Technical Insights Empower Savvy Bidders for Renewable Energy Projects (Part III)
In this blog series, we have provided insight into the renewable energy market, on topics spanning energy assessments and costs to wind and solar asset life span, in order to better inform investors on their buying decisions. The last blog in our technical analysis series will focus potential project revenue and the impact of energy storage on the future of renewable energy projects.
Considering Contract Details
There is an ever-growing list of energy sales structures for renewable projects, and it is essential to have a deep understanding of the technical risks these revenue contracts. Utility-style, bus-bar PPAs largely insulated projects from risk arising from market mechanics, transmission congestion, and reliability considerations. However, projects built in more recent years are far more likely to bear transmission-related risk, which is a major influence on revenues. Older assets need to identify prospects for follow-on electricity sales when offtake agreements expire, or else be fully exposed to volatile merchant pricing.
Newer offtake structures take myriad forms, including financial hedges, virtual PPAs, and proxy revenue swaps, and counter-parties range from financial players to corporate off takers. A common thread is that projects settle energy sales transactions at a remote hub, rather than at their point of interconnection to the grid. Prices at the interconnection are often lower than at the hub, lowering the project’s effective offtake price by the value of this price differential. Such pricing impacts curtailment, as wind projects which still receive PTCs for each kilowatt-hour generated can economically bid negative energy prices into the wholesale market, lowering their risk of curtailment in comparison to non-PTC projects.
Projecting curtailment and basis for a project is complex, and subject to significant uncertainty. Evaluation of historical data provides some insight, but is far from a perfect indicator of future expectations. Economic modeling of markets is sensitive to a range of assumptions regarding bidding behavior, build-out and retirement of generators, and commodity pricing. Nevertheless, studying transmission congestion equips bidders to better understand risks to project revenues in the context of their offtake arrangements. Further, time series modeling of a renewable asset’s output and market pricing provides insight into the uncertainty of revenue—a significant benefit when evaluating financial model assumptions for an acquisition.
The rapidly declining cost and the flexibility of battery storage systems offer value propositions for existing renewable projects. This is especially true if complemented by capture of the ITC for the battery based on a dispatch strategy that ensures that more than 75% of charging occurs from renewable sources rather than the grid.
To realize the value, investors must understand potential revenue streams from the battery and how these can be intelligently “stacked.” A battery enables wind and solar projects to smooth and firm their output by limiting ramp rates, and enable participation in markets for ancillary services. Solar-plus-storage facilities have already demonstrated the ability to effectively load-shift, delivering energy when demand is higher and increasing the project’s revenue potential. For preconstruction projects, smoothing ramp rates may enable lower interconnection and renewables integration costs as well.
Such capabilities offer increasingly compelling value propositions in conjunction with potential wind or solar project acquisition. The feasibility of capturing these revenue streams from a battery can be studied in the context of future markets to quantify upside potential. This additional revenue may then be realized through a negotiated premium on a power purchase agreement, arbitrage, or participation in markets for ancillary services. Notably, the chosen application for energy storage has important implications for the optimal technology, degradation rate, and planned replacement costs, which must also factor into the analysis.
In a seller’s market for renewable assets, the winning bidder may prove to be one with the highest risk tolerance. Bidding aggressively, however, does not require turning a blind eye to technical risk. Sophisticated analysis offers nuanced understanding of the range of likely project profitability, ability to quantify and mitigate residual risk, opportunities to optimize asset valuation to win bids, and insight into likely competing bids. Indeed, engineering analysis of renewable energy assets can be a key that unlocks the hidden value of wind and solar projects and enables commercial success.
To learn more on technical analysis for renewable energy projects, read part one and two of this blog series.
Questions? Contact Ken Elser to learn more or leave a comment below.