Take-or-pay renewable energy models
James Godfrey
If you're considering purchasing renewable energy for your business, you're likely to encounter contracts with take-or-pay clauses. These clauses require you to pay for the energy generated by a renewable plant, or at least a fixed share of it, regardless of actual energy usage. This exposes your business to considerable financial risk.
Building a renewable energy plant is capital-intensive. For example, a 100-megawatt solar farm costs around R2 billion. To secure financing, developers typically approach banks, who (being risk-averse) require payment guarantees for energy generated, regardless of whether the client needs it. As a result, renewable energy suppliers will often include a take-or-pay clause to ensure their repayments to the bank are covered.
However, this creates two major risks for businesses:
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Overproduction
If the plant generates more renewable energy than expected in a given month, you will still be required to pay for the excess, even if your business doesn't need it. This becomes a wasted cost instead of a saving.
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Underproduction
On the other side, if the renewable energy plant generates less energy than expected, your renewable energy coverage will drop. This will force you to purchase more expensive power from your utility provider, ultimately increasing your costs.
These scenarios can lead to higher than anticipated costs, making the financial risk of a take‑or‑pay contract much greater than many businesses realise.
The risk of take-or-pay models
Renewable energy generation is inherently volatile because of factors such as weather and climate. While suppliers will typically estimate how much energy a plant will generate, actual plant performance can vary significantly more than expected. Discovery Green research found that these generation projections frequently underestimate actual volatility. This means that businesses will experience greater fluctuations in energy generation than anticipated and end up paying for energy that does not align with their actual consumption patterns.
Also, when reconciling energy generation and consumption, businesses must consider time‑of‑use periods (peak, standard and off-peak). You can't simply compare the total energy generated in a month against the total energy consumed in a month. Instead, you need to assess the performance of your renewable energy plant during specific time-of-use periods. For example, how is the plant doing in January during peak times? How about in October during off‑peak times? By examining these periods, you can better assess if the plant's performance aligns with your expectations. The volatility of plant performance becomes a much greater concern when you consider generation volumes at this level of detail. This is why the risk of take-or-pay models is often greater than many businesses realise.
How take-or-pay models can hinder renewable energy adoption
Let's say your business consumes 100 kWh of energy and you plan to wheel wind energy to replace 90% of that consumption. With the take-or-pay system, you're committed to paying for 90 kWh each month, regardless of actual need. However, in a particularly windy month, the plant may generate 110 kWh, meaning you will still pay for the extra 10 kWh you don't need. On the other hand, in a less windy month, generation may drop to 70 kWh, exposing you to 30% of your energy needs at higher utility rates.
This imbalance discourages businesses from adopting renewable energy at scale. To mitigate the risk of paying for unused energy, many businesses opt for smaller renewable energy purchases (eg, 30% of total demand), which slows the transition to renewable energy.
Even with a more cautious approach - committing to replace only 30% of energy needs - unexpected events, such as strikes or unplanned maintenance, could cause energy consumption to drop to zero. Despite this, the business would still be required to pay for the contracted energy.
The take-or-pay model creates high risks for businesses, exposing them to fluctuating energy generation, rising utility prices and carbon taxes. By forcing businesses to commit to purchasing a minimum amount of energy each month, regardless of actual usage, this model results in wasted energy and financial loss.
The solution to take-or-pay risk
Discovery Green's platform model addresses these challenges by significantly reducing the take-or-pay risk for businesses. Unlike traditional contracts, the Discovery Green platform enables businesses to achieve 90% renewable energy coverage in a single transaction without the risk of wasted energy costs. This solution makes it easier for businesses to transition to renewable energy at scale without the financial uncertainty inherent in the take‑or‑pay system.
By spreading risk across a portfolio of clients and renewable energy plants, Discovery Green's model offers more flexibility, lower costs, and greater protection for businesses looking to switch to renewable energy.