Risks of Renewable Power Purchase Agreements (PPAs)

With many of my clients being approached about signing up to Renewable Power Purchase Agreements, I thought it would be timely to discuss one of the less talked about risks associated with a Wholesale PPA – the relationship of wholesale prices with output from the project.

Generally speaking a Wholesale PPA takes a portion of the output from a particular project or projects and assigns it to the customer. So, for example, a 50MW solar farm may have 10% of its output allocated to a site via a Corporate PPA. If the solar farm is at maximum output (sunny day) then the site would take 5MW. On a cloudy day the output may only be, say, 10MW in which case the site would take 1MW. If the sites load is, say, 4MW then it will be over-hedged on a sunny day and it will be selling back to the wholesale market the extra 1MW, while on the cloudy day it is having to buy the additional 3MW it needs, again from the market.

So in understanding the effectiveness of your PPA it is important to understand the impact of variable renewable generation on wholesale prices. If the impact is minimal then the over’s and under’s will balance out and there is no need to factor it into the value of the PPA. However if there are observable differences then it is important to factor this in.

To examine this further I have looked at the impact of total Victorian wind generation on wholesale prices in Victoria in the last week.

Noting that there is approx. 2150MW of installed wind capacity in Victoria, when they are operating at more than 50% of their capacity, prices are relatively depressed (less than $100/MWh) and sometimes negative. At the other end of the spectrum it is typically during periods of low wind output (less than 25% of capacity) that high wholesale prices occur (>$200/MWh).

This effect is not isolated and typically has greater amplification the greater the penetration of a particular form of intermittent renewable. The impact is greater in South Australia and we are starting to see similar effects with solar in Queensland.

Looking back at the example provided earlier with the 50MW solar farm and the 10% PPA. On the sunny day when the PPA is delivering more than the sites load, the Corporate PPA owner will be selling back the excess power at the wholesale price, which we have just seen is likely to be depressed, while on the cloudy day the site will require additional supply to meet demand and is likely to pay higher wholesale prices for it.

In summary when considering a Corporate PPA, in particular a wholesale PPA, it is important to consider the impact of the variability of the output on the value of the PPA. And historical wholesale pricing is not a great indicator of future pricing as the renewable transition progresses and penetration rates increase.