During times of extreme market volatility, some energy suppliers struggle to provide fixed price bids on new and/or renewed power purchase agreements (PPAs).This is especially prominent for intermittent technologies where the power generated depends on the weather.
Over the last few months, we’ve been approached by generators who couldn’t obtain a fixed price renewal offer even from their incumbent offtakers. We’ve put together a short introduction to variable PPAs which will help you understand whether a variable price PPA is a good option for you.
Most PPAs conclude on a fixed price contract. This isn’t the only option, though! One alternative to a fixed price PPA is a variable price contract (sometimes referred to as indexed).
What is a variable price PPA?
A variable price PPA is linked (indexed) to an exchange (a power market) – it therefore changes frequently (even up to every half-hour) during the contract term. Where in a fixed price PPA you’d receive the same price (£/MWh) for all the power your site generates, in a variable PPA, the price changes, in line with changes on the market.
There are 2 main markets that variable PPAs usually link to: System Sell and Day-Ahead. The prices fluctuate a lot during the day in both markets. Here is an example from the System Sell market on the 13th April 2022:
We’ve put together a short infographic explaining the main differences between a variable price and fixed price PPAs.
We’ve also spoken to multiple offtakers bidding through the Renewable Exchange platform to understand their positions and we can confirm that many are happy to offer variable prices when fixed price offers are not viable.
Is variable PPA the right choice for you?
We don’t know if the high power prices are here to stay. We might see more unexpected events turn the market upside down again. The power market depends on many unpredictable factors, e.g. the weather across the whole of the UK (which impacts the supply). It’s difficult to predict which option may deliver higher returns.
Variable price PPA may be a good option for some assets. If you have any questions about this type of PPA, get in touch with our team of experts to discuss your site and requirements. Contact us by emailing [email protected]