Long Term Energy Contract: Strategically Simple

Long Term Energy Contract: Strategically Simple

Abstract

Fossil fuel electricity consumption is at the heart of the global climate crisis. As renewable energy technology advances, accessibility and affordability for the masses to reap the benefit of those advancements becomes critical. Bridging this gap does not have to be difficult, it can be as simple as putting pen to paper. One signature to a strategic long term contract is all it takes. Prior to this proposal, this has been difficult due to volatile energy prices from geopolitical conflict and uncertainty in economies preventing the establishment of long term contracts with energy companies. Without the stability of these contracts, energy companies have unknowns in the budget and prices are as volatile as the market allows. Long term contracts for a decade and longer provide stability for both energy producers and consumers. This allows stable revenue for energy companies and guaranteed sources of energy for consumers. There are a number of strategic options to accomplish this, all containing simplistically novel methods and large benefits. These options include buffering the bet with long term fixed price incentives, strategic tiered pricing and discount systems, private-public-partnerships and profitability through carbon credit sales. The intended result of this proposal is stable long term profitability for Company A through reduced spend and increased revenue, subsidized energy prices for the customer, enhanced path to meet SDG 7: clean affordable energy and company long term climate goals and a path for governments to help their countries reach their net neutral emissions goal by 2050.

Pricing Models

Standard

Energy companies can use their traditional forecasting methods to estimate ten year fixed rates for consumers. They do this for both carbon and renewable energy sources and this becomes the control for the rest of the options in this proposal as there is nothing novel about this approach.

Buffered

The 10 year fixed renewable price is agreed upon with incentivized long-term rates but there is a caveat of change to provide a buffer of volatility. If the market price increases 10% in year two, then the consumer pays 5% more and the company covers the remaining 5% difference. If the price decreases 10% then the consumer gets a 5% discount for that year and the company receives 5% extra profit. This provides a more stable solution for both parties. In the long run, prices are likely to decrease as technology improves and more heterogeneous renewable energy sources are established with the current ones becoming more efficient and cheaper.

Government subsidization will be a beneficial component to this model. Given climate goals by 2050, governments with accessible budgets set aside are motivated to implement sustainable eco-friendly programs to cut greenhouse gasses. Once these partnerships are developed, the governmental institution is written into the contracts by subsidizing half of the customer and the supplier’s changing prices - consumers are risk averse and every bit of risk mitigation goes a long way to assure a customer into taking a long term bet. In our example above, the government would cover 2.5% of the customer's price and 2.5% of the supplier’s price. The government only does this with renewable energy, assisting with the climate goals and aiding in the long term goal of affordable energy.

Tiered

Renewable energy will be cheaper and more stable as it is less tied to global conflict and volatile gas prices than carbon-based fuel sources are. We will use this as a basis for tiered pricing for customers as they sign 10 year contracts. The tiered discount system works in the following manner to incentivize renewable energy utilization and the waning off of carbon fuel. Every 10% of renewable energy consumption translates to a 1% discount in the agreed upon electricity pricing. For every year signed after the 8 year mark is another 1% discount. An example of this: a customer utilizes 60% renewable energy sources and 40% fossil fuel for a 10 year contract - that customer would receive 8% discount on a 10 year fixed price for the energy company (6% for the 60% renewable utilization + 2% for 2 years past the 8 year mark).

The benefits of this are multifaceted. The company receives long term stable contracts that are focused on renewable energy. This helps the company with stable guaranteed revenue and it greatly enhances their ESG’s and climate targets. The customer gets locked in discounted rates that help them budget accurately and reach their climate goals. This provides governments an opportunity to boast a successful clean energy campaign based on their subsidizations of a capital driven model. The government should step in and form a partnership to agree to cover half of the discounted price for the companies as a climate focused subsidy. Governments around the world budget tens to hundreds of billions annually in green energy spending. Given Company A's global reach, partnerships in each country can be bolstered with stable long term energy numbers to tap into those billions to be spent on this common aim of sustainable energy which would decrease Company A's costs even further.

Carbon Credits

These strategic long term energy contracts - Purchase Power Agreement (PPA)- are further enhanced through carbon credits. By signing up for a 10 year PPA, both the energy company and the end consumer enter an award agreement with a carbon credit organization. The unknown is exactly how much power will be consumed and the market costs of it at any given future interval. The known is that renewable energy will reduce the CO2 emissions compared to its carbon producing coal energy counterpart. These carbon credits play on that known factor and pay each party in return. The company will receive 50% of the carbon credit for that particular consumer’s usage and the consumer will receive the other 50%. The overall breakdown of total power consumed ends up favoring the company far more than the consumer as each consumer is limited to that 50% but the company compounds that 50% over millions of users. This presents a win-win situation for the consumer by being rewarded for the long term contract without changing any of their behavior and the company by getting paid for their future renewable energy work.

Let’s take a look at these numbers given an energy company's projected 77 million users by 2023. In one year the average household uses 10,000kwh across Europe and the U.S. and the average price of renewable credit is $0.13/kw. This equals $1,300/yr/household in income by using sustainable renewable energy. Split 50% is $650 for the household and $650 for Company A. This multiplied by 77 million households is $50B. This is the annual income of renewable energy credits the first year of a 10 year program that is locked in and only grows with increased customers.

Cost Savings From Fossil Fuels to Renewables

Fossil fuel energy falls in between $0.05- $0.17/kwh. Solar is around $0.05 and wind is around $0.04. If we take the lower third of the fossil fuel median it gives us $0.09/kwh and $0.04 for renewables as solar is trending cheaper. That gives $0.05/kwh saved by using renewables. For estimation purposes if we look towards a future of 100% renewables per the EU goal by 2050 and apply that 100% of renewable source pricing to Company A's 2023 energy consumption estimate of 512 TWh, this saves $50M that can be distributed amongst its customers based on the cost sharing model in addition to the carbon credits above.

These numbers are incredibly exciting. By simply tapping into strategic contracts and renewable credits that already exist, there is a potential total of >$50 billion in cash flow to be tapped into. As more individuals convert to renewables and Company A acquires more customers, that number can increase further.

According to the United States Energy Information Administration, 2.26 pounds of CO2 are emitted for every KWh of electricity generated from coal and 0.97 lbs of CO2 emitted from natural gas. Taking a company's 2023 projection of 512 TWh, this gives us 1.15 trillion lbs of CO2 emissions (526B kg) of coal derived electricity and 5 billion lbs of CO2 emissions (225B kg) of natural gas derived electricity. These numbers only increase as more people join the fossil fuel grid making this proposal’s incentives to switch to renewable energy even more critical. There are hundreds of billions of kilograms of CO2 emissions to be saved simply by signing a contract.

Conclusion

The EU’s aim to reduce emissions by over 55% by 2030, with zero emissions by 2050 is not only within reach, it can be done so profitably through strategic contracts. This model allows more than $50 billion in potential revenue for Company A and $50 billion in economic incentive spread across its consumer base. It allows billions of tons of CO2 emissions to be sequestered and it allows a straightforward path for governments to hit their climate targets within the deadline.