2. Agenda
ì Outcome
ì How
is
electricity
different
than
other
commodi5es?
ì Market
Structure
Ÿ
Evolu5on
and
Impact
ì Regulatory
concerns
ì
Contractual
issues
ì
Q&A
3. Outcome
ì Understand
the
basic
concepts
of
electricity
and
the
electricity
industry
chain
ì Appreciate
the
role
of
the
PPA
in
the
electricity
market
ì Map
the
main
regulatory
concerns
ì Familiarise
with
the
key
provisions
of
a
PPA
5. Why
a
PPA
workshop?
ì WB:
the
only
thing
that
kept
the
lights
on
in
CEE,
Russia
and
Central
Assia
has
been
the
recession
ì Massive
rounds
of
investments
are
needed
to
replace
the
exis5ng
capaci5es
that
had
been
mostly
built
before
the
1980s
ì In
addi5on:
substan5al
RES-‐E
capaci5es
are
expected
to
crop
up
across
the
region
by
2020
and
beyond
to
keep
up
with
the
EU
policies
on
climate
change
and
security
of
supply
ì Prac5oners
can
face
LTSC
issues
in
at
least
3
different
constella5ons:
ì legacy
of
the
pre-‐liberalisa5on
era
ì the
new
PPAs
as
an
effect
of
the
first
step
of
liberalisa5on
–
opening
up
the
genera5on
for
compe55on
–
the
IPP,
BOTs
and
the
award
of
the
PPA
on
a
long-‐term
basis
ì new
built
projects
(typically
project
financed
-‐
off
balance
sheet):
where
the
wholesalers
/
suppliers
/
large
industrial
consumers
would
enter
into
long-‐term
PPA
with
the
generator,
and
this
would
secure
a
revenue
stream
to
service
to
debt
for
financing
the
project
6. How
is
electricity
different
than
other
commodities
?
(1)
ì Truth
no
1:
electricity
cannot
be
stored
–
all
electricity
needs
to
be
generated
when
is
needed
–
when
demand
varies
over
the
course
of
a
day,
genera5on
needs
to
vary
exactly
at
the
same
5me
ì Truth
no
2:
electricity
takes
the
path
of
least
resistance
–
it
is
virtually
impossible
to
command
electricity
to
take
a
certain
path,
the
thicker
the
cable
the
more
electricity
will
want
to
flow
through
that
cable
and
not
through
a
skinny
cable
–
final
consumers
simply
get
whatever
electricity
happens
to
be
flowing
by
their
appliances
at
the
5me
they
switch
on
the
lights
ì Truth
no
3:
electricity
travels
at
the
speed
of
light
–
each
second
output
has
be
to
precisely
matched
to
demand
–
if
not,
frequency
falls
and
bad
things
happen,
including
blackouts
7. How
is
electricity
different
than
other
commodities
?
(2)
ì Electricity
as
opposed
to
almost
any
other
commodity
(gas
is
the
closest
it
can
get)
needs
at
all
5mes
coordina5on:
day-‐ahead,
intra-‐day
and
in
real
5me
ì No
maaer
how
liberalised
is
a
market
the
SO
has
to
be
in
charge
at
all
5mes
–
telling
the
plants
when
to
run,
when
to
increase
or
decrease
output
and
when
to
stop
ì SO
has
to
make
sure
that:
ì Load
is
met
at
all
5mes
ì Relieve
conges5ons
on
the
transmission
system
ì Call
for
reserves
and
use
them
when
necessary
8. Electricity
Industry
Chain
in
a
Liberalised
Market
ì 5/6
main
ac5vi5es:
ì ProducCon
or
GeneraCon
ì Transmission
=
high
voltage
level
transport
ì DistribuCon
=
low
voltage
level
transport
ì Supply
=
selling
electricity
to
the
final
consumer
ì Trading
=
selling
and
buying
electricity
on
the
wholesale
market
ì Metering
–
part
of
the
supply
or
distribu5on
ac5vity
in
some
jurisdic5ons
(mostly
all
CEE),
or
on
its
own
in
others
(Nord
Pool
markets
and
UK).
In
a
perfectly
reliable
market
metering
should
be
separate
from
supply
/
distribu5on
9. Electricity
Contractual
Chain
(1)
Generator
PPA
Merchant
Power
Plant
Spot
sale
Wholesaler
Spot
market
Spot
purchase
Wholesale
contract
Retailer
Consumer
tariffs
(ini5ally)
now
Retail
Contracts
Consumer
10. Electricity
Contractual
Chain
(2)
ì PPA
ì sale
of
electricity
from
a
single
generator
to
a
wholesale
company
(can
be
another
generator
or
trader
or
even
end-‐consumer
typically
non-‐household)
ì Wholesaler
buyer
purchases
the
G
output
(kWh)
ì Wholesaler
may
buy
the
output
of
many
generators
under
many
different
PPAs
(certainty
this
is
the
case
with
RES-‐E
–
very
many
generators
at
small
capaci5es)
ì Wholesale
Market
ì Electricity
from
the
wholesalers
is
sold/purchased
either
OTC
or
on
the
spot
markets/power
exchanges
ì These
trades
allow
wholesalers
to
balance
their
porholio
on
the
short
term
–
since
electricity
cannot
be
stored
11. Electricity
Contractual
Chain
(2)
ì Wholesale
Contracts
ì Wholeseller
sells
to
another
one
or
to
another
retailer
via
a
wholesale
contract
ì Ability
to
call
on
the
spot
markets
allows
the
wholesale
to
offer
to
the
retailers
firm
sales
for
a
defined
quan5ty
at
a
fixed
priced
ì Deriva5ve
contracts
on
electricity
ì Compe55on
at
this
level
of
the
market
tends
to
encourage
innova5on
in
the
terms
offered
to
the
retailers
ì Retail
Contracts
(iniCally
Tariffs)
ì Electricity
is
sold
to
final
consumers
12. Market
Structure
Ÿ
Evolution
and
Impact
(1)
ì Prior
to
liberalisa5on
start-‐up
(mid
1990s
in
con5nental
Europe
and
mid
1980s
UK)
–
ver5cally
integrated
companies
carried
out
all
the
5/6
businesses
(listed
on
slide
8)
typically
serving
certain
regions
ì Transport
–
as
the
only
natural
monopoly
remained
regulated
ì GeneraCon,
wholesale
trading,
retail
supply
–
progressively
opened
to
compeCCon
ì Liberalisa5on
in
UK
was
driven
by
the
poli5cal
belief
of
the
then
Thatcher
cabinet
(inspired
by
the
America
model)
that
liberalisa5on
and
priva5sa5on
are
inherently
a
superior
market
model
ì Liberalisa5on
in
Europe
was
driven
by
the
Commission
compe55on
policies
and
the
belief
in
the
European
single
market
model
13. Market
Structure
Ÿ
Evolution
and
Impact
(2)
Liberalisation
Start-‐up
1990
ì First
Electricity
Direc5ve
96/92/EC
–
introduced
a
separa5on
between
the
regulated
part
of
the
market
(networks)
and
the
compeCCve
part
of
the
market
(G,
T
and
S)
ì Removed
legal
monopolies
–
allowed
large
consumers
to
choose
their
supplier
(“eligibility”
concept)
ì TPA
–
obliged
ver5cally
integrated
companies
to
negoCate
TPA
to
their
transmission
and
distribu5on
networks
ì Unbundling
(accoun5ng
&
management)
–
minimum
level
of
separa5on
of
the
network
business
from
the
genera5on
and
supply
business
of
the
ver5cally
integrated
companies
ì Gradual
market
opening
è
significant
differences
between
MSs
regarding
the
level
of
their
market
opening
14. Market
Structure
Ÿ
Evolution
and
Impact
(3)
PPAs
in
the
context
of
Liberalisation
Start-‐up
1990
ì Despite
their
vital
role
for
the
liberalisa5on
LTSC
are
almost
absent
in
electricity
&
gas
secondary
legisla5on
at
that
5me
ì COM
started
to
look
into
LTSC
in
mid
–
late
1990s
to
limit
their
dura5on
–
not
hamper
on
opening
the
markets
to
compe55on
ì Some
precedents:
rule
of
thumb
–
15
years
(eg:
Electricidade
de
Portugal/Pego;
Isab
Energy/Enel;
Rosen)
ì BUT
no
methodologies
had
been
displayed
for
the
analysis
of
the
foreclosure
effects
ì Market
players
already
anCcipated
since
late
1990s
that
a
15
year
dura5on
will
probably
not
be
acceptable
anymore
15. Market
Structure
Ÿ
Evolution
and
Impact
(4)
2nd
Wave
of
Liberalisation
ì 2nd
Electricity
Direc5ve
(2003/54/EC)
and
Cross
Border
Electricity
Trading
Regula5on
(1228/2003)
ì aimed
at
full
market
opening
(all
consumers,
including
house-‐hold)
ì regulated
(as
opposed
to
nego5ated)
TPA
ì mandatory
set
up
on
NRAs
ì legal
unbundling
(not
only
accoun5ng
&
management)
16. Market
Structure
Ÿ
Evolution
and
Impact
(5)
PPA
in
the
context
of
2nd
Wave
of
Liberalisation
ì 2004
onwards
relevant
cases
on
LTSC
generally
concerned
long-‐
term
reservaCon
rights
on
cross-‐border
interconnectors
signed
before
liberalisa5on
ì some
MSs
introduced
effec5ve
measures
leading
to
compe55on:
ì UK
–
state
owned
generator
split
into
compe55ve
companies
and
Virtual
Power
Plants,
ie:
capacity
release
programmes
ì Italy
–
market
share
caps
for
the
incumbents
ì BUT
the
issue
of
LTSC
was
sCll
not
addressed
17. Market
Structure
Ÿ
Evolution
and
Impact
(6)
Sector
Inquiry
2007
ì The
SI
was
launched
in
2005
and
responded
to
concerns
of
the
consumers
and
new
entrants
in
the
sector
ì The
final
report
iden5fied
serious
shortcomings
affec5ng
trading:
ì Concentra5on
and
market
power
ì Ver5cal
foreclosure
ì Lack
of
market
integra5on
ì Lack
of
transparency
è informa5on
asymmetry
and
distrust
in
the
pricing
mechanism
ì S5ll
regulated
prices/tariffs
for
the
end
consumers
18. Market
Structure
Ÿ
Evolution
and
Impact
(7)
PPAs
in
the
context
of
the
Sector
Inquiry
2007
ì SI
looked
at
PPAs
–
longer
than
3
years
and
/
or
that
are
tacitly
renewed
è
ver5cal
foreclosure
between
genera5on
and
retail
generally
reduces
the
incen5ves
to
trade
on
the
wholesale
markets
è
as
it
affects:
ì Price
forma5on
on
the
spot
market
ì Liquity
(the
lack
of)
–
illiquid
wholesale
markets
=
barrier
to
entry
&
high
price
vola5lity
ì LTSC
between
par5es
with
opposite
market
posi5ons
in
the
same
MS
tend
to
reduce
the
amount
of
open
long
and
short
posi5ons
needed
to
be
closed
on
the
wholesale
market
trading
ì LTSC
export
/
import
–
add
or
reduce
the
amount
of
electricity
that
is
available
for
trading
in
a
given
MS:
ì LTSC
imports
may
mi5gate
the
effects
of
the
domes5c
market
foreclosure
ì LTSC
exports
may
aggravate
such
affects
ì SI
–
Remedies
ì Generally:
Full
and
combined
use
of
the
Commission’s
powers,
in
close
co-‐opera5on
with
the
NRAs
ì An5trust
Rules
(Ar5cle
101,
102
and
106
TFEU)
ì Merger
(Regula5on
139/2004)
ì State
Aid
(Ar5cles
107
and
108
TFEU)
ì For
PPAs:
SI
confirmed
the
ver5cal
tying
of
markets
by
LTSC
as
a
priority
for
review
of
case
situa5ons
under
compe55on
law
and
for
providing
guidance
where
required
ì When
LTSC
concluded
by
dominant
companies
foreclose
the
market
è
potenCal
infringement
of
the
AnCtrust
Rules
unless
there
are
“countervailing
efficiencies
benefiCng
consumers”
–
in
the
analysis
of
the
LTSC
sunk
investments
made
by
the
parCes
are
considered
–
Commission
Guidelines
on
the
applicaCon
of
ArCcle
81(3)
[now
arCcle
101
(3)
TFEU]
19. Market
Structure
Ÿ
Evolution
and
Impact
(8)
Relevant
Case
Law
following
the
SI
ì Lessons
learnt
ì There
is
no
EU
legisla5on,
guidelines,
etc
to
ban
outright
LTSC
ì the
COM
will
deal
with
LTSC
only
if
they
may
substan5ally
affect
trade
between
MS
-‐
for
the
rest
of
the
cases
it
is
up
to
the
na5onal
authori5es
to
get
involved
ì as
long
as
the
market
share
of
the
companies
involved
does
not
exceed
15%
they
are
considered
de
minimis
and
do
not
fall
under
the
jurisdic5on
of
the
COM,
unless
the
agreement
contains
“black-‐listed”
restrains
ì “Black-‐listed”
clauses
–
considered
illegal
in
several
decisions
ì Unclear
termina5on
rights
ì Fidelity
rebates
ì Tacit
renewal
ì If
the
market
share
of
at
least
one
of
the
contracCng
parCes
exceeds
30%
-‐
COM
conducts
a
full-‐blown
compe55on
analysis
of
the
an5-‐compe55ve
effects
of
the
LTSC
to
decide
whether
it
infringes
EC
compe55on
law
20. Market
Structure
Ÿ
Evolution
and
Impact
(9)
Relevant
Case
Law
following
the
SI
ì Full-‐blown
analysis
–
elements
considered:
ì Market
characteris5cs
–
level
of
ver5cal
integra5on
ì First
element
to
be
assessed
ì Looks
at
poten5al
entry
in
supply
and
demand,
and
dominance
ì Dura5on
ì is
s5ll
an
enduring
ques5on
for
energy
policies
in
liberalised
markets
ì but
acceptance
by
the
COM
will
mainly
depend
on
the
compe55on
posi5on
of
the
counterparty
ì the
COM
is
suspicious
of
contracts
longer
than
5
years
and
considers
that
efficiencies
generally
do
not
offset
foreclosure
effects
beyond
this
limit
ì The
COM
also
takes
a
more
strict
approach
for
the
producer/trader
contracts
(rather
than
for
the
fuel
supply
contracts,
ie:
mostly
gas
supply
agreements)
ì Volumes
ì Exclusivity
clause
–
par5cularly
an
issue
when
the
customer/buyer
represents
a
big
part
of
the
total
demand
ì Take-‐or-‐Pay
(ToP)
–
one
of
main
reasons
why
LTSC
dry
out
the
spot
market;
w/o
the
flexibility
mechanism
of
a
ToP
clause
buyer
will
have
to
go
on
the
spot
markets
to
sell
the
surplus
/
buy
the
missing
quan55es
–
but
ToP
and
flexibility
mechanisms
are
not
banned
per
se
21. Market
Structure
Ÿ
Evolution
and
Impact
(10)
Relevant
Case
Law
following
the
SI
ì Once
a
PPA/PPAs
porholio
is
considered
likely
to
create
significant
an5-‐
compe55ve
effects
è
analyse
the
poten5al
efficiency
gains
and
run
a
balancing
exercise
ì In
theory
for
long-‐term
PPAs
to
be
cleared
by
the
COM
they
should:
ì SubstanCally
improve
economic
efficiency
ì Already
recognised
by
the
COM:
investment
and
entry
considered
to
have
contributed
to
the
success
of
the
liberalisa5on
ì Give
a
fair
share
of
benefits
to
the
final
consumers
ì if
the
long-‐term
contract
secures
a
lower
price
for
the
buyer
which
is
then
reflected
in
lowers
bills
for
the
consumers
ì Indispensable
or
at
least
proporConal
to
the
achievement
of
the
efficiency
gains
ì Can
only
be
judged
on
a
case
by
case
basis,
but
favourable
precedent
a
price
formula
benefited
the
generator
–
explicitly
considered
by
the
COM
an
efficiency
to
benefit
from
an
exemp5on
under
Ar5cle
101
(3)
ì Na5onal
compe55on
authori5es
are
s5ll
struggling
with
this
criteria
ì Not
afford
the
parCes
the
possibility
to
eliminate
compeCCon
in
respect
of
a
substan5al
part
of
the
products
in
ques5on
ì Public
service
obligaCon
22. Market
Structure
Ÿ
Evolution
and
Impact
(11)
Remedies
ì If
efficiency
gains
do
not
seem
to
clearly
offset
an5-‐compe55ve
effects
LT
PPA
can
s5ll
be
accepted
provided
sa5sfactory
remedies
can
be
imposed
or
nego5ated
ì
Typical
compe55on
remedies:
ì Amending
the
PPA:
dele5ng
exclusivity,
limi5ng
the
dura5on,
reducing
the
volume
(100%
to
70%)
ì Forbidding
any
ver5cal
M&As
to
a
dominant
company
for
a
certain
number
of
years
ì Note:
security
of
supply
argument
in
today’s
world
is
likely
to
be
accepted
only
for
gas
supply
agreements
and
to
a
lesser
extent
for
PPAs
ì Energy
specific
remedies:
ì Virtual
Power
Plants
(VPPs),
ie
capacity
release:
forced
dominant
firms
to
make
capacity
op5ons
available
for
a
pre-‐determined
5me
horizon
(Synergen
case)
23. Market
Structure
Ÿ
Evolution
and
Impact
(12)
Distrigaz
&
EDF
–
reliable
precedents
but
not
enough
Cases
Distrigaz
2007
EDF
2009
Max
duraCon
5
years
5
years
%
of
sales
to
come
back
on
70%
65%
the
market
every
year
(ie:
annual
VPP)
Contract
Clause
No
des5na5on
clause
No
des5na5on
clause
DuraCon
of
commitments
4
years
for
Distrigaz
under
10
years
for
EDF
under
40%
40%
market
share
of
the
market
share
Monitoring
of
Commitments
Annual
report
Annual
report
&
Independent
Auditor
Others
Effec5ve
right
to
contract
Effec5ve
right
to
contract
with
alterna5ve
supplier
with
alterna5ve
supplier
Commitments
may
be
reopened
if
material
changes
in
the
na6onal
law
or
the
market
context
24. Market
Structure
Ÿ
Evolution
and
Impact
(13)
Certain
uncertainties
ì Mul5ple-‐step
approach
to
analyse
long-‐term
PPAs
has
emerged
ater
the
2007
SI
but
no
holisCc
approach
dedicated
to
PPAs
yet
ì Strong
emphasis
on
investment
but
no
robust
methodology
to
ar5culate
short
and
long-‐term
efficiency
criteria
ì Balancing
between
an5-‐compe55ve
effects
and
efficiencies
remains
largely
at
the
discreCon
of
the
COM
ì Lack
of
predictability
–
ul5mate
effect
detrimental
to
crea5on
of
the
Internal
Energy
Market,
investment
in
new
capaci5es,
and
on
the
prices
to
end-‐consumers
25. 3rd
Electricity
Directive
What’s
new
for
PPAs
ì Substan5ally
increased
powers
of
the
Na5onal
Regulatory
Authori5es
(NRAs):
ì Issue
binding
decisions
on
electricity
undertakings
ì Carry
out
inves5ga5ons
into
the
func5oning
of
the
electricity
markets
ì Decide
and
impose
any
necessary
and
proporConate
measures
to
promote
effecCve
compeCCon
and
ensure
the
proper
funcConing
of
the
market
ì Cooperate
with
the
na5onal
compe55on
authori5es
and
the
Commission
in
conduc5ng
an
inves5ga5on
rela5ng
to
compe55on
law
ì Impose
effecCve,
proporConate
and
dissuasive
penalCes
on
the
electricity
undertakings
that
don’t
comply
with
their
obligaCons
under
the
DirecCve
or
with
any
legally
binding
decision
of
the
NRAs
itself
or
of
the
ACER
or
to
propose
that
a
competent
court
imposes
such
penal5es
ì Create
appropriate
and
efficient
mechanisms
for
regula5on,
control
and
transparency
to
avoid
any
abuse
of
dominant
posi5on,
in
par5cular
to
the
detriment
of
consumers
ì but
the
NRAs
are
bound
to
respect
the
contractual
freedom
regarding
long-‐term
contracts
provided
they
are
compaCble
with
EU
law
and
consistent
with
EU
policies
26. What
is
the
role
of
a
PPA
in
a
liberalised
market
?
ì Contract
for
the
sale
of
Energy
and
Availability
from
a
generator
to
a
wholesaler,
retailer
or
directly
to
the
end
consumer
ì Tradi5onally
a
PPA
recognizes
that
the
valuable
service
provided
by
a
power
plant
is
availability,
not
the
actual
produc5on
of
energy
ì But
in
a
reliable
wholesale
liberalised
market
it
is
OK
for
the
G
to
be
paid
only
for
the
actual
running
5me
–
G
takes
over
some
of
the
market
risk
as
well
ì In
today’s
energy
markets
both
the
price
risk
and
the
volume
risk
have
become
freely
nego5able
clauses
–
it
all
boils
down
to
the
specific
features
of
each
market
ì The
more
func5onal
and
reliable
the
wholesale
market
is
the
less
risks
the
buyer
has
to
take
over
–
buyers
in
liberalised
market
gained
more
bargaining
power
–
the
net
effect
should
be
that
the
end-‐consumers
will
be
happier
as
the
prices
should
go
down
or
at
least
not
go
higher
than
they
could
have
been
should
the
market
not
have
been
liberalised
28. Key
Contractual
Issues
(2)
Contract
Charge
–
Energy
Charge
ì Pricing
principle
=
pass
through
costs
legi5mately
incurred
and
pay
the
G
an
appropriate
profit
for
the
service
ì Energy
charge
–
designed
to
pay
for
variable
costs
(eg:
fuel
price)
ì Capacity
(or
availability
charge)
–
designed
to
pay
for
the
fixed
costs
of
the
power
plant
ì Energy
charge
=
€
/
kWh
=
price
paid
per
unit
of
incremental
output
ì Price
Formula
=
breakdown
based
on
the
costs
of
the
fuel
and
the
efficiency
rate
(ie:
rate
of
conversa5on
of
a
thermal
unit
into
electricity)
ì VC
=
AE/
TE
ì VC
=
variable
costs,
ie:
fuel,
other
variable
costs
ì AE
=
Actual
Efficiency
(expressed
in
kWh)
ì TE
=
Targeted
Efficiency
ì Just
a
single
price
per
kWh
–
different
prices
at
different
stages
of
opera5on
(eg:
start-‐
up
price,
different
levels
of
output
price,
seasonal
price)
ì Implies
a
certain
efficiency
level
ì Can
include
a
penalty
element
–
if
the
G
fail
to
generate
as
instructed
by
the
dispatcher
to
encourage
to
keep
the
market
balanced
29. Key
Contractual
Issues
(3)
Contract
Charge
–
Availability
Charge
ì Capacity/
Availability
Charge
–
2
main
roles
ì Provide
extra
revenue
to
the
G
to
cover
the
capital
and
other
fixed
costs
which
are
not
covered
by
the
energy
price
per
kWh
ì Provide
incen5ves
for
the
G
to
be
available
at
5mes
when
the
system
needs
genera5on
capacity
ì Availability
is
measured
in
MWh,
ie:
a
MW
of
availability
for
an
hour
ì Steps
to
nego5ate
availability
payments:
ì Step
1:
agree
on
a
Target
Level
of
Availability
(T)
in
terms
of
MW
level
and
number
of
hours
per
year,
Ty
=
Target
per
year
and
Th
=
Target
per
hour
in
a
year
ì Step
2:
Fixed
Annual
Payment
(F)
–
to
be
paid
if
the
G
achieves
the
target
level
of
availability,
but
it
should
cover
the
fixed
costs
for
one
year
+
normal
rate
of
profit
ì Step
3:
Availability
Bonuses
and
PenalAes
above
or
below
the
target
level
(Ah)
–
meant
to
keep
the
G
under
a
con5nuous
pressure
to
ensure
that
the
capacity
is
maintained
and
available,
but
the
buyer
should
not
pay
more
than
the
capacity
is
worth
to
the
system
ì How
much
is
the
capacity
of
a
G
worth
to
the
system?
=
the
value
of
the
G’s
output
to
the
system
–
price
paid
for
the
G’s
output
under
the
PPA
ì The
value
of
the
G’s
output
to
the
system
in
any
hour
=
the
cost
incurred
by
the
whole
system
if
the
generator
decreases
its
output
ì the
G’s
lack
of
output
will
be
replaced
by
output
from
another
G
–
if
this
output
is
more
expensive
the
value
if
called
System
Marginal
Cost
30. Key
Contractual
Issues
(4)
Dispatching
ì Energy
charge
is
a
key
determinant
of
the
paaern
of
dispatching
–
ideally
generators
should
run
in
merit
order,
ie:
only
the
generators
with
the
lowest
variable
costs
should
be
genera5ng
to
meet
demand
=
golden
rule
of
dispatching
in
a
liberalised
market
ì If
the
energy
price
is
above
the
variable
costs
of
the
power
plant
the
incen5ve
for
efficient
dispatching
is
lost
ì Naturally
a
G
wants
to
run
at
all
5mes
regardless
of
the
costs
of
the
other
generators
on
the
system
and
even
if
the
power
plant
displaces
other
cheaper
generators
ì BUT
to
keep
the
prices
for
the
end
consumer
lower
the
dispatcher
(SO/MO)
needs
to
dispatch
according
to
the
merit
order,
ie:
star5ng
with
the
cheapest
capacity
for
any
given
hour
and
going
upwards
5ll
it
meets
the
demand
ì So
for
efficient
dispatching
the
dispatcher
needs
to
know
the
actual
variable
cost
of
genera5on
–
Energy
Charge
in
a
PPA
needs
to
be
set
as
close
as
possible
to
the
actual
cost
of
the
fuel
burnt
for
genera5ng
1
KWh
+
some
allowance
for
O
&
M
31. Key
Contractual
Issues
(5)
Volume
ì Either
all
produc5on
of
a
plant
or
specified
calcula5on
of
volume
ì BUT
a
minimum
volume
under
a
long-‐term
PPA
is
established
by
a
provision
guaranteeing
ì a
minimum
number
of
running
hours
(most
PPAs
link
the
volume
provision
to
availability
rather
than
actual
running
–
but
the
laaer
is
equally
possible),
and
ì that
number
will
be
paid
for
–
even
if
the
plant
is
called
on
for
a
shorter
5me
ì Obtaining
a
guarantee
of
availability
from
the
plant
builder
would
insulate
the
G
–
but
in
prac5ce
it
is
unlikely
for
a
full
guarantee
to
be
given
due
to
the
insurance
premium
the
builder
itself
would
have
to
pay
ì Aaen5on
must
be
paid
for
those
jurisdic5ons
where
full
unbundling
of
the
generator
and
the
dispatcher
has
not
been
done
yet
ì Why?
In
5mes
of
low
demand
the
dispatcher
is
faced
with
the
choice
between
running
the
output
of
the
G
and
switching
off
his
own
plant
32. Key
Contractual
Issues
(6)
Underperformance
ì Technically
each
power
plant
is
built
to
provide
a
certain
capacity,
but
if
it
is
not
able
to
produce
that
capacity
the
PPA
will
have
to
deal
with
the
alloca5on
of
underperformance
ì if
Volume
clause
says
“all
output”
the
buyer
is
taking
the
full
risk
of
underperformance
ì in
reality
the
buyer
is
unlikely
to
take
100%
of
the
risk
under
all
circumstances,
especially
not
all
technical
failure
risks:
the
plant
is
unavailable
because
the
turbine
does
not
work
–
the
buyer
will
want
some
degree
of
recourse
to
the
manufacturer
ì if
there
is
a
cap
on
the
liability
of
the
manufacturer
–
since
the
buyer
is
not
a
party
to
that
contract
and
if
it
agrees
to
take
over
100%
of
the
underperformance
risk-‐
seller
should
expect
a
lower
rate
of
profit
under
the
Fixed
Annual
Payment
33. Key
Contractual
Issues
(7)
ToP
ì the
buyer
agrees
to
purchase
over
specified
period
a
minimum
volume
of
the
output
at
an
agreed
price,
and
it
is
expected
to
pay
for
it
regardless
of
taking
it
or
not
(but
usually
only
if
the
G
had
available
capacity
to
deliver
and
was
willing
to
do
so)
ì Typically
a
100%
ToP
is
jus5fiable
only
when
there
is
no
wholesale
market
(spot
or
OTC)
where
the
G
can
sell
the
excess
not
taken
by
the
buyer
–
hence
such
a
clause
would
not
be
commercially
arguable
in
preay
much
any
of
the
MSs
ì Careful
with
the
enforceability
of
the
ToP
–
in
those
jurisdicitons
where
adequate
considera5on
is
an
essen5al
contractual
element
(if
the
PPA
is
under
English
law
–
no
prob:
basic
principle
of
common
law
the
courts
are
not
concerned
with
the
adequacy
of
considera5on,
it
is
totally
acceptable
that
the
par5es
are
“smart”
enough
to
enter
into
a
“bad
bargain”)
34. Key
Contractual
Issues
(8)
ToP
–
Flexibility
Mechanisms
ì 2
essen5al
flexibility
mechanisms:
allow
for
a
Buyer’s
ToP
obliga5on
to
be
averaged
over
the
life
of
the
PPA
ì Make-‐Up
ì Carry
forward
ì Make-‐up:
ì once
a
buyer
has
made
a
payment
in
one
year
(and
taken
less)
the
volumes
will
go
into
a
“Make-‐up
bank”
ì If
in
the
next
year
the
Buyer
has
taken
the
amount
of
that
year
before
the
year
end
he
can
then
start
to
take
for
free
if
he
needs
to
up
to
the
amount
of
the
outstanding
“Make-‐up
bank”
ì Carry-‐forward:
ì if
the
buyer
takes
more
than
the
ToP
amount
in
one
year
–
receives
a
credit
for
the
overtake
ì If
he
then
takes
less
in
another
year
this
is
set-‐off
against
the
“Carry
Forward
Balance”
from
the
previous
year
35. Key
Contractual
Issues
(9)
Exchange
Rate
Risk
ì This
exists
in
almost
all
new
built
power
plants
projects
outside
the
Eurozone
ì Depending
on
the
par5es
the
project
costs
are
in
one
or
more
currencies
whilst
the
revenues
of
the
plant
is
in
the
local
currency
ì Problem
is
the
issue
can
appear
over
5me,
ie:
3-‐5
years
along
the
line
ì Role
of
the
PPA
is
to
make
sure
the
generator
receives
the
same
value
of
considera5on
irrespec5ve
of
movements
in
the
exchange
rate
ì Achieved
by
compelling
the
buyer
to
pay
in
the
same
currency
as
the
costs
ì Another
problem:
if
the
local
currency
deteriorates
the
price
of
power
under
the
PPA
rises
–
making
alterna5ve
local
sources
more
aarac5ve
for
the
buyer
ì In
prac5ce
this
risk
is
shared
between
the
seller
and
the
buyer
(if
the
buyer
is
not
a
state
owned
company
–
that
can
afford
to
produce
a
Gov
guarantee
–
and
here
we
aface
State
aid
rules)
36. Key
Contractual
Issues
(10)
Operation
ì To
keep
the
lights
on
PPAs
have
to
fit
within
the
market
architecture
and
the
Grid
Code
arrangements
of
the
market
they
operate
in
ì The
G
needs
to
know
when
to
switch
on
and
off
the
plant
ì The
MO
/
TSO
needs
to
know
in
advance
what
the
available
capacity
will
be
ì Reserve
capacity
needs
to
be
considered
for
transmission
and
distribu5on
constrains
ì Conclusion:
across
MSs
market
designs
and
Grid
Codes
are
different
–
be
comfortable
that
the
par5es
and
the
advisors
understand
them
before
nego5a5ng
a
PPA