This is the 3rd part of our series of articles on how to get the best PPA price for your renewable energy asset every time. Here we answer all your questions about PPA tendering and management.
So far, we talked about the different options for finding a suitable and creditworthy PPA offtaker and how to time your PPA tendering process for success.
In today’s post, we will look at PPA s: what makes up a PPA and could an alternative to a fixed-price contract be suitable for you in the current market? Maintaining some flexibility in PPA contracting can be beneficial for some, while others are better off choosing an option with high price certainty and a more standard structure.
In either way, when tendering or negotiating a power purchase agreement, whether it’s a renewal contract or the first PPA for a newly commissioned site, you need to make sure you fully understand all the elements that will impact the final PPA price you can secure.
What makes up a power purchase agreement (PPA)?
- Power price – this is the element that is directly linked to the wholesale power market. When pricing up a PPA, energy buyers (offtakers) consider the developments in the wholesale market and evaluate their hedged position to calculate a price discount. They’ll also look at the historic generation data for your site to further assess the certainty they have in the site’s generation profiles. Taking all of this into account and inserting all the data into their own pricing models, they’ll arrive at a bid for the power price element, offering you either a fixed-price deal or an indexed/variable-price (which tracks a wholesale market).
- Embedded benefits and other costs – in the UK, embedded benefits and costs can play a big part in the total value of your PPA. Embedded benefits are calculated based on the location of the asset and are related to the capacity and performance of the electricity grid and the overall demand and supply distribution across the country. For example, in remote parts of Scotland, there’s a lot of renewable generation due to the abundance of the wind. However, Scotland is not densely populated so the power generated there needs to be transported via the grid to areas of higher demand. This puts additional strain on the grid during times of high wind power output. To encourage more renewable generation in areas closer to demand, the grid operator introduced a range of embedded benefits and costs, such as BSUoS, DUoS, Distribution Losses, etc.
- Green certificates – Renewable Energy Guarantees of Origin (REGOs) used to only form a small part of a PPA but their value has gone up significantly over the last year. Some offtakers have more interest in REGOs purchased within PPAs and they may offer better prices for the green certificates. Where no value is offered for the certificates, it is important to clarify whether they could be traded separately to maximise value.
We track the value of REGOs and share our insights into their price developments in our quarterly REGO Index update.
- There are some other costs that offtakers may wish to include in their PPA bids, such as the metering charges or their monthly fees. These should be disclosed and clearly shown in any PPA offer – on the Renewable Exchange platform you will see them under the ‘Other costs and benefits’ section of each bid.
Types of PPAs – pros and cons
In the past, negotiating a PPA was a lengthy, resource-heavy process for both the generator and the offtaker. But Renewable Exchange revolutionised the PPA market in the UK and brought the much needed process standardisation, transparency and simplicity. It’s now quick and easy to tender and lock in a new PPA through our platform.
As the way PPAs are managed and agreed has changed a lot, a flexible approach to PPA contracting has become much more interesting and attainable to IPPs (independent power producers) in the UK. Let’s take a look at the type of PPAs and what are the advantages and disadvantages of each.
There are 3 main types of utility PPAs that you could consider: fixed-price, variable/floating-price (indexed to an exchange) or a combination of these which can be advertised under various names, e.g. track and trade.
Fixed-price PPAs are by far the most popular option in the UK and there are many advantages to contracting on a fixed-price basis.
- More confidence in the revenue stability: while your revenue will ultimately depend on the power output of your site, with a fixed-price PPA you know that no matter what happens on the power market, as long as your asset is generating power, you will be getting paid for that power. That element of price certainty is very important to many generators. It is also essential to those who have taken out loans to fund their projects or for new-built sites where the bank guarantees are in place.
- Ease of contracting: we made it super simple to tender and execute a new PPA online through our platform. This means that you can now contract for short or long-term periods and respond to market movements in a robust way. You can go out to market when prices peak and lock in for the best PPA price for just the upcoming period or for a few years. Safe option protecting you from market movements: you don’t need to worry about market movements as you’re guaranteed a price throughout the entire contract duration. If you think that the power prices might fall during your PPA period, then a fixed-price PPA may be the best option for you.
Fixed-price PPAs leave a lot of room for flexibility. As PPA tendering online is a process that only takes a few minutes, generators can now choose to respond to volatile markets by fixing for short periods of time (even 3-6 months) or securing long-term price stability with multi-year contracts. While in the past most fixed-price PPAs used to be for 1-year periods, we now see more long-term utility PPAs executed through the platform.
Variable or floating PPAs
On the other hand we have the variable/floating PPA (or indexed-price PPA). This type of contract has gained a lot of interest recently due to market volatility and illiquidity coupled with record-high power prices. At times like this, some offtakers are unable to offer competitive fixed-price PPAs. While power prices remain very high, a variable PPA may offer great returns, however, there are a few important considerations to make when deciding on this option:
- It’s very difficult to estimate accurately what revenue you might expect (even with highly accurate prediction of site output) because the price of power for each unit will be changing every half-hour or every day (depending on the index used).
- You may be getting the lowest price for power exported during peak generation. Due to the composition of the power generation in the UK and prioritisation of renewable generation, wholesale power prices are heavily dependent on the output from green energy sources. In fact, they are often inversely linked to renewable output. This means that when the renewable output is high – for example on a windy and sunny day – power prices fall. So at times that your site generates the most, you may actually receive a smaller price/MWh for each unit of exported power.
- You may end up paying a negative price during your peak generation time. Negative price periods are also directly correlated to renewable output. It’s extremely important to consider that aspect of variable-price PPAs especially when a project still has outstanding finance as you could lose the certainty of revenue needed for your repayments.
- You can’t predict where the power market will go so you should be careful not to commit yourself into an indexed contract for too long. There is no benefit to accepting a variable-price PPA that starts too far in the future: the price you would get on a contract secured a day before the start of the PPA would give you the same value as if you’d signed the contract 1 or 2 years in advance. However, if you lock in way early, you’d be shutting down the possibility of securing a fantastic fixed-price PPA in the meantime.
Finally, a link between these two options is a flexible PPA. A typical flexible PPA initially starts at a variable rate and leaves an option for the generator to fix the remaining duration of the agreement when they decide to.
While this may seem like a great option at first glance, it’s crucial to remember that the fixed price could only be secured with the contracted offtaker and you’d have no choice but to accept whatever value is offered. Thus, the only certainty you get is in the underlying variable price. At the point where you fix, you are bound to the fixed price the offtaker offers you. This takes away the competitive advantage you’d get by tendering the PPA out to the entire market.
You contracting strategy – things to consider
It is good to review your PPA strategy as the market conditions change and make sure you’re staying on track with your goals: whether it’s to maximise revenue, ensure cash flow certainty or minimise risk.
- Are you looking for certainty and a simple view of your potential revenue? It can be advantageous to enter into fixed contracts where all benefits are fixed at an agreed rate per unit of electricity exported.
- Do you want to explore the risk/reward ratio and more complex revenue structuring for a larger or diversified portfolio? It can be worth exploring the different revenue streams with fixed, variable and combination/hybrid PPAs.
- Do you prefer to work with selected suppliers? Remember that some may be good with fixed or variable risk management and prefer to work with either type of contract which may limit your options.
When deciding on the strategy for your site or the portfolio of assets you manage, consider individual asset requirements (such as the financial backing or debt and securities required), site performance profile (speak to Renewable Exchange if you’d like to find out more about our historic generation volumes dashboard) and other site characteristics (e.g. for wind sites, do their peak generation times coincide with negative price periods?). Finally, check the site-specific PPA price forecast available on your Renewable Exchange dashboard and track the price developments to know exactly when to go out to market to achieve the best PPA price.
Remember, Renewable Exchange’s PPA Experts are always available to support you and help you understand your options. Get in touch with our team by emailing [email protected] or register for your free Renewable Exchange account now.