This article takes a brief look at the state of the wholesale market, and particularly market volatility, and argues that the use of a long term fixed price can reduce energy consumers’ exposure to market volatility, which has shown signs of rising.
It focuses on Power Purchase Agreements (PPAs) which are becoming increasingly price competitive and offer corporates direct access to renewable energy supply.
Evolving UK power market enhances wholesale market volatility
The UK electricity market is undergoing significant transformation as we transition away from fossil fuels to a low-carbon economy. In addition to political motivation to change the generation mix, technological innovations are further driving the electrification of transport and heat creating increasing demand for electricity.
As wholesale electricity prices are determined by supply and demand of electricity, with significant structural changes already taking place and anticipated, the result is potential significant price uncertainty over long-term UK electricity prices. Indeed, this uncertainty has already been observed in the volatility of the wholesale prices, particularly since 2014 (see figure one).
Volatility in the wholesale electricity market is a major risk to both generators and consumers. Figure one shows this volatility in the forward baseload power contract over the last ten years — the rolling average of the front two seasons. For a large 100GWh electricity consumer for example, this volatility represents a £6million variation per annum.
Figure one: Front annual baseload power prices and volatility
Long-term price certainty and support the battle against climate change via a Power Purchase Agreement (PPA)
One of the keys to prudent price risk management is diversification. Incorporating long term hedges into this exposure is an effective way to spread the commodity risk.
A Corporate PPA is a contract between a renewable electricity generator and a business consumer to purchase renewable electricity as it is generated. Corporate PPAs are traditionally long-term in tenor (duration) and at a fixed negotiated price. PPAs bring two key benefits to both generator and consumer:
- first is the fixed price element, which provides both parties with a long-term hedge to mitigate their exposure to an increasingly volatile commodity market;
- second is that a PPA is a way for consumers to procure renewable energy direct from a generator which allows the consumers a more tangible way to demonstrate that they are contributing to a low carbon future and making steps to become more sustainable.
The PPA market in the UK is well established. Historically, PPA prices have been set at a comfortable premium to the wholesale market. But with falling renewable generation costs and a relative abundance of renewable projects this premium has been pared. We are now seeing projects being offered for long-term agreements in the £40-50MWh range — rising with inflation. Annual wholesale baseload prices are currently trading in the £50-65/MWh range, in comparison. Perhaps the most impressive thing we have seen in recent months is that many new projects are able to offer these prices in the absence of government subsidies — namely the Renewable Obligation.
With wholesale market prices rising again, we are naturally starting to see a considerable increase in interest in PPAs from electricity consumers. Not only for longer-term agreements but also for shorter-term duration contracts, albeit at a slightly higher price than a longer-term agreement. These changes in PPA prices and durations highlight a shift towards greater flexibility within the wider PPA market and potentially a broader scope for manoeuvrability when negotiating the terms of an agreement.
If you are interested in a PPA then please contact us. Mitie Energy are currently marketing two live PPA opportunities from wind as well as landfill gas and have links to a wide range of reliable and experienced developers offering PPAs from other sources of generation as well.