Main Risks Associated with Renewable Power Purchase Agreements (PPAs):
Renewable PPAs, while beneficial for financing green energy projects, come with several risks that both buyers and sellers must consider. Here are some of the main risks involved:
1. Price Risk
- Description: This involves potential losses due to fluctuations in the electricity market. If the spot price is consistently lower than the PPA price, buyers could overpay for electricity.
- Mitigation: Use hedging tools like futures contracts to stabilize prices.
2. Liquidity Risk
- Description: Challenges arise when electricity cannot be traded quickly enough to adapt to changing market conditions.
- Mitigation: Employ flexible trading strategies on energy exchanges.
3. Volume Risk
- Description: Renewable energy sources like wind and solar can experience variability in production due to weather conditions. This can result in under or over-production compared to forecasts.
- Mitigation: Negotiate contracts that share volume risks between parties, such as pay-as-produced structures with provisions for under/over-production.
4. Profile or Shape Risk
- Description: The energy output pattern may not match the consumer’s demand profile, leading to supply and demand mismatches.
- Mitigation: Combine multiple technologies, such as solar with wind or batteries, to balance output and demand.
5. Credit Risk
- Description: Risks associated with late payments, defaults, or the project company going bankrupt.
- Mitigation: Ensure financial stability through creditworthy entities or request guarantees like letters of credit.
6. Operational Risks
- Description: Includes grid curtailments, negative prices, and technical issues affecting energy production.
- Mitigation: Develop robust operational protocols and use guarantees like bank warranties to ensure performance.
7. Policy and Regulatory Risks
- Description: Changes in laws or policies can affect contract terms and project viability.
- Mitigation: Regularly monitor policy changes and negotiate flexible contracts.
8. Development Phase Risks
- Description: Delays in land acquisition, licensing, and local opposition can hinder project development.
- Mitigation: Conduct thorough feasibility studies and engage with local communities to reduce opposition.
9. Grid Access and Integration Risks
- Description: Challenges in complying with grid operator instructions can impact energy dispatch and supply.
- Mitigation: Ensure compliance by engaging closely with grid operators and planning for backup solutions.
Understanding and effectively mitigating these risks are crucial for the successful implementation of renewable PPAs.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-main-risks-associated-with-renewable-ppas/
