Powering Progress: Weighing up renewable energy options for business

By Westpac Institutional Bank

Affordability, price stability and resilience are the major procurement priorities our customers are telling us they’re considering when sourcing their next electricity contract, and there are many trade-offs to consider.

Organisations across the country are rethinking their power sourcing options as Australia’s energy system continues its rapid transformation.

Growing electricity demand, a rise in renewable deployment, shifting market dynamics and increasing physical climate risks are turning energy resilience into a priority that extends beyond emissions reduction. Energy security, affordability and operational continuity are now key elements of the sourcing equation.

While renewable energy procurement remains a critical business decision, organisations face the challenge of navigating cost, contract structures and market risk exposure while maintaining progress toward broader sustainability objectives.

To help cut through the complexity, Westpac hosted a webcast event where leaders from sustainability consultancy ERM explored practical renewable energy sourcing options and the considerations that can help inform an effective approach.

“Australia's energy system is at a pivotal point,” said Tim Parker, Director, Sustainability, Westpac Institutional Bank. “One of the most significant opportunities for many businesses is renewable energy procurement, but customers often tell us that they face challenges in understanding what options are available and in comparing the various procurement models, costs and implementation risks.”

Energy market shakeup

Australia’s National Electricity Market (NEM) is undergoing significant change, with about two-thirds of the remaining coal-fired generation capacity expected to retire by 2035 and the remainder by 2050. That generation is expected to be replaced primarily by renewable energy, supported by battery storage.

At the same time, overall electricity demand is predicted to increase substantially, driven by factors such as population growth, electrification and emerging sources of demand, including data centres.

Mark Asbjerg, Associate Partner ERM, discussed the structural change in the National Electricity Market and explored five renewable energy sourcing options, plus their benefits and potential risks.

Potential to mitigate electricity market price risk and reduce green premiums

1. Financial or virtual power purchase agreements (PPAs)

This option is a contract for the value of power and for the provision of Large-scale Generation Certificates (LGCs), which are tradeable financial instruments created under Australia’s Clean Energy Regulator to incentivise renewable electricity generation.

“The contract targets organisations that use more than 50 gigawatt hours of electricity per annum in a single jurisdiction like NSW or Queensland and is for the value of power and the provision of LGCs from an off-site renewable energy project” said Asbjerg. “It’s settled financially rather than through physical delivery and is structured as a contract for difference.”

While this option may provide opportunities for a partial financial hedge against electricity price volatility and LGC prices, Asbjerg explained it can be complex to structure and will introduce direct spot market exposure, which can lead to cashflow volatility.

2. Retailer-intermediated PPAs

In this option, a contract is facilitated by a retailer who manages energy procurement from an offsite renewable project and integrates it into the customer’s standard electricity supply.

“This type of agreement replaces a standard electricity contract and the retailer then manages the LGC settlements, the market risks, etc, so it is simpler for the end user,” said Asbjerg. “Each retailer has its own pricing model for these structures, so there's no one-size-fits-all.”

The model can deliver lower long-run pricing for end users, he explained, and is operationally simpler than financial or virtual PPAs as it replaces an existing electricity supply agreement.

“Typically there's no direct exposure to the spot market, but if I compare it to option one, you do give up a bit of value to the retailer for them to manage the risk and variability,” Asbjerg said. “This option still requires a reasonable scale – at least 10 gigawatt hours per year per jurisdiction – to attract competitive offers.”

3. On-site generation

An electricity buyer can install rooftop solar on their premises and retain or surrender the LGCs that it generates toward their purchasing commitments via this option.

“It's typically a complementary approach to other sourcing options as it’s unlikely to generate 100 per cent of an organisation's renewable certificate requirements,” he says. “In terms of benefits and risks, there are upfront capital costs associated with installing these behind-the-meter systems, or some suppliers can offer a structured power purchase agreement, where a supplier takes on the capex and sells back the electricity generated by those solar panels at a fixed price to the end user.”

4. Load-following LGCs or GreenPower

Combining a standard retail electricity supply agreement and the additional purchase of load-following LGCs or GreenPower, managed by the retailer, in this option charges appear on a monthly invoice, and the agreement has a one-, two- or three-year contracting cycle, which is similar to a standard retail contract.

“The benefit of this option is that the retailer takes on all the administrative burden compared to purchasing LGCs separately,” according to Asbjerg.

“This option also necessitates recontracting every one, two or three years with the price of GreenPower indexed to what's happening on the LGC curve.”

5. Fixed volume LGC purchase agreements

In this option, end users buy a fixed number of LGCs directly from a generator or broker and are required to manage the surrender of these certificates on a regular basis, which involves setting up and maintaining a registry account with the clean energy regulator.

“End users have to ensure that they are surrendering the right number of LGCs to match their consumption for the relevant period, so there is some additional administrative burden with this option,” noted Asbjerg.

With the energy transition reshaping electricity market dynamics, price volatility is expected to continue over the next decade. When it comes to renewable energy sourcing, each option offers different trade-offs between simplicity, cost certainty and risk exposure.

Market changes impacting onsite generation

Brendan Young, Associate Director ERM, noted that the business case for on-site solar may also be impacted by the Federal Government’s recent Small-scale Technology Certificates (STCs) announcement. Solar PV systems with a total on-site capacity between 100 kW and 1 MW and installed after 1 October 2026 will become eligible to create STCs, which can reduce the cost of installing medium-sized solar systems by around 20 per cent.

“The 20 per cent discount up front, combined with the fact that battery storage prices have reduced around 27 per cent from 2020 and the EV fleet charging that's coming on board, may really help the overall investability of these products,” Young predicted.

“By upsizing to 1MW [solar PV systems capacity], you can use that energy to put into a battery or to charge your fleet. It provides a low-energy cost, a lower price point risk at the asset level, resilience and electrification of your assets.

Key takeaways

With the energy transition fundamentally reshaping electricity market dynamics, price volatility is expected to continue over the coming decade. Falling solar and battery costs, coupled with expanded federal incentives, have also materially improved the business case for onsite energy investments.

“The big takeaway is that there's no single best renewable energy sourcing option for everyone,” concluded Asbjerg. “The optimal approach is going to depend on size, risk appetite, sustainability objectives and internal capabilities. There are a wide range of options to consider when considering renewable electricity sourcing and if you are not already exploring, ERM would be happy to discuss which of these options might be best for you.”

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