Corporate renewable electricity sourcing is set to play a large part in the transition of the economy and can provide developers with long term revenue stabilisation which allows them to obtain financing to build renewable energy projects
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Traditionally the risks associated with long-term energy contracts have been dealt with in Europe by utilities which have a deep understanding of the energy market and large diversified portfolios of projects and technologies to spread the risk. They have had to develop sophisticated strategies to incorporate an increasing amount of variable renewable electricity. As renewables become the main energy technology for large energy companies and new renewable energy suppliers enter the market, corporates are increasingly interested in signing long term PPAs. It is essential they gain an understanding of the risks they could be exposed to.
The corporate renewable Power Purchase Agreement (PPA) is an electricity supply contract between a renewable power plant (or several power plants) and a corporate buyer (or several buyers). The corporate PPA has developed from a traditional supply contract between utilities and conventional power installations.
However, the risks associated with a renewable electricity supply are significantly different to the risks involved with a conventional electricity supply. This is because renewable power plants have zero cost for fuel and produce based on the resource availability (which is variable) whereas conventional power producers’ costs are dependent on fuel prices but can produce a stable output, generally better matching the buyer’s demand profile. As such, the corporate renewable PPA has developed into an extensive legal document with a myriad of clauses to assign the various risks to the relevant counterparties.
As corporate PPA contracts become more commonplace, various innovations are likely to simplify the burdensome contracts and a number of different methods to mitigate the various risks for each party are likely to evolve.
This report, with contributions from the providers of such risk mitigating products, aims to provide corporates new to renewable PPAs with information on how risks can affect their business and the various strategies/products available to mitigate them.
A summary of the risks associated with corporate renewable PPAs
|
Risk |
Summary |
|
Development |
The renewable power plant is not consented/permitted or constructed on a timely basis or at all |
|
Performance/Operational |
The renewable power plant does not perform as expected (for example it fails to achieve a minimum agreed level of operational availability) |
|
Volume |
The renewable power plant does not produce the volume expected from modelling of long-term (i.e. 20-30 years) meteorological data as a result of different than expected resource levels (wind speed / solar irradiation etc.) |
|
Shape/Profile |
Even if the overall volume of output is produced as expected, the hourly production from a renewable power plant will differ from a 24-hour baseload delivery of electricity (quoted for standard products). Differences in hourly prices lead to a production value which is greater or less in aggregate than the equivalent standard baseload product |
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Cannibalisation |
The spot price of electricity has a negative correlation with the supply of renewable electricity and this is expected to increase as more renewableelectricity penetrates the market. For example, when the wind is blowing, more electricity from wind farms enters the grid at very low marginal cost and the abundance of cheap power pushes prices down. When the wind is not blowing and the wind farms are not producing power, spot prices are likely to rise again. The same negative correlation applies to solar photovoltaics |
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Basis |
The reference price of electricity for payments in the PPA contract can differ from electricity prices that the corporate buyer is exposed to under its local (physical) electricity supply arrangements (more relevant for financial PPAs or physical PPAs in markets with zonal pricing) |
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Balancing |
The hourly deviations between scheduled production and real production due to error in weather/ electricity production forecast |
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Credit – settlement Credit – replacement |
The buyer may pay late or fail to make a payment at all for the electricity delivered |
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The buyer may default (or the subsidy may be cancelled or altered) and a replacement arrangement has to be made |
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Liquidity |
Electricity cannot be traded quickly enough to avoid a change in price, determined by the bid-ask spread |
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Price |
Losses can occur from adverse movements in the market price of electricity. For instance, if a corporate buyer locks in a price based on projections of future prices and the spot price falls below the agreed PPA price for long periods |
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Merchant risk |
The combination of revenue (or cost) risks for a seller (or buyer) arising from an unknown volume and unknown price of electricity to be produced |
|
Tenor / Length of contract |
The buyer (or seller) can be locked into costs which can be above or below market price. The risk increases with length of contract |
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Legal |
Credit support, Force Majeure, Change of Control, Termination, and Conditions Precedent amongst other key clauses that need to be negotiated |
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Changes in law Regulatory |
Changes in law may affect the balance of benefit or risk between the parties, e.g. tax changes |
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Regulatory changes can affect the economics of a project. For example, retroactive changes to Feed-in Tariffs systems seen in Spain, Romania and the Czech Republic in the early 2010s |
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ForceMajeure |
Events can occur which are out of the control of any of the parties involved which can delay the completion of a project or impact its generation e.g. flood, fire or storm damage |
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