Energy prices are painfully difficult to forecast but a quick glance at futures prices shows expectations they will fall. Prices for wholesale electricity over the next three years are declining, with forward contracts for calendar 2021 ranging between 13% to 22% below calendar 2020 prices. You’ll have to pay an energy consultant for estimates beyond that.
With gigawatts of new supply coming online over the next decade – and as demand holds steady – we can pray that prices fall.
It may not be a market where price rises of the recent past are a good indicator of what to expect in the years ahead. That’s why energy management consultancy Energy Action is cautioning businesses to consider the financial risks associated with corporate power purchasing agreements (PPAs), where managers sign up for contracted prices on terms up to 15 years.
“Many sophisticated corporates are interested in eliminating the middleman, effectively accessing the wholesale market through direct financial or physical market relationship with the generator,” says Energy Action CEO John Huggart. “There is a lot of sense in that.”
The problem is there is a no such thing as a renewable generator that will identically match the requirements of the customer, so it’s a lot less risky to keep a relationship with a retailer. Power purchase agreements expose the customer to the complexity of being a market participant, and that can be a headache. Retailers, Huggart says, can only look at the “tsunami of renewables projects for opportunistic buying”. That leaves developers directly eyeing customers for finance.
Large customers who have signed PPAs are likely sourcing energy from a portfolio of suppliers. They are probably experienced enough to understand the importance of spreading their risk.
What’s more concerning, Huggart says, is that mid-market customers are being shown all the positives of a PPA – price certainty and lower emissions – but offered contracts “we believe could be onerous quite quickly”.
Power purchase agreement contracts are far more complex than the one- or three-year energy procurement agreements that have become standard in the industry over the past 20 years. It pays to get legal advice, which will add to the cost in this specialised area. It may be worth it, however, as Huggart has heard of PPAs that stipulate what could easily become restrictive load variations.
It would take a lot of nerve to commit an organisation to operate within a narrow band of energy volumes for another 10 years, he says, “and you could be exposing yourself to additional risk on price resets by increasing you operations or lowering your volume requirements because of efficiencies or change in nature of your business. To commit for 10 years, that’s a big call.”
As developers scramble to stake their claim on an overcrowded NEM, they may have trouble living up to plant capacity. If ambitions for generation are struck lower by marginal loss factors, it may be the contracted buyer who is somehow penalised. “How and where are those risks accepted in the agreement? Or how are they priced?”
The PPA market has torn ahead in only three years, with data from Energetics showing less than 200MW of deals in 2016 growing to nearly 1,800MW worth of PPAs signed in 2018. This year has been busy, with about 200MW of deals including Viva Energy, Westpac, Flow Power and Pernod Ricard, and Kellogg’s 15-year agreement with the NSW Beryl Solar Farm, announced in July.
In March this year the Business Renewables Centre – Australia launched its PPA platform in a bid to connect companies with more than 13GW of proposed wind and solar projects looking to secure offtake agreements.
The fast track
The most recent entrant to the Australian market is Lithuanian-headquartered renewable energy procurement and trading platform WePower, which in July announced funding from Marubeni Corporation to support development of a platform it says will connect clean energy producers with companies of any size.
WePower customers are offered standardized PPAs it claims can be finalised in as little as two weeks. “They can select the amount of energy they would like to buy, confirm it and, once the auction ends, they will automatically see the agreement for future delivery of energy,” says co-founder and CEO Nikolaj Martyniuk.
“We want to aggregate more buyers for renewable energy developers. We see the market is running out of larger energy consumers; our focus is getting more possible energy off-takers into one single purchase and allowing them to go through the purchase much faster than it usually takes.”
WePower’s list of suppliers totals about 2.5GW of capacity, Martyniuk tells EcoGeneration. The company is looking at smaller projects – from 6-10MW for solar – to much larger plants in the hundreds of megawatts.
“If the project information is uploaded and the buyers are interested in buying energy at the price offered, the deal can go through within two weeks, no problem,” he says.
“We worked for a very long time on finalising a PPA agreement that would be acceptable to the banks, the buyers and the sellers, and that simplifies the transaction for the customer. We worked a lot on removing the complexity in the transaction.
“We think it should not be more complex than just signing a contract with any gentailer today in the market.”
WePower will launch its first green energy PPA auctions in the local market later this year.
Energy Action has worked on securing PPAs for clients including the University of NSW and sees them as valuable facilitators of clean energy development, but Huggart is concerned for players in the mid-market.
“It may look very attractive on a brochure or website to own your own slice of a wind or solar farm but it could expose your organisation to a lot of risk,” he says.
The first option to lower energy costs for any business with roofspace is to invest in solar, he says. “That would be our first recommendation. It’s much lower risk, much higher return.” The second is to make sure every effort has been undertaken on energy efficiency. “It’s the least sexy option but it’s probably the most effective option.”