Traditional Power Purchase Agreements (PPAs) carry several inherent risks that buyers must understand before entering into these agreements. Here are some of the main risks associated with traditional PPAs:
Main Risks of Traditional PPAs
- Market Price Volatility
- This risk involves fluctuations in electricity market prices, which can affect the financial benefits of a PPA. Buyers might end up paying more for electricity than they would under traditional supplier contracts if market prices drop.
- Project Development Risk
- The risk that a generation facility might not be commissioned on time can disrupt the expected start of electricity supply. This can lead to delays in receiving the contracted power, impacting budgeting and energy security.
- Cannibalisation
- As more renewable energy sources enter the market, they can push down electricity prices, potentially impacting the profitability of PPAs, especially those with fixed prices. This risk is particularly relevant in regions with high solar or wind penetration.
- Base Price Risk
- This risk arises when the reference price in a PPA differs from the wholesale market price. If the market price drops, the buyer might pay more under the PPA than they would have on the open market.
- Shape Risk
- Renewable energy sources like wind and solar have variable generation profiles that can deviate from baseload electricity contracts, leading to mismatches between supply and demand. This can result in additional costs.
- Imbalance Risk
- Forecasts for renewable energy generation are often inaccurate, leading to imbalances between actual and forecasted production. These imbalances can result in additional costs for buyers.
- Volume Risk
- This risk involves deviations between forecasted and actual renewable energy production, leading to over or under-hedging in market prices.
- Credit Risk
- The risk that one of the parties (e.g., the developer) might fail to fulfill their obligations under the PPA, which can disrupt the supply of electricity.
- Contractual and Accounting Risks
- PPAs can introduce complex accounting challenges, as they may be treated as financial leases or derivatives, impacting a company’s financial statements.
- Regulatory Changes and Law Risks
- Changes in laws or regulations can impact the terms or viability of a PPA, potentially altering its profitability or structure.
Mitigating Risks
To manage these risks, strategies such as contractually-based mitigation terms, diversifying portfolios, and negotiating specific protections (like price floors or performance guarantees) are crucial. Additionally, ensuring strong grid infrastructure and stability can help mitigate operational and settlement risks.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-main-risks-associated-with-traditional-ppas/
