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As an energy buyer, after months of hard work to secure and sign a power purchase agreement (PPA), it may feel like you’ve finally crossed the finish line of a long race. But entering into a PPA is more similar to completing the first stage of a triathlon. It’s an important milestone, but there’s still more distance to cover. Here are five important things to know and expect after signing a PPA to cross the true finish line with a strong performance.
1. Countdown to commercial operation
The commercial operation date, or COD, is when the solar or wind facility is officially operational and sending energy to the grid. In a PPA contract, there are typically two dates to pay attention to after execution: the targeted COD and the guaranteed COD. In the event that the facility is not operational by the targeted COD, the seller typically has to start paying you delay damages for every day of delay (unless the delay is due to a force majeure event). If it is not operational by the guaranteed COD, you have the right to terminate the PPA, and the seller has to pay you termination damages. The day after the project reaches COD is when the settlement term kicks off.
2. Good PPA management maximizes impact — and it starts sooner than you think
Establishing good habits when it comes to PPA management helps ensure that your company’s environmental and financial performance stays healthy. Since PPAs are long-term contracts — spanning 12-20 years on average — setting up good habits leads to long-lasting impact. This includes taking proactive steps to:
- check market forecasts regularly,
- compare actual energy generation and energy prices against forecasts,
- verify financial settlements for accuracy,
- track renewable energy certificates (RECs) generated, and
- measure greenhouse gas emissions avoided.
By taking these measures, you ensure that your company stays on track toward achieving its sustainability goals by receiving the RECs it’s paying for. You’ll also be able to catch financial settlement errors, and know if you need to take action to mitigate risk in your PPA portfolio.
Furthermore, a common misconception is that PPA management should start after the wind or solar project becomes operational. However, there is usually a one-to-two year gap between the time a PPA gets signed and when a project is finished being built. Companies that want to stay one step ahead should not wait. Instead, by checking market price forecasts in the interim, companies can get a sense of how their PPA will perform. Based on expected performance, they can make strategic decisions about their next PPA, such as selecting a certain type of energy or location that maximizes environmental impact and financial value, and diversifies risk. This is particularly important for corporations with large energy loads that need to assemble a portfolio of PPAs to meet their sustainability targets.
3. Play the long game to manage market uncertainty
Energy markets can fluctuate since they are affected by events such as extreme weather, supply chain disruptions, and changes to government regulations — all of which we have seen in recent years. For example, COVID and other factors have strained solar and wind supply chains, contributing to a 14.4% year-over-year increase in solar and wind PPA prices in North America. However, the good news is that the renewable energy industry is resilient and has rebounded after setbacks time and time again.
That said, there are four key strategies to preparing for and managing market uncertainty:
- Stay focused on long-term trends. In a sense, PPAs should be treated like 401K retirement funds. You should focus more on PPA performance over the lifetime of the contract than monthly fluctuations, especially when it comes to generation. Weather patterns can cause any given month to deviate from expected generation because it’s sunnier or windier than average, but on the whole, trends should balance out. However, if you’re seeing consistent under-performance, it could be a sign that you’re being impacted by operational risk, not weather risk. Your PPA should have production or availability guarantees, as well as seller default triggers for extreme under-performance. In addition, contract structures such as proxy generation settled PPAs can help buyers mitigate operational risk exposure.
- Build a diverse portfolio of PPAs that balances out risk. Much like a 401K is built to balance risk with returns, a portfolio of PPAs can help smooth out surges or dips in energy pricing. For instance, a company with a solar PPA in Texas (ERCOT) may want to consider balancing their portfolio with a wind project in Indiana (MISO), which will generate at different times of the day, will not be subject to the same regulatory/market risks, and may correlate better to geographically disperse energy consumption.
- While staying focused on long-term trends, it is still important to check short-term market forecasts frequently. By doing this, PPA managers can anticipate whether they’ll be on-budget with financial settlements that month, and better plan for the next month. While some companies can invest staff time into DIY PPA management, many others don’t have that option. For those looking for a plug-and-play solution, LevelTen’s Performance Monitoring Software may be a good option. It provides insight into the impact of forecast-shifting events in near-real time. And, it provides access to multiple forecast curves, empowering PPA managers to see how different assumptions change expected outcomes.
- PPA management often involves or impacts stakeholders across teams such as finance, energy and sustainability. Set appropriate expectations and communicate frequently with all stakeholders to ensure that there are no surprises.
4. Trust but verify financial settlements: Errors happen and they can be costly
Once projects become operational, it can be tempting to treat monthly settlements as a perfunctory task: An act of cutting a check for the settlement invoice and balancing the budget. However, financial settlement errors do happen and they aren’t always caught by invoicing companies. For example, one common error is that the wrong wholesale energy market price can be associated with a specific hour or hours of generation. That’s why it’s important to verify settlements by checking wholesale energy market prices in your invoice against actual prices published by the relevant market operator, multiplying them with energy generated, and calculating the settlement values.
Verifying financial settlements is a time-intensive task that involves cross-checking different spreadsheets. But, since errors can lead to significant underpayment to companies, it’s a best practice to follow. There are solutions like LevelTen’s Performance Monitoring software that verify financial settlements, saving hours of work poring through spreadsheets. For example, LevelTen’s Performance Monitoring Software helped one Fortune 100 client catch a clerical error that resulted in an under payment of more than $70,000 in a single month. Our software can also be customized to the terms of the PPA, simplifying complex calculations that would be required for new contract structures such as basis differential, upside sharing, and solar combined with battery storage. It also provides daily production and market price data the day following actuals. In other words, you don’t have to wait until next month to see how your PPA performed this month.
5. Environmental impact reporting is just as important as financial reporting
Most companies that enter into PPAs are motivated by emissions reduction goals, and many are holding themselves accountable by participating in programs such as the RE100, Science-Based Targets Initiative, and the CDP. Each program has its own set of reporting requirements, usually on an annual basis. To achieve their renewable energy commitments, companies should track the RECs they earn throughout the year. This enables companies to identify potential shortfalls in RECs early on, enabling them to take action before end-of-year, when RECs typically become more competitive and expensive.
Outside of compliance-motivated reporting, companies should also view environmental impact reporting as a reputational opportunity. More than ever, consumers, investors and policy makers are demanding climate action from companies. Companies that can demonstrate that they have decarbonized their energy supply have a powerful story to tell. LevelTen’s Performance Monitoring Software simplifies Scope 2 reporting by providing a one-click view of RECs generated and emissions reduced. Seamlessly integrated within Performance Monitoring are industry-leading carbon accounting tools WattTime and Tomorrow, which offer advanced insights into marginal emissions impact.
Download the LevelTen Energy Performance Monitoring One-Sheet
If you’re looking for a better way to manage your PPAs or want to learn more about LevelTen’s Performance Monitoring Software, please contact us today for a free consultation. Or, complete the form below to download our Performance Monitoring one-sheet.
