Power Purchase Agreements (PPA) continue to be an integral part of an energy trading portfolio, playing a crucial role in accelerating the development of renewable energy projects, promoting sustainability, and facilitating the transition to a cleaner and more resilient energy system. However, valuing PPAs can be challenging, requiring consideration of a multitude of factors, and careful judgment. In this blog, we discuss why PPAs are under the spotlight right now, the factors that make their valuation challenging, and how a modern ETRM solution can help you to efficiently capture their value for more informed decision making.
The rise in importance of Power Purchase Agreements
PPAs play a crucial role in accelerating the development of renewable energy projects. By providing a guaranteed revenue stream over a long-term contract, PPAs mitigate the financial risks associated with renewable energy investments. This encourages developers to build new wind, solar, and other renewable energy facilities, helping to expand the share of clean energy while reducing dependency on fossil fuels.
Many corporations, governments, and utilities have set ambitious sustainability targets, including commitments to reduce greenhouse gas emissions and increase the use of renewable energy. PPAs provide a practical mechanism for these entities to procure renewable electricity and demonstrate progress toward their sustainability goals.
PPAs provide stability and predictability in the energy market by establishing fixed prices for electricity over the contract term. This predictability benefits both generators and buyers, helping to manage financial risks and plan future investments. The declining costs of renewable energy technologies, particularly solar and wind power, have made them increasingly competitive with traditional fossil fuel sources. PPAs enable renewable energy developers to offer electricity at competitive prices to buyers, often at or below the cost of fossil fuel-generated power.
PPAs help to build a more resilient and decentralised energy infrastructure, enhancing energy security and reducing vulnerability to supply disruptions and price volatility.
What kind of companies are using PPAs now?
A wide range of companies across various industries are utilising PPAs to procure renewable energy and meet their sustainability goals. Large technology companies that have big data centres are purchasing PPAs to help meet their sustainability goals. Companies like Amazon and Apple have entered long term PPA contracts.
Some financial institutions, including banks, insurance companies, and investment firms, are increasingly incorporating renewable energy into their portfolios. Some financial institutions directly invest in renewable energy projects, while others enter PPAs to offset their energy consumption with renewable electricity.
Traditional utilities and energy providers are also involved in PPAs, both as buyers and sellers of renewable energy. Utilities may enter PPAs to comply with renewable energy mandates, diversify their energy portfolios, or meet customer demand for clean energy.
To summarise, PPAs are being used by companies across diverse industries to transition to renewable energy, reduce their carbon footprint, and achieve their sustainability goals.
Why are PPA contracts difficult to value?
Valuing PPA contracts can be challenging due to several factors:
- Long-Term contracts: PPAs typically involve long-term contracts spanning several years or even decades. Predicting future electricity prices, market conditions, and regulatory changes over such extended periods is inherently uncertain, making it difficult to accurately assess the value of the contract.
- Complexity of energy markets: Energy markets are influenced by a multitude of factors, including supply and demand dynamics, fuel prices, policy changes, technological advancements, and environmental regulations. Evaluating how these variables will evolve and impact the value of a PPA requires sophisticated modelling and analysis.
- Risk factors: PPAs are exposed to various risks, such as counterparty risk (the risk of the buyer defaulting), volume risk (fluctuations in electricity demand or generation), operational risks (performance of the generating asset), and regulatory risks (changes in government policies or regulations). Assessing and quantifying these risks accurately is essential for valuing the PPA.
- Discount rate selection: Determining the appropriate discount rate to use in valuing a PPA is critical but challenging. The discount rate should reflect the project’s risk profile, but there may be disagreement or uncertainty about the appropriate rate to apply, especially for renewable energy projects with unique characteristics.
- Market liquidity: Unlike publicly traded securities, PPAs are often bespoke contracts negotiated between private parties, making them less liquid and standardised. The lack of a liquid market for PPAs can complicate the valuation process and increase uncertainty.
- Accounting and financial reporting standards: Valuation methodologies for PPAs may vary depending on accounting standards, regulatory requirements, and industry practices. Ensuring compliance with relevant standards while accurately capturing the economic value of the contract adds another layer of complexity.
How can Brady Technologies help?
Brady’s modern, highly performant ETRM SaaS solution ‘Igloo’, has been designed for efficient management of PPAs. The solution handles Baseload and Pay-as-Produced PPAs for both valuation and actual generation data. Once entered in Igloo, PPA contracts are easily accessible in the live position view, and their valuation can be tracked through the profit and loss report.
Ease of capturing PPA flexibility
Igloo accommodates the flexible and unique nature of PPA contracts. By utilising custom load shapes, customers can define the specific volumes of a PPA contract in a daily or hourly format. This flexibility extends into the future, enabling the ability to handle contracts of any length without the need to conform to standardised load shapes or models.
Furthermore, Igloo facilitates pricing valuations of PPAs via the ability to upload custom pricing curves linked to PPA pricing indexes. When setting up a PPA deal in Igloo, customers can select the pricing index associated with the contract, which often includes the agreed contracted price and a relevant physical index tailored to the asset’s risk profile and location.
Real-time PPA positions and P&L tracking for more informed decisions
Via Igloo, customers can monitor their live positions, manage risk exposure for each asset based on risk date, and access various profit & loss overviews categorised by book, counterparty, or strategy. Igloo’s reporting capabilities include out-of-the-box reports generated daily, offering granular data that can be integrated with other systems.
In summary, Igloo leverages custom load shapes and pricing curves to effectively handle the complexities of PPA contracts and valuation. Real-time visibility of PPA positions and profit & loss tracking are supported through standard reports. Igloo also provides customisable reporting options, delivering detailed data via email or Secure File Transfer Protocol on a daily basis to meet additional bespoke reporting needs and obligations.
In conclusion, valuing PPA contracts requires a deep understanding of energy markets, financial modelling expertise, consideration of various risk factors, and careful judgment. Accurately valuing PPAs is essential to make informed decisions about project financing, asset management and risk management.
Book a consultation with us to learn more about how Igloo can help you to succeed with PPA valuation and reporting today.
Author
Alex Mewha
Customer Operations Business Specialist
