The FinTech company Pexapark has written a blog post which gives some guidelines and 4 steps to negotiate the best possible PPA agreement.
Written by Luca Pedretti, COO and Co-founder of Pexapark, www.pexapark.com
In the post-tariff era of renewable energy, asset managers actively need to take care of the energy sales side of their multi-million Euro investment themselves. They are tasked with finding, negotiating and closing a Power Purchase Agreement (PPA) with an offtaker, be it a utility or an industrial consumer. Negotiating a good PPA isn’t easy and requires experience and access to specialist analytics, but there are general guidelines you can follow to get the most optimal PPA done on your own.
1. Prepare yourself
Experience dictates that preparation is the key to securing the best possible PPA for your renewable asset. Start by really understanding the key energy risk parameters from your wind or solar park. Ask yourself some basic questions: What are your historical profile and imbalance costs? How accurate was your energy forecast? What is your expected energy production? Spend time researching publicly available information from energy exchanges, grid operators, regulatory bodies, industry associations and blogs. Understanding the details matter. There is a wealth of valuable content online which will provide good contextual insight to current market prices, trends and regulatory developments governing your energy sales. Finally, meet and talk with your fellow peers, build on each other’s market knowledge and experience.
2. Set yourself a framework
Before even thinking about writing a Request for Proposal or going straight out to the offtakers to ask for their terms, you need first to put yourself in the shoes of the wind farm owner. What can, and are, you willing to accept in terms of possible incomes and risks? Each decision comes with a tradeoff between the two. Your actionable framework should answer at least the following questions: What income volatility is acceptable without triggering serious consequences (e.g. infringing budget restrictions or triggering financing covenants)? Against which benchmark will the owner or investor value your actions in the future?
3. Execute your plan
When you have a clear picture of what is needed and desired to manage your renewable asset’s energy sales and risks, you are finally ready to take action. Frame a short and concise request for a proposal stipulating the main terms and conditions you want to have covered by the offtaker. The more information you provide on your needs, the better the offtaker can cater to it. Again, there are great internet resources and templates to help you structure your proposal.
Before sending your proposal, first try to build a rapport with the offtaker. Identify the person responsible, call to discuss your request and clarify any initial questions you or they might have.
If possible, engage 3-5 offtakers and reduce the possible candidates during the initial negotiations, aiming to have the two best offtakers in the game until the very end. A contract is binding only once it is signed, so you do not want to be caught by any surprise in negotiations with the offtaker at the very end.
A simple matrix comparing key commercial, operational and regulatory terms of the offers will help narrow down your selection. Many asset managers underrepresent credit quality and after-sales services in their decision framework. Simple hacks like a short check with a credit agency, asking for references from existing clients and contractual remedies like bank guarantees will eliminate most of the uncertainties faced in this field. Applying such a structured review of the PPA offers will help ensure no details of the agreement are overlooked.
4. Keep on monitoring
Now you have successfully performed your tasks and closed a PPA to secure your future energy sales. What should you do next? Lean back and wait for the end of the contract term? Depending on the type of PPA you signed, the attraction of taking it easy might be tempting, but even when you have entered into a long-term PPA you should keep close track of its absolute and relative performance. Keeping track of your energy revenues, costs and risks, as well as having your own power forecasts and price curves, is less effort and more cost effective than you might think. Having this data at hand will allow you to better engage with your offtaker on questions of performance, and will help you to build additional competence and knowledge of your energy sales.
Plus, as you will have discovered during your PPA process, having more data will certainly help you when you come to start your next round of PPA negotiations.
Written by Luca Pedretti, COO and Co-founder of Pexapark. If you want to know more about Pexapark and their services, please visit; www.pexapark.com