions goals and reap the corresponding benefits, our group - originating from the long-standing U-M group Students for Clean Energy - came together to figure out the best way to proceed. Our task force is comprised of students and faculty from many different fields, including finance, economics, environmental studies, and electrical engineering. We are united by a common interest in finding real, feasible solutions to U-M's energy dilemma. In particular, we are excited about the potential of using power purchase agreements (PPAs) to deploy massive amounts of renewable electricity for the university.

PPAs involve an electricity buyer locking into an extended contract for the purchase of electricity at fixed or escalating rates from the owners of an electricity-generating asset. For the purposes of this report, we will focus only on PPAs for renewable electricity, although they are used in the industry for both renewable and nonrenewable electricity. PPAs can be onsite or offsite. Onsite PPAs involve actual delivery of the purchased electricity and use of it by the buyer. Offsite PPAs involve the buyer guaranteeing that the owner of the renewable power receives a certain price per kilowatt-hour from selling the electricity on the open market in

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