Late-Stage Project Values and Renewable Energy PPAs

Synthesizing the PPA market, Ascend concludes the bull market for clean energy suppliers continues with increases in prices across all U.S. power markets. Project delays and procurement mandates combine to stretch timelines and fall short of swelling market demand. Energy buyers are in the precarious position of buying now in a tight market with potential room for relief in the visible future. Furthermore, buyers are witnessing a changing landscape as clean energy markets start positioning for hourly net zero emissions. Ascend recently hosted a webinar that discussed PPA price trends, future market expectations, and best practices for energy buyers to evaluate PPAs.

Key Takeaways

• Although PPA prices have risen, and continue to rise, across the U.S., average PPA prices vary significantly by region; for example, solar PPA prices range from $39/MWh in some parts of CAISO or ERCOT to $79/MWh in ISO-NE.
• Ascend Analytics' Market Intelligence forecasts PPA prices to decline over the next five years as supply chains normalize and interest rates decline. However, the modest decline in PPA prices will phase out at the end of the decade as the Inflation Reduction Act (IRA) ends.
• As the market for low-risk, low-return PPAs become even more competitive, opportunities may arise for more attractive risk/return profiles using an alternative contract structure, such as the type of project revenue insurance offered by Ascend's EnSurance™.
• When valuing PPAs, a holistic approach of the economic value of energy at the hub and node and RECs combined with a qualitative assessment reduces delivery risk relative to solely looking at price at the hub.

PPA Prices Expected to Normalize, Then Rise Again

PPA prices for solar and wind are expected to decline in the near term as supply chains normalize and interest rates decline, followed by a resumption of previous curves in which PPA prices rise as the IRA phases out in the mid to late 2030s, as shown in Figure 1. Because the Production Tax Credit (PTC) benefits from inflation over time, solar will see larger cost declines due to PTC as well as to technological improvements. Similarly, storage costs are forecasted to decline in the near term as supply chains normalize, then rise again as the IRA phases out. However, continued price declines will be tempered by supply competition with the electric vehicle (EV) sector. Four-hour storage capital expenditures will see small variations between ISOs, driven mostly by land cost, shipping, and labor.

Alternatives to PPAs?

Currently, PPAs reflect the dominant contract structure. From an off-taker perspective, PPAs represent an arrangement that locks in a stable cost. For developers, PPAs offer a constant return that might be economically suboptimal relative to merchant storage, but which avoids a higher risk profile. Because PPAs are so ubiquitous and the market for late-stage renewable projects so competitive, however, even modest returns are being squeezed. These dynamics lead to the creation of alternate contract structures that lie between low-risk, low-return PPAs and high-risk, high-return merchant storage, as shown in Figure 2. Emerging models, such as Solar+Storage forward block sale or revenue insurance like that offered by Ascend's EnSurance, present a 'middle' way that manages risk yet offers higher returns.  

Evaluating Renewable Energy Projects in Terms of Value, Not Just Price

When evaluating renewable energy projects, Mr. Boukarim observed that the cheapest price doesn't always represent the most economic choice. Accounting for all factors that affect a project, both economic and qualitative, remains critical. In making an economic assessment, valuations must include energy net revenue, ancillary services net revenue, renewable energy credits (RECs), hourly REC/emissions offsets, and capacity value. Qualitative assessments should cover environmental impact, developer experiences, supplier diversity, financing, workforce development, and benefits to local communities. For economic valuations, Mr. Boukarim noted the importance of capturing geographic variation, especially with regard to basis and volatility at a nodal level. This proves critical when accounting for basis risk relative to an off-taker's load, as shown in Figure 3.

"A key question here is who wears that risk? We've seen a lot of developers settling their PPAs at the hub, but that means they need to charge a premium to the off-taker to bear that risk since that is not a cost they can recover from ratepayers," Mr. Boukarim stated. "What we're observing in the market is that usually busbar settlements are better for PPAs from the off-taker's perspective because those might act as a portfolio hedge and can minimize the cost of the entire portfolio."

As demand for carbon-free power supply grows, so does the need to develop a cost-effective decarbonization strategy. A crucial factor for doing so involves examining hourly load matching using regional and marginal emissions that evolve over time and account for how systems change. Accounting for load centers and location remains important, too, as well as capturing the way that these dynamics evolve over time. This approach provides a realistic lens to assess cost relative to value and results in a more holistic approach to project valuation. Mr. Boukarim cited an example of two solar projects with PPA prices of $38/MWh and $43/MWh. While the $38/MWh project may have appeared economically optimal based solely on price, factoring in CO2 offsets based on marginal emissions over time for each project demonstrated that the lower priced project ($38/MWh) was the least valuable one because of limited impact on offsetting thermal emissions (regional renewable saturation), producing a carbon abatement cost of $62/tonnes compared to $46/tonnes for the project priced at $43/MWh.

The Next Frontier – Hourly Matching of Renewable Energy and Load

Off-takers evaluating late-stage renewable energy projects should economic metrics that align with their procurement need. Those seeking RECs, for example, might use an energy normalized NPV model, while capacity seekers would opt for an RA normalized NPV. Another best practice involves identifying projects that rank high on multiple economic and qualitative metrics. Those projects can be difficult to find, Mr. Boukarim acknowledged, noting that Ascend's PowerSimm™ analytics platform represents a valuable tool in evaluating received offers by assessing expected revenues and costs calculated across all value streams. This type of granular approach represents the future of project valuation, according to Mr. Boukarim.

"For the next frontier, we expect people to look at their portfolio position and track the actual position on a month-hour basis, to see those hours when you're short and then try to fill them with resources that are actually offsetting those high-emission hours," he stated.

In conclusion, Mr. Boukarim advised developers to keep qualitative factors in mind when negotiating renewable energy PPAs, noting that off-takers want to contract with reputable developers and thus minimize investment risks. In preparing to sell projects, developers must address risks related to site control, interconnection status, environmental screens, land use and permits, project financing, developer experience, among other factors. Doing so helps projects stand out for potential off-takers, and thus helps increase the probability of success.

Ascend Analytics Market Intelligence: Proven Insights for Managing Investment Risk

AscendMI™ (Ascend Market Intelligence) delivers bankable proprietary power market price and emission forecasts that reflect the new market dynamics driven by the energy transition. AscendMI provides 20+ year forecasts for day-ahead and real-time power prices for major trading hubs, ancillary services prices, capacity prices, and REC prices as well as nodal basis and emission forecasts for every major market in the United States and Europe. Ascend MI's valuations have been supported by generating valuation results that are consistent with actual operations.