Cornwall Insight has been examining the fast-developing market for flexible asset Power Purchase Agreements (PPAs) with a new report, The Flexible PPA Market Report, specifically launched to cover this. Through our leading market research and regulatory expertise, complemented by in-depth discussions with a range of market participants, the report encapsulates the sector, looking at the size of the market, typical terms and profiling active offtakers and their services. This blog provides five key trends identified over the course of our research.
The sector is fundamentally different than that for renewables PPAs
There are notably fewer players compared to the 40-45 offtakers active in the renewable PPA market and, of the active parties, there is a considerable variation in service offerings.
Managing the PPAs is much more resource-intensive, especially under revenue share agreements when full market monitoring and dispatch decisions may sit with the offtakers. As such, service fees and discounts against wholesale prices can be higher than typical renewables PPAs and the majority of offtakers report very small margins achieved on each contract.
Scale is important
Our report groups offtakers into four broad categories; operating at scale, established offering, new/developing and yet to launch. There are up to 20 participants actively looking to sign flexible asset PPAs, but the market is dominated at present by four established players that we have classified as “operating at scale.” Achieving economies of scale was cited as an important element in building a successful flexible asset PPA offering, as the upfront capital and resourcing costs associated with automation and new value-add services can be more easily justified.
PPAs are typically shorter and simpler
The prevailing trend for flexible asset PPAs is to be shorter in length than typical renewable asset PPAs. While some offtakers are prepared to offer long-term deals of 10-15 years, the most common products were in the 1-3 year range. This is due to the financing arrangements for many flexibility assets being equity-backed but also the competitive nature of the market, with generators willing to re-tender regularly to ensure they are receiving the maximum revenue from their assets.
The PPAs themselves tend to be simpler than the average renewable asset PPAs too. Again, equity-backed financing has helped here, but so has the complex technical nature of projects and how they operate. Revenue streams in the market are closely aligned to operational parameters and warranties, with the due diligence involved often expensive. Therefore, many generators choose to sign simpler PPAs to negate these costs, especially when project margins are already tight.
Service offering is more important than price
While generators are of course sensitive to price, offtakers report that the service offering is ultimately the most important factor in winning and retaining business. Optimisation packages, access to multiple revenue streams and a strong track record on achieved revenues are the most attractive selling points for generators, even if the latter can be hard to demonstrate.
Although a number of offtakers are still developing or refining their optimisation packages, all participants agreed that the capability to offer within-day trading and/or participation in the Balancing Mechanism were growing priorities for generators.
Revenue comes from a range of sources, which is set to broaden further still
Offtakers reported that the churn of wholesale power contracts on the forward curve remains the foundational revenue stream for flexible assets, with day-ahead and intra-day trading taking precedence when temperature and demand conditions align. Several offtakers reported that they would assist clients with winning Capacity Market and Balancing Services contracts, but these aspects may be undertaken by the generators themselves. Net Imbalance Volume (NIV) chasing and participation in the Balancing Mechanism (BM) are also requests that are becoming more common.
Going forward, offtakers reported that they are keeping a close eye on developments that may offer additional revenues to generators in the near term; including wider BM access, DSO flexibility services and Project TERRE.
Our new Flexible PPA Market Report is available for subscription and looks at:
- the size of the market
- typical terms and contract lengths
- profiling active offtakers and their services
- market share of offtakers
- sector trends identified through in-depth discussions with market participants