Embrace Flexibility to Optimise your PPA Revenue
Recent volatility in the power market is benefitting generators who can take a more proactive and flexible approach when selecting a Power Purchase Agreement (PPA).
Wholesale power prices are now the highest they’ve been in the past three years. Season ahead prices for winter are now £62.20, up from £45.20 at the same time in 2015. In fact, in a previously unseen trend, prices are now £10/MWh higher than they were in April, when they typically fall by around £2-5/MWh, as the power markets enter the summer season.
Several factors have coincided to prompt this situation. In the UK, power prices are driven by the value of gas and these have been rising continuously. A very cold winter across Europe saw gas reserves exhausted as people fired up their heating to deal with the bitter temperatures. This was compounded in the UK by the fact that the biggest gas storage facility, Rough in the North Sea, closed last year. It had previously accounted for 70% of the UK’s gas storage.
Meanwhile, in China, summer began early. Demand for energy surged as people cranked up their air conditioning. Utilities in China were keen to source this power from gas rather than coal, so have been willing to pay more than their counterparts in Europe. Ships carrying liquified natural gas (LNG) from the US were therefore diverted to China, leaving European utilities with no choice but to pay higher prices to secure supplies.
A new PPA model emerges
The price hikes spurred by these events have resulted in opportunities for canny generators to maximise their profits. Limejump’s Track & Trade PPA allows our customers to track the market before fixing at the best price, reflecting a move away from the traditional method of securing a PPA.
Typically, generators would set a date for a PPA tender, asking several suppliers to quote and then picking the best price on the day. But the current market volatility means that this is no longer the best option. The difference in suppliers’ price on the day of a tender is massively outweighed by a moving price so it is better to track than tender.
Tracking the market in advance of your contract start date could mean that you can lock in your price when a spike occurs and achieve a better offer price than you would have received on a tender day. Also, the market is in backwardation, which makes the case for not taking long-term contracts even stronger.
Speed is crucial – sometimes a surge may only last a few hours. But you can set a bracket within which you want your ideal minimum and maximum price to fall. Our traders issue daily market reports and send alerts when the price jumps to the level you are looking for. Then you can lock that in for your chosen time period – from a week, a month, or the duration of your contract.
Many of our customers have already benefitted from our Track & Trade contract model. We have observed a trend in both generators and investors to consider exposure to daily prices through tracking rather than securing traditional long-term PPAs.
Some of our more active customers have been even smarter in their use of Track &Trade. They lock a price for blocks of one or two months at a time, but then come back out and track the market again. Continuous trading in this way enables them to capitalise on prices spikes at all times.
The next renewable revolution
Customers being paid government subsidies under the Feed-in-Tariff (FiT) scheme are now also benefiting from rising market prices, with forward power prices outperforming the FiT rate. Many customers are switching to tracking the market, and some have been able to lock in prices of over £60/MWh, well above the current FiT rate of £52.40/MWh.
New renewable energy generators such as onshore wind and solar PV, who are not eligible for government support from FiT, Contracts for Difference, or the Renewables Obligation Certificate, can capitalise on price volatility and general rising prices, which combined with falling Capex costs, mean that projects are now starting to be viable. However, long-term PPA prices do not allow for this as the market is in backwardation, so it will be fundamental for developers and investors to understand the more intelligent PPAs in order to realise the next renewable revolution.
How long will these beneficial conditions last? The rise in prices has defied most predictions, and how long it will continue is uncertain. What is certain is that daily price volatility and opportunities it causes are increasing. Customers must think about more intelligent solutions to maximise their returns. But with European gas prices remaining below those in China, and the European winter just a few months away, Track & Trade will continue to deliver exciting returns.