Solar Power Purchase Agreement Examples
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Understanding Electricity Markets
Understanding Electricity Markets
(Abhishek Uppal)
The structure of electricity markets
Electricity is a vital good with a number of characteristics that set it apart from other commodities:
It is difficult to store and has to be available on demand;
It is not normally possible to ration electricity or have customers queue for it;
Demand and supply vary continuously, within a very short timeframe.
There are five main participants in electricity markets:
Power generators, who operate power plants;
Transmission system operators, who manage the electric power grid and ensure its reliable operations;
Electric power distribution companies, who serve as power retailers for businesses and residences;
Power traders, who act as financial intermediaries in the relationship between power generators and electric power distribution companies;
Customers, who demand a reliable supply of electric power.
Contracts are the principal instruments used to govern the relationships between the actors in the power markets. Normally, these are concluded between power generators and electric power distribution companies or power traders. These contracts can be established on a long-term basis. For example, in the US, there is a 7-day, 24-hour market (a contract to provide a constant supply of base load power) and a 5-day, 16-hour market (a contract to supply power during peak demand periods). They can also be established on a short-term basis, either in the day-ahead market, or in the hour-ahead market (the spot market).
What does this mean for renewables?
Conventional LCOE analyses have compared renewables to "electric grid parity", stating that parity is the point at which power generation from an energy source becomes competitive with the electric power grid.
When the electric grid parity of alternatives is assessed, day-ahead and hour-ahead peak power prices have normally been used. These are significantly higher than prices in the 7-24 market, because more expensive gas peakers that can be brought on-line within half an hour when demand peaks set the marginal cost of power in this market. These peakers are more costly than base load coal or nuclear, because they consume relatively expensive fuel, and depending on the demand, older, less-efficient plants may need to be brought on-line.
It may be fair to compare solar power to peak power, as solar panels produce the most power during the early afternoon on hot, sunny days - when the electric power system is at the height of peak production. The arguments for wind being compared to peak power are less compelling.
However, the fact that solar and wind are both intermittent sources of power prevents them from securing the conventional, longer term 5-16 and 7-24 contracts. Renewables are instead forced to secure contracts in other ways:
In the wholesale market at the "generator" end of electricity markets (e.g. wind parks), feed-in tariffs are used in geographies like the EU, while purchasing price agreements (PPAs) are normally used in geographies without a feed-in tariff. Some renewable producers are also taking on merchant generator risk, by deciding to sell some of their production on the spot electricity markets;
In the retail market at the "customer" end of electricity markets (e.g. rooftop solar), net metering and feed-in tariffs in geographies like the EU have established a purchase price for renewables. Where there is no feed-in tariff, renewable power generation is sold onto the grid at spot electricity prices.
While in the build-out phase, the intermittency of renewable generation will not be an insurmountable challenge for the electric power grid. However, some studies have suggested that as penetration of intermittent sources of power increases to around 20% of generation capacity, the grid may need to be upgraded to handle the increased capacity.
These factors will all be dependent on the specific characteristics of regional electricity markets. Investors will need to evaluate the condition of local electricity markets, and how individual projects are likely to play into these markets, as they make investment decisions - underscoring the importance of adapting the industry-level LCOE model to an investor's spreadsheet, and taking into account broader factors from the competitive landscape.
About the Author
Abhishek Uppal college graduate from Cornell University.
University Park Community Solar LLC on how to craft a community Power Purchase Agreement