When discussing renewable energy, it is almost impossible not to mention power purchase agreements (PPAs). The formal contract is a supply agreement which enables companies to decarbonise their operations through renewable energy.
The topic had been heavily discussed at Solar Media’s Renewable Energy Revenues Summit in June 2023, and has become increasingly an integral part of the GB energy industry,
GridBeyond, a provider of advanced control and real-time optimisation solutions, is heavily involved in the PPA space and utilises its artificial intelligence (AI) platform to optimise agreements.
To find out more about PPAs, some of the challenges and observations from the market, Current± sat down with Neil Garland, head of origination in the UK, at GridBeyond.
How vital are PPAs in the growing renewable space, and what are some trends you are beginning to witness in the market?
PPA’s are incredibly important as they are the primary means for transacting renewable electricity volumes between parties. They allow renewable generating developers to sell their electricity to utility suppliers or even directly to businesses via corporate PPAs (CPPAs).
Historically, PPAs were only secured by utility suppliers and with very large renewable generating plants, although we’re seeing a shift towards more deals overall being done between generators and businesses and at a smaller scale. This change is no doubt indicative of the fact that many businesses are on a net zero journey and are securing CPPAs as a means of delivering their strategy.
How can AI aid companies in accurately forecasting revenue and forward curves for renewables? What is your own experience with this?
Whilst admittedly my own knowledge of AI is fairly limited, it’s greatly utilised by the wider business. We use it to optimise customer assets (such as their CHPs or BESS), identifying the most suitable ‘stack’ of demand-side response in order to maximise revenues.
AI also helps us to produce our long-term global electricity price forecasts (currently which go right out to 2050). It looks at range of inputs including (but not limited to) generating plant availability, gas and fuel prices and weather patterns. It also uses mathematical simulation techniques to capture randomness (i.e. stochastics). The idea is to try and predict strange events you may not see coming.
The key benefit of AI is that it minimises the amount of human intervention required. Once it’s been given its instructions with a clear set of parameters and it can do a lot of the heavy lifting for you.
What are some of the challenges associated with PPAs? How has GridBeyond worked to solve some of these?
Well firstly, there’s the term requirement, which can be quite long. New-build plants, particularly at the larger end, will typically require a long-term PPA (such as 10/15 years) with a credit-worthy counterparty to make the project viable. After the initial PPA term has ended, they are more likely to be open to shorter-term contracts as they’ve already made their return on their investment.
Shorter-term PPAs also tend to be the only option available to smaller generators as they can only sell to energy suppliers. With that said, an interesting trend is that the size requirement for generators to enter into CPPAs (i.e. with a business) is gradually reducing – this reminds me of what happened with flexible import supply contracts a good few years ago whereby the barrier to entry lowered over time meaning that smaller businesses could take advantage of them.
Pricing is generally a challenging topic for any negotiation, although the current market certainly isn’t helping! I’ve had several recent conversations with energy buyers who see that electricity prices are falling and are reluctant to enter into a PPA (even for 5 years) because they don’t want to risk being ‘locked out of the market.’ Whilst I understand the sentiment, I can’t help but feel that this is short-sighted – especially considering the heights that the market reached during 2022 and 2023!
My view is that aside from the inherent sustainability benefits, a PPA is an opportunity to secure a medium/long-term hedge for a percentage of your volume and at a competitive price.
What are some of the risks involved with a PPA? What should businesses consider?
Credit risk is likely to be a key concern for all generators. What happens if the buyer defaults on their payments? Typically they will require a form of credit support from the buyer, which can be covered by a Letter of Credit, Parent Company Guarantee, Surety Bond or form of collateral.
For both parties, a delay to the Commercial Operation Date (i.e. supply start date) can be a concern as it can be very costly. A robust PPA will have adequate provisions to deal with this, plus renewable developers will know to either put money aside or take out insurance cover, just in case.
Is there anything else on the topic of PPAs that you think/want our audience to know?
There has never been a better time for the renewable energy market. Since the pandemic, there’s been a surge in development. Higher energy prices along with a greater demand for certifiably renewable energy due to an intense interest in net zero have no doubt greatly supported this.
I firmly believe that we’ll continue to see this market go from strength to strength. The barrier for entry will continue to reduce, meaning that smaller generators and buyers can jump on the CPPA bandwagon. Pricing and terms will become even more standardised than they are today which will allow PPAs to be delivered more quickly and easily.
For readers wanting to know more about GridBeyond and PPAs, click here.