PPAs: A Balancing Act
Today’s renewable energy landscape has seen dramatic changes due to the increasing pool of potential buyers – namely commercial and industrial organizations. A key driver of these changes has been renewable power purchase agreements (PPAs) – contracts between two parties where one party sells both electricity and renewable energy certificates to another party – and many global businesses looking to embrace clean energy are jumping on the PPA bandwagon. Just this month, Facebook entered into a 139 megawatt (MW), 15-year PPA with EDP Renewables, and J.M. Smucker Co. signed a long-term PPA with Lincoln Clean Energy for 60 MWs of the 230 MW Plum Creek Wind Project in Nebraska.
While PPAs can lead to an uptick in clean energy usage that results in a reduced carbon footprint, cost savings, and an elevated brand reputation, they come with risks that buyers and sellers should fully understand before committing to a deal. This requires companies to analyze how generation and market prices align in real-time at a specific location of the facility underlying the contract, with a statistical understanding of three major deal components:
- The real-time generation signature of the project underlying the PPA
- The real-time market price signature where energy from the PPA is fed into the grid
- The real-time alignment of generation and market prices
Consider the following scenario: Your real-time meteorologist gives you a forecast of 500 MW of wind generation for the next hour. However, she also states that the generation could be as much as 700 MW or as low as 100 MW. Your current dispatchable assets, a 100 MW slice of hydroelectric generation and a 400 MW combined cycle gas turbine (CCGT), give you enough reserve capacity to balance hour ahead sales within the forecasted range. Given that the revenue from your renewable PPA is allocated to power produced from your (renewable) wind generation, your incentive is to schedule as much energy for the next hour as you can.
For example, if you nominate 500 MW for the next hour, and the wind generates 700 MW, then you’ll decrement your dispatchable assets by 200 MW to balance. On the other side, if the wind only generates 100 MW, then you’ll need to increment your dispatchable assets by 400 MW to make up the difference. However, for you to do the latter would require that both the hydro and CCGT are dispatched at a combined 100 MW maximum, which only leaves 100 MW of decremental capacity – which is not enough to cover the 700 MW high wind scenario.
So, what’s the optimal mix of the hour ahead sales to the PPA and dispatch of your assets to cover some reasonable, but perhaps, still risky range of realized wind production?
A formal answer can be derived by solving an optimization problem. Of course, the optimization problem should depend on a variety of different market factors, like the value of the PPA relative to the market price of power and the cost of production from the dispatchable assets (e.g. the cost of natural gas and VOM, etc.) for the CCGT. Other non-market based factors might be important, too, like the opportunity cost of selling too little of the wind or balancing penalties from selling too much. The incorporation of the constraints of the dispatchable hydro and CCGT assets are important for a realistic portrait of the next hour reserves. For instance, the hydro may provide a continuous range of capacity from 0 to 100 MWs, but the CCGT may not provide the complete range of capacity from 0 to 400 MWs, depending on whether it’s operating in the 1×1, 2×1, or 2×1 with duct firing configuration.
Notwithstanding are the important constraints imposed from the risk preference of the seller. The seller must have the ability to cover the scenarios where the wind produces the upper forecasted range of 700 MW, as well as be able to cover the lower forecast of 100MW. They should also be able to calculate scenarios when the portfolio lacks sufficient incremental of decremental capacity to balance wind.
Advanced Analytics: Balancing PPAs with Ease
With the opportunities and risk PPAs bring to the table, buyers and sellers of renewable energy must have an advanced commodity trading and risk management solution (CTRM software) with fully integrated advanced analytics, such as Allegro Horizon and Analytics. With these solutions, you will gain real-time options-based decision support, optimization and valuation. Some of the asset optimization tools in our product suite that can help you navigate PPAs include:
WindWorks: Module for balancing uncertain wind generation within a portfolio of conventional energy assets and associated contracts.
Renewables (PowerWorks): Module for production-based valuation and risk management of a portfolio of wind, hydro, and solar generating assets.
Let Allegro’s commodity management software and advanced analytics help take the stress off balancing the value and risk of PPAs. Contact us today to get started.