In recent months, there has been an increased focus on the energy plans of oil and gas majors alongside a growing demand for cleaner energy and decarbonization. With three of the world’s largest companies Shell, ExxonMobil and Chevron all in the spotlight to reduce their emissions on accelerated timelines, it’s important to understand what it looks like for the fossil fuel industry to begin the process of cutting emissions. A first step for many oil companies is to implement renewable energy strategies to offset energy consumption in the oil and gas production side of the business.
Since the extraction and refinement of petroleum and natural gas require considerable consumption of electricity, this offers a good starting point for both emissions reductions and cost savings if done correctly. As a result, there is a growing interest from oil and gas companies to reduce emissions and offset utility costs by procuring on-site renewable generation from renewable energy like solar PV, cogeneration or combined heat and power (CHP), battery energy storage systems (BESS) and wind. The good news is that careful planning, coupled with effective procurement and contracting strategies, can result in lower risk and a greater return on investment and provide a positive first step in reducing emissions.
Create a goal-oriented path to decarbonization
Careful planning starts at the beginning of any energy development project and considers future energy consumption, emissions reduction targets and costs. While oil and gas companies are experts in fossil fuel generation, when procuring new types of generation with new financing mechanisms, it’s important to have the specific expertise to advocate for your interests. Renewable energy procurements that do not require minimum design and production standards result in a wide and inconsistent variety of technologies, sizing and financing, which are challenging to evaluate. Unstructured procurements are also likely to produce proposals with assumptions that are aggressive, biased towards the proposer’s interests or suboptimal for meeting the customer’s goals.
A clear understanding of the costs and benefits of a project is required in many organizations, especially when considering a new technology. A critical first step is an investment-grade feasibility study (IGFS) to objectively evaluate the company’s forecasted energy consumption and savings targets. A comprehensive IGFS will consider multiple energy sources (utility, cogen, solar PV and BESS), multiple financing options, environmental social governance (ESG) targets, as well as all available federal, state and local incentives, including Renewable Energy Credits (RECs) and Low-Carbon Fuel Standard (LCFS) credits.
Once completed, the IGFS should define the most efficient and cost-effective measure(s) to achieve the targets and frame a competitive procurement. In practice, an energy company based in the U.S. went through two competitive procurements; the latter was after completing the IGFS, which determined the ideal size solar PV system and financing mechanism that would be the most efficient and cost-effective to achieve the targets. The new proposals, which adhered to the newly well-defined targets and standards, provided an apples-to-apples, side-by-side comparison and better met the company’s needs. In the end, the selected proposal provided 17% greater savings than the same proposer’s first proposal. Careful planning from the beginning sets targets, reduces risk and often increases financial savings.
Optimize your financing
A Power Purchase Agreement (PPA) is a typical financing mechanism for a renewable energy project that many outside the industry remain unfamiliar with. In brief, with a PPA, a customer enters into a typically 20 to 25-year agreement with a solar (or other renewable energy) developer, typically an EPC (Engineering, Procurement & Construction company), to finance and build a solar project on the customer’s property. The developer then sells the electricity generated by the solar facility back to the customer. PPAs were developed in the late 1990s, and in recent years have become increasingly popular with commercial utility customers due to their lack of upfront cost and competitive financing.
It’s critical to understand how to mitigate the risks associated with a PPAs specific contract language. A PPA should be developed using conservative energy assumptions and equitable contract provisions to ensure the customer does not end up losing money, which can happen if the PPA costs more than the savings from utility and other incentives. It’s also possible for the project schedule to extend beyond the agreed-upon timeline or to be in limbo if the developer is not carefully vetted and goes out of business. In order to minimize the risk of entering a PPA, it should be developed with a team on your side of the table, including project management and legal teams who have experience with the selected technology and financing. The contracting process should support the project goals and address the company’s concerns with the potential risks of the 20-25 year investment.
A successful renewable project leads to future projects
After successfully contracting one solar PV PPA with both cost-saving and emissions reductions, oil and gas companies frequently pursue additional and potentially larger PV projects at other facilities. After completing their first on-site solar project, one oil and gas company’s pursuit of additional solar PV will result in over $200 million in estimated cumulative energy savings and incentives over 20 years from their first two projects. When done correctly, renewable energy like solar PV, cogeneration or CHP, BESS and wind can offer a lucrative first step as oil and gas companies accelerate their commitments to decarbonize.
Author Bio: David Seiler is the Director of Business Development at Sage Energy Consulting. He is an electrical engineer with over fifteen years of experience in the energy and solar PV sector, including project feasibility analysis, design, development, installation, and commissioning.