How to calculate the fair value of a pay-as-produced PPA price?

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The final price of a Power Purchase Agreement (PPA) is influenced by various factors, including the market's expectations for future electricity prices, the capture rate of the specific power plant, the variability in expected generation, the value of Guarantees of Origin (GoOs), the volatility of the asset specific day-ahead market as well as the expected cannibalisation rate of a technology. 

In this article, we will examine Synertics’ methodology to estimate the fair value PPA price of a location and technology-specific asset.

Figure 1 presents a general breakdown of the components for a generic pay-as-produced PPA price. 

The waterfall chart highlights the primary pillars that will impact the fair value of a PPA price. Please note that the values shown are only illustrative but exemplify the process.

 
Firstly the country-specific future baseload prices are used to compute a reference baseload price. Capture rate, volume risk, price risk, and cannibalization discount rates are consequently subtracted from the reference baseload price. In the last step, the future value of the GoOs throughout the duration is added to unmask the final PPA fair value price. 

It is important to note that this methodology does not include any balancing-related costs.

Baseload futures 

How are the market agents pricing electricity in the future? This value represents the expected average price of electricity for baseload consumption over the duration of the PPA. If market agents anticipate high electricity prices, PPA prices generally increase. Conversely, if low prices are expected, PPA prices tend to decrease.

Capture rate discount

Given each asset's specific production profile and the day-ahead prices, the capture rate will reflect how the average price earned by a power plant compares to the baseload price of electricity in the day-ahead market. Higher capture rates translate into higher PPA prices. In other words, the more a power plant can generate during hours of high electricity prices, the higher its market value.

Volume risk discount

The volume risk of an asset is a product of the production volatility within a given time period, which is derived from changing solar and wind resources availability. Proper operation and maintenance can increase the plant’s performance. In this sense, there is uncertainty in the overall generation that poses a risk for the offtaker. The volume risk discount is a value charged by the offtaker to account for the risks related to the plant’s uncertain generation.

Price risk discount

Just as the generation of electricity is uncertain, so is the future price of electricity. If wholesale prices fall, the financial performance of a PPA can suffer, leaving the offtaker in a less favorable position. To account for this risk a price risk discount is applied.

Cannibalisation risk discount

Cannibalisation risk discount reflects the risk of additional capacities of a specific technology being added into an electricity market further driving down the capture rates.

Guarantees of Origin

Most offtakers are interested in assuring their clients how sustainable their products are. The Guarantees of Origin are certificates on the source of the electricity used and, therefore, add value to the PPA and make them more attractive. Every MWh transacted in a PPA has a Guarantee of Origin associated, which provides the off-taker the means to display certified green electricity consumption. Demand and supply-side metrics are used to portray the value of such certificates during the duration of the PPA.

The summing of all these factors composes the final fair value PPA price. Each market will have its own particularities, such as electricity price caps, availability of GoOs, liquidity of futures markets, and decarbonisation targets, which is why PPA prices can vary between countries.

Conclusions

PPA pricing is a complex task that accounts for many factors in which the generator and the offtaker evaluate and transfer risks. In the case of a pay-as-produced structure, the offtkaker is bearing all risks and needs to account for them when computing a PPA price.

The PPA Evaluation Tool computes the location and technology-specific PPA prices while accounting for and visualising all factors that have been described. 

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