Posted on: 03/10/2017
Our recent Power Shift report looks at how generators should switch from fixed Power Purchase Agreements to longer-term structured hedging strategies to get the best revenues in a changing energy market. Chris Smith, Head of Renewable Sales, highlights the potential revenue gains in light of recent market volatility.
Over recent years, the landscape for independent generators has changed rapidly, with subsidies and embedded benefits being reduced and wholesale markets becoming complex and unpredictable.
With that in mind, it’s understandable that 30% of generators under PPAs are on fixed agreements according to Cornwall Insight, typically opting for the traditional ‘once-a-year’ price fix.
This approach limits generators from accessing the power market value that more resourced and larger generators benefit from.
Over the past few months, prices have moved within large ranges. Outside of significant daily movements, Summer 18 ranged from £39.40 up to £43.25 and Winter 17 from a low of £45.55 to nearly £52.00 between July and September.
What would it mean for your project if you had hedged your power at the upper end of that range? A few pounds per MWh extra would presumably be very welcome!
The generators that I speak to are regularly frustrated by missing these opportunities but just don’t have the time, resource or expertise to watch the market closely.
It was this market feedback that has led to us developing a UK-first product, a fully managed trigger-based PPA. The ManagedPPA product aims to mitigate risk for generators from purchasing at market lows and support earning opportunities from upward market movements, without the pressure of continuous decision-making usually associated with more active hedging strategies.
For our recent Power Shift report, we analysed three example generation projects to determine the value that ManagedPPA would have delivered over the two-year term.
The biogas asset would have achieved 8.3% higher earnings over the Summer 15 to Winter 16 period. The greater value is clearly derived from the back two seasons where the product allows you to benefit from a longer hedging horizon.
The onshore wind example is for a similar time period and again shows similar results with 6.7% earnings with the increased value coming from the back two seasons.
For the energy from waste project, the time frame is changed and more marginal. However, for a non-Renewables Obligation project, a 3.4% increase over earnings would have been significant.
Whilst a relatively small sample of three, the consistent message is that all the projects would have derived greater value for their power on the ManagedPPA.
With prices becoming increasingly volatile as the market continues to fundamentally change, these opportunities to earn more are only going to increase.
We would encourage you to get in touch with us to discuss how ManagedPPA could work for your project.