This document provides an overview of electricity markets and power purchase agreements (PPAs) for renewable generators. It summarizes different types of PPAs, including those used for various renewable subsidies in the UK. It also discusses key components of electricity prices, such as wholesale power prices, embedded benefits, and renewable subsidies. Additionally, it outlines how electricity is traded in wholesale markets and the role of system operator Elexon in balancing supply and demand.
3. SmartestEnergy
The UK’s leading purchaser of power from independent
renewable generators and supplier of renewable electricity to
large commercial and industrial organisations
Established as generation aggregator since 2001
Diverse portfolio
3GW contracted installed capacity
600 sites (>13% of GB independent embedded renewables)
Includes all commercial-scale renewable technologies
Strong balance sheet, backed by an international corporation
Annual turnover £1.2bn and profit after tax £13m
Wholly-owned subsidiary of Marubeni Corporation
170+ employees across offices in London, Ipswich & Glasgow
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5. What is a Power Purchase Agreement?
Route to market contract between:
Generator (the seller) and Purchaser of electricity (the buyer)
Defines the commercial terms, including:
Pricing structures
Key dates and schedule for delivery
Obligations and penalties
Payment terms
Risk and termination provisions
The principal agreement that defines the revenue and
credit quality of a generating project and is a key
element of project finance
6. Construction Risk ROC PPAs
For Project Finance, up to 15 years
FiT PPA
For Feed-in Tariff generators
CfD PPA
To dovetail with CfD contract
Short-term PPA
Merchant, typically up to 3 years
FlexiPPA
Typically for portfolios
Frameworks up to 7 years
“Linked Supply”
Direct PPAs with end-users
PPAs for renewable generators
7. Project revenue made up of 4 components
7
Wholesale Power Price
Fixed or flexible market
price
Embedded Benefits
Payments for distribution-
connected generators
Renewable Subsidy
e.g. ROC, FiT, CfD top-up
New Benefits
REGO value emerging
Capacity Market
Avoidance Benefit
New Benefits
Subsidy
Embedded Benefits
Power
8. Fundamentals: short-term
Supply & demand
Recession led to 6-8% demand reduction
Outages
Supply of primary energy
Price largely linked to gas price
Coal, oil
System capacity margins
Gas storage
European markets
Weather
UK Electricity Wholesale Market drivers
Sentiment: longer-term view
Economic climate
(Geo)political effects
Regulatory changes
Emissions legislation
New technologies, sources and uses
9. Power Price options
May be fixed for a forward period based on liquid
wholesale market at the time
typical forward liquidity 3-4 years
Prices can be fixed beyond the liquid curve if a
suitable hedge can be found in the market
Price may float by linking to a market index or via
agreed price setting mechanism
Floor price may be required for project finance
12. PPA - Imbalance
Purchaser takes Volume Risk on the forecast versus delivered generation output
An imbalance charge is made, based on:
Nature of the supply
Historic data (if any)
Prevailing level of wholesale prices
Prevailing wholesale price volatility
Time between contract agreement and delivery
Purchaser’s experience of similar generation
Purchaser’s portfolio
Expected nature of prices in the imbalance mechanism
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13. What are Embedded Benefits?
Costs to end users accrue as
benefits to embedded generation
as it is treated as ‘negative demand’
in settlements
Vary according to location and
connection voltage
Distribution and Transmission losses
Generation Distribution Use of
System (GDUoS)
Balancing Services Use of System
(BSUoS) charges
Residual Cashflow Reallocation
Charge (RCRC)
Capacity Market Avoidance Benefit
Transmission Network Use of System
Charges (TNUoS)
14. Transmission Network Use of System
(TNUoS) – Triad benefit
14
2015/16 Final
(£/kW)
2016/17 Final
(£/kW)
2017/18 Current
Forecast
(£/kW)
1 Northern Scotland 23.47 40.97 29.73
2 Southern Scotland 26.79 40.24 30.45
3 Northern 32.62 42.93 38.16
4 North West 35.68 42.83 43.59
5 Yorkshire 36.29 42.49 44.13
6 N Wales & Mersey 35.62 42.68 44.50
7 East Midlands 39.07 44.72 47.01
8 Midlands 39.63 45.74 48.26
9 Eastern 41.18 46.54 49.02
10 South Wales 37.61 42.31 45.44
11 South East 43.74 49.20 51.83
12 London 46.24 51.87 54.37
13 Southern 44.79 50.08 52.83
14 South Western 43.98 48.58 51.43
Range 22.77 11.63 24.64
16. Embedded Benefits Review
1. Growing gap between the Use of System charges faced
by transmission connected and embedded generation
2. Regulatory developments:
a) Ofgem reviewing charging arrangements for
distribution-connected generators
b) CMA proposals also effectively remove the transmission
losses embedded benefit
3. NG widening review of “Commercial Charging
Arrangements”
17. ROC PPA
Power + ROCs + REGOs + Embedded Benefits
Monthly cashflow
Short-term market remains competitive
Long-term market typically 10-15 year deals
Fewer PPA providers
Power and ROC price volatility
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20. FiT PPA
FiT includes published Generation Tariff plus
Export Tariff
Paid quarterly in arrears
Indexed annually
PPA is a market alternative to Export Tariff
Generators can opt-out
Export Tariff provides effective floor price
PPA includes Power + REGOs + Embedded
Benefits
Monthly cashflow
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22. 22
How CfDs work
Low Carbon Contracts Company (LCCC) operate scheme
Difference payments from and to LCCC
Generators also need a PPA provider to sell their power (at
the Market Reference with discount)
Strike Price = Market Reference Price + Difference Payment
23. Key aspects of CfDPrice
Generator pays back
Strike price
Generator receives Difference Payment
Market reference price
- day-ahead for intermittent
- season ahead for baseload
23
PPA standard model is a discount to MRP
24. CfD v RO
24
ROC CfD
Support financing low-carbon generation
Drive down costs
Long-term price certainty
25. PPAs in a post-subsidy world
Market stabilisation CfD
Direct end-user PPAs
Generator agrees (long-term) price with Consumer
Consumer must also be creditworthy
Supplier provides PPA to Generator
Including Embedded Benefits
Power is sleeved through to Consumer’s supply
contract at agreed price
PPA provider may or may not also be Consumer’s Supplier
Certainty for both parties
Great opportunity to bring together willing parties
CSR and PR opportunities
27. Wholesale electricity is traded mostly OTC via
brokers
Voice and screen
Traders prefer interface
More flexible
Provides market intelligence
Encourages tighter prices
Highlights opportunities
Trades are anonymous, until after the trade
Other trading done via exchanges, on indices
UK trades up to 6 times consumption
Some other European markets more liquid
Wholesale market
29. Traded Periods
Forward Market
Months, Quarters, Seasons, Annuals
Prompt Market
Day-ahead, week-ahead
Spot Market
Within-day
Up to gate closure
Can trade baseload or “shape” e.g. peak/ off-
peak
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35. What does Elexon do?
Elexon monitor and validate payments made
between generators and suppliers (BSC Parties)
Compare how much electricity generators and
suppliers were contracted to produce or consume
with actual volumes
Calculate a price for the difference and transfer
funds accordingly
Elexon deliver the Balancing and Settlement Code
National Grid
Balance physical
generation and
demand
Elexon
Settlement imbalance
for generators and
suppliers
BSC Parties
Produce or use
energy
37. Trading arrangements
Transmission Network
(Operated by National Grid)
Generation
Large
Consumption
Central volume allocation
Supplier volume allocation
Grid Supply Point
Distribution Network
GSP GroupSupply
Embedded
Generation
38. How does Imbalance occur
38
Generators Suppliers Non-physical traders
May produce
more or less energy
than they have
sold contractually
May consume
(through customer
demand) more or
less energy than
they have
purchased
contractually
No generation to
sell, or demand to
satisfy – buys from
generators and
trades to suppliers
for profit
39. Elexon Settle Imbalance
ELEXON’s systems capture the contracted volumes from generators/
suppliers to record what they said they would produce/consume
ELEXON’s systems and processes analyse the actual data to see who
generated/consumed what
National Grid (Transmission operator) provides pricing data on actions
taken to balance the system
Prices are calculated by Elexon as per National Grid data and applied
to difference between contracted volumes & actual data =
Imbalance.
Payment is made to and from their customers – the BSC parties
40. Thank you for watching….
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