Power Purchase Agreement pricing for Europe
Supporting corporate buyers, developers and lenders
In a post-subsidy world renewable energy developers have to seek for alternative instruments which will ensure long-term revenue certainty and show a solid business case to their lenders. At the same time, corporate buyers become more conscious about the sustainability of their electricity procurement and commit to CO2 neutral energy sourcing. Finally, investors and lenders prefer to invest in renewable projects which have secured revenue stream, at least for a tenor equal to the debt repayment term. Power Purchase Agreement (PPA) are becoming an attractive hedging instrument in European markets.
Supporting corporate buyers, developers and lenders
With its in-depth understanding of electricity market and unique dynamic forecasting methodology DNV supports parties involved in PPA contract arrangement. The common industry practice is to utilize a forecast of average monthly prices as a reference point to define PPA price. This approach turns to be weak as the true price captured from the market is affected by a number of dynamic risks related to weather uncertainty, system imbalances and cannibalization effects. We offer a quantitative assessment of future market risks, way beyond a standard average power price. This assessment helps buyers and sellers to secure a meaningful price for electricity ensuring optimal hedging under a PPA.
PPA pricing beyond average forecasts
A multitude of stakeholders involved in signing a Power Purchase Agreement inevitably brings variety of interests and perceived risks. Selecting a right price for electricity under a PPA allows to re-distribute some of the risks and account for various market uncertainties. DNV has extended its standard Power Price Forecast with a targeted analysis for parties involved in long-term PPAs and hedging. As an add-on to our standard forecast we are now offering a unique long-term dynamic market risk analysis:
- Uncertainty in the spot price development
- Profile and cannibalization risks effects
- Imbalance risks
- Joint affect of merchant exposure and true captured prices
Suitability for a broad range of PPA contracts
Today’s market risks are limited. However, with increasingly market based renewable investments and advances in market design, buyers and sellers of renewable energy are asking for:
- More advanced market dynamic analysis
- Asset risks understandings
- Assessment of the impact those risks have on contracts and business cases
The analysis of PPA price development helps investors, developers and corporate off-takers to evaluate the level of uncertainty expected. Whether a PPA is a pay-as-produced or a firm volume agreement, whether the agreed price is fixed or market based, counterparties always carry a portion of risk related to long-term electricity price volatility and price dynamics in a subsidy-free world.
Quantitative assessment of dynamic market risks
Combining historical market data analysis with our future outlooks we support market parties by obtaining a true market price, accounting for underlying uncertainties. The core of this dynamic calculation is a sophisticated stochastic approach to create a vast number of futures, all with realistic weather and price profiles for a certain renewable technology and bidding zone for a specific year. By creating full weather distributions, we obtain accurate price, profile and imbalance risk.
Location-specific analysis
In case locational dynamics are to be included given a specific asset, DNV is prepared to deliver asset-specific dynamic risks, as the outcome of individual analysis may deviate from the overall trends.
