The Power Purchase Agreement (PPA) market is evolving rapidly with rising entrants into the market and more options for long term, flexible or corporate PPAs, writes Helen Melling, energy specialist at Carter Jonas.
A PPA is a legal contract between an electricity generator (provider) and a power purchaser (buyer, typically a utility or large power buyer/trader).
Whether generating electricity from wind, solar, biomass, anaerobic digestion, combined heat and power (CHP) or landfill gas, a PPA continues to provide a flexible option for maximising the income from your asset.
That being said, for several years now, generators’ income has come under continual pressure from regulatory change focussing on embedded benefits.
Triads have already reduced significantly and more change could be on the way as part of Ofgem’s Targeted Charging Review (TCR) consultation.
The consultation proposes to remove some embedded benefits altogether or even move a benefit to a cost.
This is expected to have significant financial implications for commercial businesses of all sizes, particularly those with on-site generation or Triad avoidance procedures.
For example, the proposed removal of the Balancing Services Use of System (BSUoS) benefit for a wind or solar asset owner in England and Wales could reduce the total rate received by as much as £5.50/MWh depending on the region.
This alone equates to about a 10 per cent reduction in annual PPA income.
For assets in northern Scotland the financial impact could be even bigger as BSUoS may turn into an extra cost due to generation in this area consistently exceeding demand.
Ofgem proposes that these changes are to be implemented in 2020 or 2021, however, given the implications, there has been a significant amount of lobbying against the proposals which also contradict the Government’s ambition to create a low carbon, flexible power sector.
The Ofgem review has done little to support investor confidence in embedded generation particularly in a period of market volatility and Brexit uncertainty which is affecting the strength of Sterling.
However, volatility in power markets is also creating opportunities for generators to take advantage of peaks in power prices such as those witnessed back in September 2018.
As a result, it is becoming increasingly important for generators to ensure they are on the right PPA product and implement a purchasing strategy in order to future-proof assets.
Additionally, the PPA market is currently higher than the Feed-in Tariff export tariff therefore generators on the Ofgem tariff should be looking to move to a PPA in order to further maximise their income.