Power Purchasing Agreements (PPA) pricing structures are often more daunting than they should be. As power prices fluctuate, alternative pricing structures become more popular. At Zeigo we aim to streamline the PPA process, so we have come up with a simple guide to outline the different pricing structures.
First things first a few definitions:
The Buyer is a corporate off-taker of energy
The Seller is a generator that is selling renewable energy to the grid.
In illiquid markets, only fixed price physical PPAs can exist. However, Virtual (VPPA) and Physical PPAs in liquid power markets can be enacted with any of the following structures as follows (excepting Reverse Collar, which is exclusive to VPPA).
The different Pricing Structures:
1.1 Fully Fixed: The price is fixed at the beginning of the contract and does not change for its duration. With this structure, there is less risk involved, although the price risk falls on the buyer.
1.1 Fully Fixed: Pros and Cons
1.2 Fixed with Escalation (stepped): year 1 energy price is pre-agreed. Price is then escalated by a pre-agreed rate or external benchmark on an annual basis. This annual escalation may be restricted to an initial contract period e.g 3-5 years. The price risk falls on the buyer.
1.2 Fixed with Escalation (stepped): Pros and Cons
1.3 Fixed with Inflation Indexation: The price rises annually with inflation according to a publicly produced inflationary index as determined by the contract.
2. Floors, Caps, and Collars
An energy minimum and maximum can be agreed, the buyer will pay the market price but costs are capped at the agreed ceiling and floor prices even if the market goes above or below.
2.1 Floors, Caps, and Collars
This structure functions the same as discount to market with collar, although there is no discount to market. That is – the price will follow market rates, if they do not rise above the cap or fall below the floor.
2.1 Floors, Caps, and Collars: Pros and Cons
2.2 Reverse Collar: Exclusive to VPPAs, If the market price is below the strike price and above the price floor price, the buyer pays the difference between the market price and the PPA strike price. If the market price is above the strike price and below the price cap, the seller will pay the buyer the difference between the market price and the strike price.
3.1 Discount to market The price is fixed at a constant discount in relation to the market price, spot prices, or forward. The seller bears the brunt of the price risk.
3.1 Discount to market: Pros and Cons
3.2 Discount to market with floor: The contract includes a price floor which the buyer agrees to not pay less than, ensuring greater bankability of a new build asset for the seller.
3.3 Discount to market with collar: The contract includes a cap price along with the floor price, to limit the Buyer’s exposure to price spikes. The floor price may be higher as a result.
4. Hybrid Structures: This structure refers to any contract that involves a combination of the above structures.
- % of output: A combination of fixed and floating structures are determined by percentage of output (e.g. 60% fixed, 40% floating).
- Over time: A combination of fixed and floating structures are determined by a set number of years (e.g. 4 years fixed, 6 years floating).
5. Clawback: The buyer pays a fixed price but pays less when market prices fall below this price. If market prices rise again, the buyer will pay the seller above the fixed price only so far as the seller has clawed back the same amount that the buyer has made from the initial drop. The buyer then goes back to paying the fixed price. This structure also includes a loss cap which, when hit, requires the buyer to go back to paying the original fixed price.
The continued uptake of PPAs will see an increase in the alternative pricing structures. Pricing structures are unique to the energy buyer’s needs. Different factors play into choosing which PPA pricing structure is right for them such as risk sensitivity, credit score, and volume needed. The Zeigo platform helps you navigate the intricacies of different PPA pricing structures. By requesting access to the Zeigo platform here you can start your PPA journey.