PPAs for Subsidy-Free Projects: The Importance of Risk Management Agents

In the course of the past few years, we have seen an increased wave of renewable projects being planned under subsidy-free scenarios, mainly because of a recent fall in technology costs, combined with a renewables revolution resulting from ambitious CO2 reduction goals (targeting an increased contribution of renewable energy to at least 32% of the EU’s final energy consumption by 2030), reduction/cessation/delay of subsidies for renewables across Europe, and a high demand for renewable energy from large companies due to their corporate sustainability policies.

The UK, Spain, Nordics region and Italy are the primary locations in which examples of subsidy-free projects either commissioned, or under construction, in EU can be found. The main drivers for these locations are the grid parity achievement, falling technology costs and an attractive wholesale long term market. For example, the Don Rodrigo plant (175MW, solar technology) in Spain is one of the largest subsidy-free projects in Europe.

The main barrier to the delivery of subsidy-free projects is the lack of a fixed, steady income stream for the project.  This has traditionally been provided by the subsidy scheme and enables Final Investment Decisions and project financial arrangement to be put in place.   Without a subsidy, investors and financiers face merchant price risk or exposure to price volatility in the electricity markets.

Even for projects under subsidies, the merchant price risk has become a new reality: countries such as Spain and Netherlands have seen their recent renewable auctions moving to merchant revenues, which means that despite some connection agreement guarantees, permissions, floor prices and a few other advantages, the project still needs a long term fixed income solution.

And now comes the buzzword: PPA. Power Purchase Agreement (PPA) is not a new acronym to many and their purpose is traditionally very well understood having been used extensively to bring projects to market over recent years, however they are becoming now even more important with the new wave of subsidy-free renewable projects from independent generators and investors, as they are the best available option to help minimize this merchant price risk and create a credible, bankable project. We see that PPA offtakers are more and more prepared to become Risk Agents for the renewable plant owner.

How can Risk Agents contribute?

Merchant price risk means exposure to increasingly complex drivers of power prices, such as commodity prices or renewable technology capture prices. Complex modelling and analysis capability is required in order to quantify the risks accurately, and Risk Agents who are actively trading energy and genuinely able to manage the risks presented are typically well placed for this purpose.

The risks that a Risk Agent, such as ElectroRoute, can take on behalf of a project includes:

The amount of risk exposure and coverage required will vary on a project by project basis, based on technology, size, legislation, financing requirements, risk appetite etc. Although there is an ongoing industry effort in harmonizing PPA negotiation and structures, ElectroRoute firmly believes in the importance of being able to provide renewable generators with tailor-made, flexible and competitive offtake arrangements which manage the generator’s risk while meeting the requirements of its financing partner.

As an experienced energy trader and energy Risk Agent, ElectroRoute’s offtake arrangements are designed to remove or manage a variety of energy market related risks for the generator. If you would like to discuss further how can ElectroRoute help you minimize the risk exposure of your subsidy-free renewable projects, please get in touch with our Client Services team at clientservices@electroroute.com.