Now is the time to fix PPA market shortfallings

In this Q+A Dr. Mo Hajhashem makes a strong case for the necessity of the paradigm shift in renewables asset management.

Now Is The Time To Fix PPA Market Shortfallings

Let’s start with the basics Mo; What is a PPA?

A power purchase agreement (PPA) is a contractual agreement between buyers and sellers of energy. PPAs tend to be signed for around 10 to 20 years and centre on the amount of energy generated by a renewables asset. The buyer or off-taker (energy suppliers and corporate consumers) and seller (renewables generators / power producers) agree to buy and sell an amount of energy that is or will be generated by a renewables asset.

Large corporations generally require a massive amount of energy. They usually negotiate and agree to PPAs based on their average energy consumption. Once they are receiving power from the renewables asset they may trade any remaining energy to other parties.

Off-takers can also be an energy supplier that will buy energy from the renewables asset and then resell the energy at higher prices.

What’s your take on the status of the current PPA market?

In these unprecedented times traditional PPAs with single credit backing of one off-taker are no longer secure.

Renewables asset owners, asset managers, infrastructure funds investing in renewables and utilities and energy companies that wish to build their own renewables assets are all losing out.

And that’s because the PPAs they have in place are all linked to the wholesale market which is directly affected by the risk of volatile gas prices.

What other threats currently exist in the PPA market?

Corporate PPAs can play a bigger role in bringing renewables to the mainstream. Let’s say a corporation has a PPA in place for 3GWh with a renewables asset but the asset doesn’t necessarily provide all the required energy of the corporation as the total consumption is 10GWh. As a result this corporation ends up going back to the expensive tariffs of their current supplier for the remaining 7GWh.

Current PPAs have been designed to secure them for generators. However, considering the current market situation and since the current PPAs are mainly between generators and one off-taker (which are mostly energy suppliers), any given supplier could go bust tomorrow as their financial backers could pull out. Many energy suppliers have wound up during this ongoing energy market crisis and generators all of a sudden end up out of contract. The risk is likely high and the rate of return for long-term traditional PPAs are relatively low.

It’s also important to note that current PPAs aren’t attractive for newly built renewables assets as they don’t cover subsidies. And the current practice in the PPA market is layered with multiple agents in the middle - increasing costs. We believe these issues can be fixed through our P2P PPAs. In P2P PPA arrangements, instead of one to one matching of assets and corporations, we match many assets to many generators at the same time. This way, a corporation might get the energy from many generators in each half hour or a generator might sell the energy to multiple corporations at the same time. In this model we aim for 100% energy coverage through P2P PPA and to minimise the exposure to the suppliers’ supply tariffs.

Let's say a building has a consumption of 10GWh. We look at the renewables assets that are registered in our system. We look at the corporation’s consumption pattern, we look at the renewables generation profile and pattern and we find the best match in order to minimise the imbalance risk, as imbalances cost a lot right now. We make a shape and block from the appropriate ‘complementary renewables assets’ and directly connect them to the matched corporations.

Why do I say complementary? Because we need to make sure that when the wind is not blowing or the sun is not shining that the hydroelectric is working. They are all then complementing each other which ensures we have a solid, reliable and accurate piece of work.

So, how will renewables asset investors and managers maximise their return?

The landscape of power purchase agreements is changing as the world continues to shift to a cleaner and greener energy mix.

Our ‘Peer-to-Peer’ system is accurate in prediction and matching and we have already managed to bring renewables to the mainstream market - and we have made it viable without government subsidies.

We aggregate the generators and consumers, do our profiling, make a shape out of it and when the matching happens we make a contract between one generator and what might be many consumers and/or we make a contract between one consumer whose energy might come from a combination of generators.

So, this is the beauty of it. Higher return, higher security?

As a renewables generator you will make much more and increase your margins. But what about security of income? Instead of securing your income with the credit of one single off-taker, as the current practice in the market is, you secure your income with the credit of a collection of consumers. Should any of these consumers go bust or something should happen which affects their contract, we can easily replace them with another one with the same consumption pattern and credit rating and your contract stays in place.

We're creating efficiencies in this system when we directly connect renewables and corporations together. You don't need to go through intermediaries and our system removes many costs including searching costs, unnecessary labour costs, and imbalance costs. Everybody is happy, specifically energy and infrastructure investors. They really like our system and are satisfied that they can have higher returns with higher security.

This is the future of corporate PPAs.

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