1. Long-term grey-power contract

We will discuss two key issues. Of course there are many more considerations such as unplanned outages, delivery point, maximum start date of the project, how to deal with commissioning, etc. etc. For now we explain only the duration of the PPA and the indexation.

The first explanation is the duration of the contract.

End-users may look at the length of the PPA from two different sides. On the one hand the longer the contract, the more certain the delivery, especially in times where many companies are pursuing wind and solar renewable energy sources. Another factor is the so-called “additionality” principle. Many companies wish renewable energy from new energy sources. In other words the partnership is to add to more renewable energy being realised in the world. The longer the PPA duration the longer the “additionality” claim is valid. On the other hand, the consumption of the end-user may not be so certain, maybe operations will fold in which case the contract needs to be transferable; maybe operations will grow in which case clauses around additional capacity are key. A key consideration in such a long-term contract of course is the indexation.

Wind developers and solar developers may look at the length of the PPA also from two different sides. On the one hand they prefer a length which makes the project as “bankable” as possible. A PPA duration for the minimum length of the loan is important. Most likely the banks will insist on this. With the loan durations typically following the length of the tax- or subsidy conditions, the length of the PPA can easily be in access of 10 years. After the loan, the project will continue for many more years until it has reached its economic optimum (e.g. excessive maintenance costs or more attractive re-powering option). Consideration could or could not be given to the next phase of the project-life in the PPA.

The second explanation is the indexation.

To improve the bankability of the project, the risks of changes in markets and regulations should be minimized. In certain countries and regions the regulatory system around fiscal-advantages and subsidies can be mimicked in the indexation in the PPA.

Examples of price structures are:

  • “Unweighted” where the price paid is the power-price of each particular hour of the day-ahead market.
  • “Weighed” where the price paid is the average powerprice of all hours in a year minus a discount for the so-called “profile” effect of the hourly prices.
  • The power prices could be fixed over the years, or inflated or indexed to general market prices.
  • The prices can be discounted with an amount or % for the effect of paying imbalance market or system markets costs.
  • The imbalance amount or % could grow over the years. Or could be benchmarked to government-set publications.

Setting the right price structure requires a detailed analysis and understanding of the regulatory framework and a proper translation in the PPA. (Separately the issue of price guarantees will be discussed). Since perfect mirroring of the regulatory system in the PPA indexation is often difficult, a quantitative analysis is needed of the different regulatory- and market-risk scenarios. Wind4ind can do this.