Hedge Contracts Emerge as Alternative Off Take Structure for Solar and Storage Schemes

A growing number of solar-plus-storage developers are exploring hedge contracts as alternatives to power purchase agreements for their projects, as it becomes evident that such over-the-counter trades can provide significantly better early-year returns than traditional longer term off take arrangements.

Specialist advisory firm Ascend Analytics recently highlighted the potential for hedging with a simulated case study that it ran for a solar and storage project at Palo Verde in California. The analysis showed that a seven-year block hedge (for most of the units output over a 24-hour cycle) could deliver revenues of well over 30million USD in the projects fiscal year - 50% more than the 20 million USD it could reasonably expect to derive from a power purchase agreement (PPA). This increase in assumed risk over seven years, meanwhile, was minimal - and still less than six times that associated with the comparable merchant project.

Reducing the Payback Period

The appreciably higher annual returns achievable through the hedging contract also reduced the hypothetical developer’s exposure to the facility having to revert to merchant status when the hedge expired as it cut the payback. on the capital investment from nine-and-half years to six-and-half.

Scott Wrigglesworth, Ascend Analytics Vice President of Operations and Strategy, said the key to achieving this result was not manage the asset to match output with the hedge, but rather to maximize the value of its sub-hourly dispatch - which could often mean selling greater volumes of power than were covered by the hedging contract.

“The block hedge construct provides a proper risk/return trade-off for the asset without having to sell at a lower PPA price,” Wrigglesworth explained.

Although PPAs remain the dominant off take arrangement for solar-plus-storage projects, interest in  hedge alternatives is certainly growing - a total 26% of the attendees at a recent Ascend Analytics workshop were considering such arrangements.

Hedge Types

While the Palo Verde example was based on a standard blockage, Ascend Analytics has been commissioned to analyze a growing number of variations for hedging arrangements, including shaped hedges, top-bottom trades, storage revenue swaps, and other fixed volume/fixed price swap contracts.

“We're seeing more frequently that companies are exploring different ways to contract resources,” confirmed Wrigglesworth. “We're seeing increased innovation in this space as well.”

 To read the full story, login into Voltility.net. Article written by Andrew Cavenagh, August 11, 2023.

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