Posted on: 12/09/2017
Unique ManagedPPA designed to help independents win in volatile market
Independent renewable generators can help offset falling revenues by being smarter about when they sell their power, finds a report from SmartestEnergy released today.
It reveals strong demand from independents for expert support on hedging, and SmartestEnergy is launching a unique trigger-based managed Power Purchase Agreement (PPA), which enables generators to take advantage of a rising market and protects them when prices fall.
Power Shift: Mitigating risk and becoming more active in a changing energy market demonstrates that a long-term hedging strategy which actively tracks fluctuating energy prices four seasons ahead can reduce risk and yield greater revenues.
Power prices are becoming increasingly volatile. Since January 2015 baseload power prices for Winter 2017 have ranged from £35/MWh to £51/MWh. Generators who sell at the wrong time can miss out on tens of thousands of pounds. However, around 30% of generators under PPAs still opt for a fixed product according to energy analysts Cornwall Insight, typically taking a single price for their power once a year.
Iain Robertson, Vice President, Renewables, said: “Independent generators are playing a vital role in helping the UK keep the lights on and cut carbon emissions at minimal cost, but making smaller-scale projects stack up financially has become increasingly challenging as subsidies are cut, additional income streams come under threat and markets see ever-greater volatility.
“Independents know that they can benefit from a more active hedging strategy but most lack the experience and resources to do this. We have responded by developing an industry-first product designed to help generators make the most of their assets and support continuing growth in the sector.”
Independent generators have been hit by steep cuts in renewable subsidies, Triad payments will drop sharply from 2018 and wholesale energy prices are expected to fall by 19% over the next three years.
They recognise that they can benefit by taking a more active sales strategy. SmartestEnergy surveyed 39 generators across all renewable technologies accounting for approximately 10% of the PPA market:
- Three quarters (77%) believe that they could achieve better returns by actively hedging their energy but only 13% say they watch the market closely and are comfortable making decisions on when to sell.
- Few generators (15%) take a long-term hedging approach looking more than a year ahead; 43% sell up to a year ahead while 23% sell no more than a season ahead.
- Nearly half (46%) plan to become more active, taking advantage of market volatility or taking a longer-term approach; 41% are uncertain what to do and only 13% plan to maintain their current approach.
- The great majority (85%) acknowledge that they would need extra support to sell their power more actively; 49% would consider a trigger-based PPA but only 10% would consider appointing a person or team to monitor the market.
Under the ManagedPPA SmartestEnergy traders monitor the market on behalf of each generator, working to agreed guidelines. When prices rise 10% above an agreed reference price it will trigger a sale but a fall of only 5% is needed to trigger a sale.
They operate a two-year, four-season hedging strategy. In the nearest two seasons each time a trigger is hit 50% of remaining capacity is sold. However, in the two later seasons only 25% is sold at each trigger point in order to maximise the opportunity to benefit from future price growth.
Market analysis indicates that, on balance, this long-term hedging strategy can enable generators to achieve higher revenues than a once-a-year price fix. The report looked at three example projects ranging from 1-10MW, comparing the revenues achieved from a fixed PPA over two-year periods to those that would have been achieved using the ManagedPPA triggers during the same period:
- A biogas plant would have made 8.3% more in 2015 and 2016 – an extra £43,209.
- An onshore wind farm would have made 6.7% more in 2015 and 2016 – an extra £63,848.
- An energy from waste project would have made 3.4% more in 2013 and 2014 – an extra £111,745.