Get the best deal from a competitive green energy market

Charles Ward looks at the rapidly changing renewable energy market, where generators need to constantly review agreements to maximise returns

There is scope for many generators to significantly increase the returns from their projects, regardless of scale. While the Feed-in Tariffs (FiTs) can provide a large portion of project returns, the market element of renewables income is covered by Power Purchase Agreements (PPAs), which have three main elements – power prices, green certificates and embedded benefits.

How do I sell my power?

A PPA is a contract between the generator and a licensed energy supplier. This agreement sets out a number of obligations for both parties.

Negotiating a PPA can be lengthy and time-consuming, influenced by many factors including generation technology, geographic location, projected and historical output, term of contract, and the percentage of embedded benefits included.

There is also the question of which party takes the risk if the contracted power output is not reached – this is known as the imbalance risk.

In addition to selling directly to a supplier, generators may sell their power through a private wire deal. This is an agreement made between a generator and a local neighbour with high energy demand.

For example, a generating farmer or landowner may have a dairy farming neighbour with a high electricity demand or an arable neighbour with a seasonal grain drying power requirement.

A PPA-type agreement is required in such circumstances to govern how each party shares in the benefits of such an arrangement.

Types of PPA available

  • Fixed: Buyer pays a fixed price for a fixed tenure – normally up to five years.
  • Index: Buyer pays percentage of an agreed pricing index for six months to five years.
  • Long-term: Buyer agrees terms with an extension mechanism for up to 20 years.
  • Spill: Buyer agrees to buy all power produced without any volumetric commitment – generally based on an index price.
  • The PPA with a fixed or spill-based contract is the most common.

In the current market, where competition for PPAs is high, the optimum way of securing top market price is through a tender process.

This involves showing your PPA to as many possible buyers as possible at the same time. While the process can be time consuming the benefits can be considerable.

Who do I sell my power to?

There are many buyers of green power and many different PPA structures. The challenge is to ensure you compare like with like to increase the chances that the project receives maximum value for its generation. The market is split between about 15 active buyers, soon to be joined by more:

 The big six utilities

 European utilities without generation capacity in the UK

 Energy aggregators – companies that purchase green power and then sell it either to business or residential consumers

 Large industrial/commercial consumers of green power.

In addition to generators approaching each buyer individually, there are firms that provide a PPA tendering service. This is charged either as a fixed price for consultancy or on a £/MWh generated basis.

The make-up of the PPA price

1. Power price The principal part of your PPA price is governed by the wholesale power price, the generational technology and location. A buyer of green power will generally use the wholesale power price or an index based on the market to price the power part of the PPA.

This price is shown in £/MWh and is currently in the range of £48-60 MWh. Embedded benefits can add up to a further £10/MWh.

2. Embedded benefits The embedded benefits can at times represent a large portion of the overall return of the project, ranging from 0-20%.

These are benefits that accrue to the generator but for which the suppliers buying from the generator will pay as part of the PPA, in addition to paying for the power generated and for green certificates (see boc for more about green certificates).

Embedded benefit values are calculated by the local distribution network operator (DNO) and include credits applied when the additional exported power has a positive effect on the distribution of electricity via the local grid.

For example, some of these credits are known as TRIADS and offer a potential bonus for generating exported power at peak demand times. They represent the average demand on the national grid during three half hours between November and February each year.

Each of the three TRIADS must be separated from each other by at least 10 days. Historically, they are normally at around 5-6pm and often on particularly cold days. For generators producing during these peaks the returns can be very significant.

Much depends on the location of the site and the local grid, although TRIADS are not available to solar power producers.

3. Imbalance risks When negotiating with a supplier, a generator will forecast their power export.

If the actual volumes delivered vary from this estimate then the supplier will have to balance this difference by buying in power from the wholesale market, which means that the cost of an unexpected delivery pattern can be very significant.

This is a potentially big risk and so it is common for the risk to be passed to the generator.

However, suppliers will take on this imbalance risk for a charge of between 2.5% and 5% of the total PPA value, giving the generator security in future cashflows and reducing their business risk.

4. Green certificates Renewable generators receive Levy Exemption Certificates (LECs) and – outside the FiTs regime – Renewable Obligation Certificates (ROCs).

Suppliers must demonstrate that a certain proportion of the power they supply comes from renewable sources and ROCs provide the certification for this, hence they have a value to the supplier.

There are two elements to this value – the ROC Buyout (£42.02 – fixed in advance by Ofgem and index-linked) and the ROC Recycle (determined at the end of the compliance period). Current forecasts estimate the recycle value from £0-7 per ROC.

LECs provide exemption for business customers from the Climate Change Levy (CCL) and so have a value to the supplier looking to organise PPAs with generators. They currently have a value of £5.25 and are index-linked.

Buyers generally will pay to generators a percentage of the value of green certificates, currently ranging from 60%-100% of their value.

Charles Ward is a director at independent renewable energy consultancy, New Stream Renewables