The Challenges of Forecasted Electricity Price Increases
Would you like an opportunity to mitigate against forecast long term increases in electricity pricing and procure renewable energy?
The future of Electricity Pricing is looking pretty bleak and is forecast to increase over the next 5-10 years, with all coal-fired generators scheduled to be retired by 2030. Snowy 2 was to be the saviour with an additional 2GW generation coming online in 2024 to offset some of the losses, but this has now been pushed to the end of 2029. All new Generations will be renewable, primarily solar, wind or battery storage, which have a higher cost of generation than Coal, and there is not yet sufficient generation planned or under development to replace the generation that will be retired.
Power Purchase Agreement – A Renewable Solution
An emerging trend in the market is to use a Power Purchase Agreement (PPA) for a long-term contract that provides some certainty on price and secures power from renewable generation assets. While PPAs can be used to purchase any kind of energy, in more recent years they have become closely associated with the supply of renewable energy such as solar and wind, and the development of new renewables facilities.
PPAs are one of the mechanisms through which commercial and industrial energy users can reduce the power grid’s reliance on traditional coal-fired electricity through investment in renewable energy generation and developments, but also provide some energy price security.
There are 2 types of PPA
- A ‘behind the meter’ PPA is a physical PPA such as a solar system on a customer site.
- The other is an ‘In front of the meter’ PPAs where the energy generator isn’t in the same vicinity as the consumer, this is the area getting some growth and showing an opportunity that we are seeking to explore.
Within these PPA constructs, there are 2 ways to implement agreements:
- Wholesale – a direct, financial agreement between an electricity generator and a customer which does not include retail supply; and
- Retail – an arrangement between an electricity generator and a customer, organised by a retailer. The generator agrees on an energy price with the retailer and the retailer passes it on to the customer.
Few customers have the ability or resources to manage a Wholesale PPA, as it is unlikely to have a profile where the renewable generator load aligns with the customer load, so a separate Retail contract is still required. Wholesale PPA’s are extremely complex.
Alternatively, customers can leverage a Retail PPA where the Wholesale PPA has a Retail agreement wrapped around it to cover load that the Renewable Generator does not align with and also covers Network and other Regulatory Charges. The Retailer acts as the bridge between the renewable energy project and the customer, removing the complexity of load profile alignment, agreements allow customers to have fixed electricity rates that incorporate the renewable energy price and are firmed to their load.
Customers can readily secure a PPA from most retailers within 1 year of the start date of the contract, however, parties can sign a PPA before the power station is built as a way to underpin and secure financial backing for the project. Often securing a contract for a power station that is under construction, and greater than 12 months from completion, will see more favourable rates secured. Once a generator is within 12 months of completion, they can trade futures in the market at current rates and the opportunity for more favourable pricing is lost.
NES is currently seeking expressions of interest from customers who are keen to secure some price certainty for the next 7-10 years by securing power from renewable sources and working towards long-term emissions reductions.
We are aggregating interested customer loads to release a Request For Proposal to Retailers in coming weeks for review, with a view to requesting “Best and Final” offers during October 2023 for a start date of 1 January 2025. Customers with contracts not aligned to 1 January 2025 will have tailored strategies implemented to facilitate alignment to the aggregated agreement.
If you are interested in participating or want to discuss further, please contact Mick Robinson, [email protected] no later than 11th August.