With renewable energy targets at the front of companies’ minds, Firmed PPAs are frequently being seen as an avenue to help achieve ambitious targets. However, there are pitfalls to consider when looking at a Firmed PPA that are examined further below.
Power Purchase Agreements (PPAs) have been around as long as energy markets, however in the context of renewable electricity they are normally associated with a party (either a retailer or an end user) contracting with a renewable electricity producer (generally solar or wind) to take a portion of the power that is produced from a solar or wind farm(s). However solar and wind do not generate on demand. They generate when the elements allow them to, therefore the electricity output never fully aligns with the demand. To counter this some retailers now offer Firmed PPAs. Effectively surplus electricity is bought back by the retailer when generation exceeds customer demand, and at times of high demand / low generation additional power is supplied by the retailer. The retailer charges a premium for this fully “Firmed” product.
Ultimately the customer gets what they are after – a portion of their electricity requirements supplied from a renewable source that they can point to i.e. a specific wind or solar project, but do so in a way that all of their demand is supplied at all times at a price that is known in advance.
However there are a few things that need to be considered before committing to a Firmed PPA. Four important issues are:
- Contract terms are typically much longer than traditional electricity contracts – often 10 plus years to be able to sign up to attractive rates with the renewable producer. Much can change in electricity prices in these timeframes as we have seen over the last 10 years. Any basis of “savings” for the Firmed PPA must be discounted to reflect the large uncertainty for anything past a 3-4 year timeframe.
- Firmed PPAs appear to be fixed but they may have clauses that allow the prices to be changed in the future. Escalation clauses such as CPI are common, as is the ability to modify the Firming portion based on changes to wholesale pricing over time. We are already seeing trends of very low, even negative wholesale prices in the middle of the day or when it is windy, and very high at other times. If, as expected, this trend continues, then we are likely to see Firming portions increase over time. It is important to make sure that you are not exposed to, or at least understand, this risk.
- Current Black Electricity prices are very low – e.g. Victorian Futures prices are currently about $55/MWh (5.5c/kWh) for calendar year 2021, reducing to about $45 for calendar years 2022, 2023 and 2024 (ASX Energy Oct 2020). Firmed PPAs are being competitively tendered at around the $70 – $80/MWh mark. There is currently a significant premium for Firmed PPA’s over the traditional electricity contracts. Are there other ways you can meet your renewable commitments at less cost to your organisation?
- Group purchasing of Firmed PPAs is common at the moment. A number of Councils have gone down this route to enable them to meet renewable targets at apparent fixed pricing. Retailers supplying Firm PPAs have concerns with offering group deals, especially if the group cannot come up with key common areas of agreement in their tender documents such as common contract documents, or obligation to commit to signing up to the final contracts. Uncertainty generally leads to higher prices being offered than would otherwise be the case, or retailers offering limited proposals, or not responding at all to tenders of this nature.
Undoubtedly, even after taking into account these factors, Firmed PPAs will still be attractive and the best option for many companies, or groups, looking to improve their sustainability credentials.
At Smart Power, our energy experts can assist you in considering Firmed PPAs, as well as other options to reduce your emissions and/or meet your renewable targets.
