PPA tinder, what’s the best match for me?

“What’s the best PPA in the market currently?” is a frequently asked question to me. It’s a valid question, because the Dutch PPA market is very competitive and continuously moving, but the question is not that easy to answer. Moreover, it says something about the person asking. The person asking has in mind that there is a best fit for its asset or portfolio. Generally, project owners are actually asking: “what is the best priced PPA in the market?”, which is indeed a simple but also a slightly naïve question. There are many risks and details to be considered, each representing value in the PPA and revenues for the project. This blog explains the most important risks for independent power producers to consider and the various possibilities to monetize your electricity production. The purpose is to provide renewable asset owners with some inspiration and insights on how to determine the best PPA for them.

Preparation is key

Ideally, the PPA is contracted after the development phase, after the permit is final and (if applicable) the subsidies are awarded. The short-term goal of a project is to reach Financial Close which can require to agree on a PPA beforehand. The long-term goal is to optimize operational revenues, allow for effective implementation and fit the long-term strategic goals of the project owners. Before approaching the market for PPA’s, the first step for renewable projects (whether it is onshore, offshore, wind or solar) is to determine these requirements. These requirements are determined by the project’s characteristics, which can be a unique DNA for the PPA. For instance, who are the shareholders, what are their views and incentives and what’s the strategy on financing and ownership after Financial Close or C.O.D.? Are there any given requirements, determined by its size, a governmental subsidy scheme, the development process, its geography or the permit? And finally, what are all requirements on the to-be-handled main merchant risks, like the price risk, profile risk, imbalance risk and the availability risk? The outcomes of a thorough internal scrutinization determines a requirements list, which is the basis of finding the right partner in the market. Hence there are three instruments to secure your electricity revenues to consider: a) establishing your PPA by means of tendering; b) establishing your PPA in bilateral negotiation; c) establishing a direct market access, via a service party.

PPA Tendering

To answer the simple question in the introduction of this blog, the best priced PPA is most likely to be determined by setting up a PPA tender. By creating a level playing field and determining the required standards for your PPA partner, you can get the most out of your bargaining position as renewable project owner. Many onshore windfarms and solar fields use a tender to get a market overview and pick the partner of their choice. As risks increase with size, a tender is more complex for large windfarms then for small solar projects. However, it could already be profitable to organize a tender from a yearly production of 50 GWh, establishing a payback period investing in consultancy costs of less than two years based on a 2% revenue increase. Generally, a small PPA tender can be organized in a few months, while larger and more complex windfarms can easily take up a year or even more, if the circumstances of the project or the market changes significantly over time.

Bilateral PPA agreement

The choice for negotiating a PPA in a bi-lateral setting puts the optimization of project revenues in a more vulnerable position then a tender, but there are reasons to do so. First, it might not be a choice at all, but a given. For instance, in offshore wind the PPA is a vital part of succeeding in a tender to establish a (subsidy free) permit. Without a proper plan to handle the PPA risks, the absence of a predictable and stable revenue flow is a mayor liability to the project.

Another reason to engage in a bilateral PPA negotiation is a common interest to succeed in the PPA negotiation, like common regional DNA, (joint) local ambitions or desired combined exposure. A good example is the PPA of Windfarm Krammer in the Netherlands, which closed the first corporate PPA in the Netherlands with a consortium of Nouryon, DSM, Phillips and Google. The project is owned by local communities Deltawind and Zeeuwind, who enable the project benefits to be earned and distributed locally. The PPA served as example of an innovative structured PPA and generated much attention globally.

A bilateral agreement requires an investment on expertise and implementation from both producer and/or offtaker but it gives space for a customized agreement. Of course, as project owner you can always have multiple bilateral talks until you signing of any binding terms.

Direct market access

The third and last option is to skip the PPA, and sell the power to the market directly, using a service party to facilitate the market access. It takes some preparation to understand the full costs of implementation and of course you will bear your own market risks. This structure can be provided via a supplier as well, which can save investment costs and utilizes their experience and expertise. These market risks need to be analysed thoroughly to understand the risks you are taking. Moreover, you will need to spend time managing the operations of your asset (which is highly advised to be outsourced to a professional asset management party) but the risks and rewards of the market results will completely end in your pocket. General structures of direct market access would result in one-off implementation costs combines with a fixed service fee and a bonus / malus system for the service party in order to incentivise them for optimal performance. A large disadvantage of a direct market access structure is that it will raise questions from your lenders, which have mayor influence when using project finance. Your lenders will generally request certain and risk-free revenues flows, which is under pressure given your weather-related production profile. When selling your production directly to the market, you are actively taking the profile, imbalance and price risks of unavailability during your operations. Direct market access is mainly interesting when your weather conditions are very favourable and your project risks low.

Think before you act

Whatever your revenue strategy is, PPA’s or trading activities require in-depth commercial and operational knowledge and experience. The devil is in the details and there is optimization possible during the contracting phase, implementation phase and the operations phase of the project. Simply accepting a PPA from your current supplier is highly likely to decrease your revenues. Requesting a few PPA’s in the market and in combination with a quick scan on the commercial variables, can ignore important (operational) details. When the size of a project increases, even small risks easily represent mayor values, demanding thorough analysis and mitigation. It’s highly advised to think before you act to keep all your stakeholders and your finance manager happy.

#ppa #renewableelectricity #wind #solar