The Risk of Oversupply: Contracting for a Smart Renewable PPA

Author: Misti Groves works directly with project developers & purchasers to execute strategic customized contracting solutions.

Why might the rapid penetration of renewables pose risks to corporate renewable energy power purchase agreement (PPA) buyers? We hear this question frequently within the commercial, industrial, and institutional (C&I) energy buying space.

As the market for clean energy expands, rapid influxes of new renewable capacity to the grid introduce the potential for oversupply of renewables in any given area. These scenarios may lead to reliability curtailment and depressed electricity prices – which pose a risk to PPA offtakers. While oversupply risk might be impossible to avoid completely when signing a PPA, it is one that corporates can actively mitigate and/or manage using several contracting strategies.

Generation Curtailment

Reliability curtailment becomes a risk for corporate buyers if their project is connected  to transmission that is overburdened with incoming power. Enough stress on the grid, in certain circumstances, could force the grid system operator to ask project operators to cut back or even halt energy production. This recently happened in California with wind and solar developers.

Corporate offtakers can be affected by this oversupply risk if they are expecting a certain level of production to meet their sustainability goals and/or power their facilities. Generation curtailment could result in the corporate being forced to purchase energy or RECs elsewhere in order to satisfy their renewable energy targets.

The first strategy to address curtailment risk involves deliberate project selection and siting. The second level of risk mitigation involved in reliability curtailment is related to contract negotiations. An experienced buyer’s agent can advise corporates on risk-sharing and shifting strategies which distribute exposure associated with this risk more appropriately between the corporate offtaker and developer. For instance, a production or availability guarantee could be incorporated to assure a certain level of facility performance  for the corporate buyer, so, if the facility is curtailed, the buyer would receive damage payments.

Depressed Electricity Prices

Oversupply of renewables in a given area poses yet another risk for corporate offtakers—depressed wholesale electricity prices. This risk is pertinent to PPA buyers because the relative value of a fixed price PPA to a corporate buyer is based on the wholesale market price of power. Depressed price scenarios tend to occur in areas with strong wind resources and many wind farms in operation. Wind generators in Panhandle and West Texas have faced this problem, where the large supply of wind could not be met by demand and the local grid was oversaturated.

Mitigating economic risk associated with oversupply requires significant project vetting and market knowledge. As a buyer’s agent, Schneider Electric utilizes its intimate experience in PPA markets across the globe to assist corporations in choosing project locations that strategically avoid troublesome areas.

Seeking support from a skilled buyer’s agent is a fundamental first step toward designing a power purchase agreement with the greatest protection against risks and the largest opportunity for success in achieving financial and sustainability goals. For a deeper dive into all of the risks and associated mitigation strategies involved in executing a successful PPA deal, download our PPA Risks White Paper.

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