GreenBiz Workshop Slides: "VPPAs: The Good, The Bad, and The Ugly"
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Transcript of GreenBiz Workshop Slides: "VPPAs: The Good, The Bad, and The Ugly"
VPPAs:
The Good, The Bad & The Ugly
GreenBiz WorkshopFebruary 15, 2017
1
Agenda for Workshop
+ Welcome & Introductions
+ VPPA Level-Set
+ Biggest Drivers & Risks of VPPAs
+ Breakout Work Sessions
+ Report Back to Group with Main “Aha” Moment
+ Key Considerations and Wrap-Up
Today’s Goal:
For you to leave with a holistic view of VPPAs and better understanding of whether a VPPA might be right for your company (and what questions you should be asking!)
VPPAs: The Good, The Bad & The Ugly
2
What is a Virtual Power Purchase Agreement?
Key Terms:
+ Power Purchase Agreement (PPA): A contract between two parties where a developer sells electricity to a buyer
+ Virtual PPA: A financial contract where the buyer:
+Pays a fixed price to the developer for electricity and RECs from a specific renewable energy asset
+Retains RECs and does not receive or take legal title to the project generation
+Project generation is instead sold into the wholesale market
+Receives proceeds from that sale
NB: Buyer continues to receive and pay for energy for its
operations/facilities from local utility/electricity provider
A VPPA is a form of price hedge where a buyer enters into a fixed-price, financial contract for electricity and RECs from a specific renewable energy asset
3
VPPA: How It Works
PROJECT
Developer sells project generation
into the market
Developer receives the variable market
price for selling project generation
BUSINESS AS USUAL
WITH ELECTRICITY
PROVIDER
Payment based on difference between the contract price & market value of the project
generation
Developer provides Buyer with RECs
from project generation
BUYER
POWER GRID
UTILITY
Buyer continues to buy & receive
electricity from local utility
Utility continues to dispatch electricity
to Buyer
EXECUTEVPPA
HOW DOES A
VPPA WORK?
4
VPPA: Payment StructureVPPAs: The Good, The Bad & The Ugly
$
TIME
Market price
VPPA Fixed Price
BUYER PAYS THEDIFFERENCE TO SELLER
BUYER GETS PAIDTHE DIFFERENCE BY SELLER
5
VPPA: A Contract for DifferencesTODAY ($/MWH) FUTURE ($/MWH)
Retail electricity rate ($80.00) ($85.00)
REC price ($0.50) ($1.00)
Total Cost to Buyer: ($80.50) ($86.00)
TODAY ($/MWH) FUTURE ($/MWH)
Retail electricity rate ($80.00) ($85.00)
VPPA fixed price paid to developer (includes REC) ($26.25) ($26.25)
Proceeds from sale of electricity into wholesale electricity market $25.00 $28.00
VPPA Contract Settlement Value: ($1.25) $1.75
Total Cost to Buyer (includes utility power, RECs, hedge): ($80) + ($1.25) = ($81.25) ($85) +$1.75=($83.25)
Difference between Scenarios ($0.75) $2.75
SCENARIO 1NO VPPA
SCENARIO 2WITH VPPA
VPPAs: The Good, The Bad & The Ugly
6
VPPA Drivers: The GoodVPPAs: The Good, The Bad & The Ugly
Big Impact
• Additionality
• Positive environmental impact
• Single transaction can meet large goals across many markets
• Positive signal to market and investors for reputation & brand
• Increased employee engagement, retention & recruitment
• Potential for geographic tie between buyer’s load & project
Good Economic Decision
• Price hedging tool for long-term energy & RECs
• Take advantage of current but expiring federal tax incentives
• Historically low renewable energy project costs
Fits Well with Current Operations
• No change to current utility relationship
7
VPPA Drivers: The ChallengesVPPAs: The Good, The Bad & The Ugly
THE “BAD”Risks That Can Be Managed
• Complexity of transaction requires deep wholesale power expertise
• Buyer procurement process: Internal resource availability; stakeholder education & alignment; approval process
• Lack of correlation to local retail rates
• Too small electricity footprint can impact cost competitiveness (approx. threshold of 15 MW)
• Transaction cost
• Accounting concerns
• Contract length can exceed risk management parameters
• Project curtailment, basis risk and negative price risk
• Credit requirements can be significant
THE “UGLY”Risks Outside Your Control
• Future wholesale energy market prices worse than expected
- Natural gas prices stay low or go lower
- More renewable energy projects built in same area
• Project does not reach completion:
- Developer unable to obtain financing
- Poor development or construction by developer
• Policy uncertainty:
- ITC/PTC Rollback
- Increased incentives for coal production
• Force majeure event
8
VPPA Market Context: Contract vs. Power Prices
PPA Price vs. Forward Price Curves
VPPAs: The Good, The Bad & The Ugly
Case NPVEffective REC
Value/Cost
High $32.4M $9.71
Base $4.9M $1.49
Low ($16.5M) ($4.93)
9
VPPA Performance: What Could Have Happened?VPPAs: The Good, The Bad & The Ugly
10
Breakout Work Sessions: 4 Key DriversVPPAs: The Good, The Bad & The Ugly
Unexpected Market Conditions
Lower wholesale power prices than expected
Harry Singh
Project Location
Correlation to load, RE penetration rates, local policy impact
Kourtney Nelson
Transaction Complexity
Stakeholder alignment, required internal education & approvals
Melissa Peterson
Additionality
How and whether it matters
Erin Craig
11
VPPAs: The Good, The Bad & The Ugly
Unexpected Market Conditions
1. Natural Gas Prices (e.g. pipeline infrastructure, polar vortex, fracking restrictions)
2. Policy changes (e.g. environmental regs, tax incentives, RPS targets)
3. Level of RE penetration (relevant for location but can sometimes can have more widespread impact)
4. Hydro Conditions (relevant in some markets like the West)
5. Power Market Design (scarcity pricing, capacity markets, other tariff changes)
Project Location1. Proximity/Correlation to load (poor hedge); relevance of local impact
2. Current Resource Mix & GHG Impacts (Scope 2)
3. Level of RE Penetration (overall in market and close to project, impacting negative covariance, congestion, curtailment ) and Impact on Pricing (low or negative pricing exposure)
4. Local Policy impact (e.g. redefinition of reginal boundaries for CAISO and DSW joining SPP)
Transaction Complexity
1. Educating non-energy stakeholders & decision makers
2. Gaining stakeholder alignment when different priorities
3. Paper process/approval (who signs?)
Additionality
1. What does it mean?
2. Does it matter?
3. How do you achieve it?
4. What does it cost?
Breakout Work Sessions: 4 Key Drivers
12
Key Considerations Require Tradeoffs
Co
ntr
act
str
uct
ure •Fixed vs.
escalating PPA price
•Tenor: How long?
•Price caps or collars?
•Fixed vs. escalating PPA price
•Tenor: How long?
•Price caps or collars?
Reg
ion
al
ma
rket
sel
ecti
on •Proximity to
load
•REC value
•Cost to develop
•GHG intensity
•Resources
•Market stability
•Proximity to load
•REC value
•Cost to develop
•GHG intensity
•Resources
•Market stabilityS
ettl
emen
t b
asi
s &
pro
ject
ris
k •Project busbarvs. market hub
•Generation: Weather
•Purchase products to hedge these risks?
•Project busbarvs. market hub
•Generation: Weather
•Purchase products to hedge these risks?
Ad
dit
ion
ali
ty •Existing vs. new projects
•First buyer or later?
•Small slice or large?
•Keep RECs?
•Existing vs. new projects
•First buyer or later?
•Small slice or large?
•Keep RECs?
VPPAs: The Good, The Bad & The Ugly
13
Thank You
Kim Fiske [email protected]
Kourtney [email protected]
Melissa Peterson Apex Clean [email protected]
Erin CraigOrigin [email protected]
Harry SinghGoldman [email protected]