Glossary of Renewable Energy Procurement Terms
March 08, 2019
Anyone who is researching power purchase agreements (PPAs) for the first time is going to be hit with a barrage of jargon, acronyms and legalese. To help, we’ve compiled a glossary of terms related to renewable energy procurement. If you have questions about any of these terms, we’d be happy to help; just email firstname.lastname@example.org.
Energy Market Terms & Definitions
ISO or RTO
Independent System Operator (ISO) or Regional Transmission Operator (RTO) – a deregulated, neutral party responsible for the management and control of the electric transmission grid in a defined geographic region. ISOs/RTOs have transparent, auditable market pricing that allows buyers and sellers to agree on the settled value of VPPAs.
This is a specific point on the electric grid to which the project is connected. ISOs/RTOs send unique market price signals at each project node, as determined by constraints and congestion on the transmission system.
This is the trading hub that the contract will be settling at financially. Each ISO has multiple trading hubs. Hubs are typically an aggregation of hundreds of individual pricing nodes in a wide geographic region, which helps add durability to the forecasted price. Different hubs will have different forecasted prices and therefore the hub selected has a significant effect on the forecasted value of a contract.
Traded price for power at a given location and a specific future date. Though this is not tailored to any given project’s generation profile, it is the best indicator available of the market’s risk-adjusted expectation of future prices based on trades.
Project-Related Terms & Definitions
CO2e Emissions Displaced
This metric estimates the amount of greenhouse gasses that will no longer be emitted by power plants on the grid once this project commences operation. Certain projects have higher CO2e emission displacement factors. LevelTen calculates emissions displaced using the EPA’s AVERT model.
Commercial Operation Date (C.O.D.)
The date on which a seller notifies a buyer that a generating facility is operating and able to produce and deliver energy and any associated environmental attributes to the buyer under the terms of a commercial contract (e.g. PPA). This allows buyers to set their expectations for when a project will begin delivering energy and environmental attributes. It also holds the seller responsible for managing to those expectations and to stay on schedule during their development and construction of a renewable energy project. Often, if a contracted project is not operational by the C.O.D., the buyer will be eligible to collect damages from the seller.
Project Total Size
The maximum output (in watts, kilowatts, megawatts, etc.) the project is capable of producing at any given moment in time. Generally, larger projects have better economies of scale compared to smaller projects of like-technologies in similar localities. The project size is commonly referred to as “Capacity” or “Nameplate Capacity.”
Projected Annual Output
The amount of total energy (expressed in kWh or MWh) that a project is expected to generate in an average year. In any given year output averages will vary by 3-5% of the expected output. The output from solar panels degrades over time as the equipment ages and becomes less efficient (at ~0.5% per year), while wind turbines do not experience degradation, aside from routine operations and maintenance.
How the project will generate power. Solar and wind make up the bulk of renewable energy projects being built today. Projects with combined storage are also becoming more common.
Power Purchase Agreement Terms & Definitions
A commitment from the seller that the project will be available to generate energy for a certain percentage of the year (usually between 85% – 95%).
A letter of credit, guaranty, or other financial collateral provided by the buyer for the benefit of the seller to be drawn upon during cash shortfalls or default events. Buyers with investment grade credit ratings typically do not need to provide an additional form of Buyer’s Security.
How often the project/buyer calculate the differences (either positive or negative) in the PPA price and wholesale electricity market price. Calculation Intervals are typically synchronized with the interval at which the ISO/RTO settles its Day Ahead or Real Time markets.
Payments due to the buyer if the seller does not complete the project to the expected size. These penalize the seller for underbuilding the project.
This is the annual percentage the VPPA price will increase. LevelTen’s Marketplace standard is 0%.
Market Price Floor
This is the wholesale market price (or floating price) below which the buyer will not make payments. The Market Price Floor caps a buyer’s downside wholesale market price exposure by limiting the buyer’s VPPA payments to the VPPA Price plus the Market Price Floor.
This is the wholesale market price (or floating price) below which the VPPA will no longer settle (i.e. the trade quantity of MWh in the PPA will equal 0). This caps a buyer’s downside for wholesale market price exposure.
A letter of credit, guaranty, or other financial collateral provided by the seller for the benefit of the buyer to be drawn upon during cash shortfalls or default events. The seller is usually required to post within 30 days of executing the PPA and maintain pre- and post-COD.
Contracts with as-generated offers will settle against the project’s generation as metered on site and represented by the 8760 Profile uploaded by the developer. Fixed shape offers will settle against the pre-defined 12×24 shape as uploaded by the developer.
The length (in years) of the proposed power purchase agreement. The buyer will be agreeing to purchase power for the length of the term. Most projects will offer similar term length options.
Finance Terms & Definitions
The rate at which future expected cashflows are discounted. This allows for comparison of cashflows closer to the present day with those further into the future.
Forecasted Revenue NPV
The sum of the buyer’s PPA revenue derived from settling financially at the agreed upon settlement location over the life of a PPA discounted to present value. This gives a measure of the revenue (before netting out PPA costs) of a PPA over its contract life, discounted to present value.
PPA Cost NPV
The sum of the PPA price multiplied by the volume of energy generated over the life of a PPA, discounted to present value. This gives a measure of the cost (before netting out PPA revenues) of a PPA over its contract life, discounted to present value.
Still have questions? LevelTen Energy has a team of industry experts who can help. Don’t hesitate to reach out.