In this series of posts, you’ll find answers to all your questions about power purchase agreements (PPAs). Whether you own a single asset or manage a portfolio of renewable energy projects, we’ll help you understand what to do to get the best PPA price and how to maximise your export power revenue.
You may be approaching your PPA renewal date. Or perhaps you’re developing a new renewable energy project and exploring the different routes to market available to you. This is where we’ll explore all the options you have for finding a PPA deal and what are the advantages and disadvantages of each.
What are my options?
There are many different methods available to you for sourcing your next utility PPA deal:
- Going direct to an electricity supplier (utility offtaker)
- Using a broker
- Participating in a PPA auction
- Tendering directly yourself through Renewable Exchange
Let’s look at those different options in more detail.
Going direct – RFQs sent to selected offtakers
In the UK, there are now 28 utility suppliers (offtakers) on the market. Sending RFQs (Requests for Quotes) directly to suppliers is a manual and time-consuming process. Bids come back in different formats and may vary in detail. They may choose to provide some benefits and costs as either pass-through rate or fixed values. Each supplier may also offer different payment terms and green certificate prices. All this makes it a very difficult process to compare the bids and understand which offer is best. (That’s one of the reasons why at Renewable Exchange we introduced the standardised bid comparisons view providing you with full clarity of the ultimate bid value).
In a traditional call for bids process, suppliers also have to limit the risks associated with the length of the process. E.g. they may increase the discount calculated into the price to account for market changes happening between the time they submit their bid and the bid review date. The quotes are normally provided with an extended validity date to account for how long the process may take but it does mean they are normally discounted more than a short-term bid would be.
Going through a call for bids process yourself is highly resource-consuming and limits your reach. If you decide to go down this route, make sure you have all your requirements clearly laid out and consider preparing a form for bidders to fill out – this will help you analyse the responses.
Using a broker
An intermediary such as a broker will normally complete a similar process as explained above for you. They have to spend resources on this, so they’ll understandably charge you for the service. They may also do some analysis of the quotes for you and advise you on which offer to choose – rather than presenting all the options. The process is also quite lengthy although a broker may have the resources and market knowledge to speed it up for you.
When using a broker, make sure you get full visibility and understanding of the bids as well as the broker fees. (One of the reasons Renewable Exchange was developed in the first place was to address the lack of transparency of quotes presented by intermediaries.)
A PPA auction was a system first introduced in 1990 to administer the Non-Fossil Fuel Obligation (NFFO) subsidy – the first renewable energy subsidy offered to generators in the UK. The current PPA auction is a legacy system which hasn’t been updated to account for the highly differentiated market.
These traditional PPA auctions are open-bid, increasing-price auctions. The auction starts at a very low reserve price and the bidders continuously increase their bids until only one party remains and the PPA gets locked in at that final price. The bidders have full visibility of what prices are put forward and who else is bidding.
There are many disadvantages to this format of an auction and it does not provide the generator with the maximum market value results for their PPA. Let’s look at how an open-bid auction works…
Imagine there are 10 bidders involved in the auction. Each of them will have a pre-approved maximum price they can bid, set by their trading desks. The auction starts at a low value and the interested parties bid. During the course of the auction, bidders gain an understanding of what the interest is in the asset. They will also be observing the situation on the power market and may adjust their strategy accordingly.
The top two bidders have both evaluated a site and decided that the maximum price they can offer is a £100/MWh for bidder A and £105/MWh for bidder B.
As the auction progresses, the bids increase… £93.. £94…£95… At some point, bidder B bids £100/MWh. They were willing and able to offer up to £105/MWh for this asset but actually at this point, bidder A steps away (they’ve reached their limit) and the auction concludes.
Bidder A can’t bid above £100. As a result, bidder B manages to save himself £5/MWh on the contract – great for them! Unfortunately, this also means that the generator loses out on potentially getting £105/MWh – after all, this was the maximum value the market was willing to offer.
PPA tendering – guaranteed best price
At Renewable Exchange, we carefully analysed all the options available to generators and decided that none of the existing methods was good enough and would always guarantee generators the best price for their PPAs. That’s why we decided to launch the Renewable Exchange PPA tendering platform.
In a tender format, generators are guaranteed to obtain the maximum value the market is willing to offer at the time of the tender.
Participating bidders don’t see who else is bidding and what the interest is for the asset, so they always submit their best bid in the hopes of winning. Let’s go back to the example before and see how it would play out in a tender format.
Bidder A will submit a bid of £100/MWh and bidder B a bid of £105/MWh – the maximum they are able to offer. The generator will receive all bids at the same time and will be able to review them. Bidder B will still win but this time paying the maximum price of £105/MWh. Thus, the generator obtains the maximum market value.
Another advantage of using the Renewable Exchange PPA tendering platform is the full market exposure. Renewable Exchange works non exclusively with all utility offtakers in the UK. All offtakers working in the PPA space will immediately see your tender and will be able to submit their bids.
In a PPA tender, you are able to see and compare all the bids. You may want to work with an offtaker who didn’t submit the highest bid. We thought about that too! With Renewable Exchange, you have full control of the process and are able to contract with any of the bidders – you are not required to go for the top bidder.
Our results are the proof that our method works:
Renewable energy generators keep returning to tender their PPAs through the Renewable Exchange platform as they know they can maximise their revenue and always get the best PPA price by going out to the entire market through a blind tender process. There’s now been more than 1,300 PPAs signed through our PPA tendering platform.
So, what is the best option for securing a PPA?
Each generator may have different circumstances and preferences for how they secure their PPAs. We’ll leave it to you to decide which option will work best for you. Speak to your friends and colleagues, compare all the options and make sure you fully understand which method provides you with the best results.
If you’d like to discuss anything covered in this blog post or ask about your project, reach out to our PPA Experts at [email protected].
There’s more to Renewable Exchange than the tendering functionality. If you’d like to explore the Renewable Exchange platform, you can register for a free account or read about all the platform features.
In the next blog of this series we will look at Timing Your PPA Execution for Success.
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