Challenges and Drawbacks
- Complexity and Cost:
- Increased Complexity: The negotiation process for proxy generation PPAs can be more complex and time-consuming, potentially increasing costs. This is due to the relatively new nature of these contracts, which means fewer parties are familiar with them.
- Higher PPA Prices: Sellers may charge higher prices to offset the additional risks and complexities they assume, such as operational risks and contract intricacies.
- Risk to REC Authenticity:
- Replacement RECs: If actual energy production is less than the proxy generation amount, sellers may provide replacement RECs from other projects. This can lead to a situation where buyers are effectively purchasing unbundled RECs not directly linked to the project they are supporting.
- Basis Risk:
- Electricity Basis Risk: This risk arises from the difference between the hub price used in settlements and the nodal price at the grid connection. Developers bear the basis risk, which can affect their revenue if the nodal price is lower than expected.
- Credit Support Requirements:
- Credit Support: Developers often need to post credit support to hedge providers, which can be a financial burden, especially for smaller entities.
- Insurance Limitations:
- While proxy generation PPAs allow for better management of operational risks, other hedging solutions, such as weather and price risk insurance, may still have limitations due to the nascent market for such products.
- Comparability Issues:
- The disconnect between proxy generation and actual production can create issues in terms of project valuation and performance assessment compared to traditional PPA structures.
- Regulatory and Market Risks:
- Market Fluctuations: Although proxy generation PPAs mitigate operational risks, they do not eliminate market risks entirely. Buyers may still face risks related to market price fluctuations if the strike price is higher than the market price.
Overall, while proxy generation PPAs offer several advantages in terms of risk management and predictability, they also introduce new complexities and potential drawbacks that must be carefully evaluated by project developers and buyers.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-potential-drawbacks-or-challenges-of-implementing-proxy-generation-ppas/
