Connecting Renewables and the

Power Purchase Agreement

Tim Foster

2

SmartestEnergy

• Licensed Electricity Supplier

• Leading independent provider of Power Purchase

Agreements – short and long term

• 1200+MW, 350+ sites, 10% of the UK’s Renewable

Output

• CHP, AD, landfill, wind, waste to energy, mine

methane, hydro, biomass

• Supply Contracts – fixed price or flexible

• Load Management and Demand Side activities

• Our business is focused on power purchase

arrangements for the embedded generation sector

3

Overview

• Connecting to the Grid

– The Regulated Process

– Connection Offers

– Typical Technical Issues

• Metering

• Power Purchase Arrangements

4

Connecting to the Grid – The Regulated Process

• 14 Distribution Network Operators

(DNO)

• 1 Transmission GB System Operator

(NGETL) and 3 transmission owners

(NGETL, SP Transmission Ltd,

Scottish Hydro-Electric Transmission

Ltd)

• Licences to distribute / transmit

electricity - Regulated by Ofgem

• Remit to operate economically,

efficiently and in a non-discriminatory

fashion

5

The Connection Agreement

• Agreement between the generator and the Distribution Network Operator or The Transmission Network Owner that allows the import/export of electrical energy to/from a site

• DNOs / NGET obliged to offer terms to connect to network

• The Generator must submit competent application and pay fee

• DNO Obligated to make offer within 3 months

• Offer open for acceptance for 30 days or 3 months

• Disputes referred to Ofgem

• The Connection Offer includes:

– Outline of connection solution

– Outline of DNO works, reinforcements and construction programme

– Technical and communication requirements

– User’s construction obligations

– Outline of operational constraints

– Price

6

The changing shape of the network

Transmission-

connected

generator

Distribution

network

Transmission system

Grid supply point

Wind

farms

Customers/

PV generatorsCHP

Distribution

connected

generator

7

Distributed Generation Capacities

275 kV

132 kV

132 kV

33 kV

33 kV

11 kV

11 kV

400 V

Distribution

Transmission500 MW

20 MW

5 MW

5 kW

Typical

Connection

Voltage for

AD

Generators

8

Typical connection issues that are encountered

• Historical “passive” DNO network designs coupled with the

Proliferation of “distributed generation” can give rise to Network

constraints or reinforcement

• Historically burden of cost upon developers

– Move to “shallow-ish” charging helping certain developers.

• Some typical issues:

– Thermal ratings

– Voltage rise issues

– Fault level contribution

– Reverse power flows

• Unfortunately a potential embedded generator will pay to resolve

many of these issues

9

Thermal Characteristics and Limits

Transformers

Overhead line

• Overheating leads to insulation failure

• Reverse power flow capability?

Switchgear

• Overheating leads to insulation failure

Cables• Overheating leads to insulation failure

Safety clearance

10

Voltage Rise

Distance

Voltage

Max

MinSummer

Winter

No Generation

Distance

Voltage

Max

Min

Generation

Power Flow

11

Generation Contribution to Faults

• Contribution of current to a fault on network can lead to an

overstressing of existing switchgear and is a major limiting

factor to the connection of embedded generation

Fault Current

GGFault Currentg

Primary

Substation

12

It is never as simple as just plugging it in…..

• There is no such thing as a standard Grid Connection and costs will depend not only on the level/capacity of connection but also the “upgrade” works required

• Recent experiences suggest an average grid connection cost of £100,000 per MW but costs can be doubled or halved

• Check how much of the work is “contestable”

– Why pay the DNO for trench digging!

13

The Meter Operator Agreement

• Meter requirements depend on the generating capacity

– Greater than 30kW – a half-hourly meter (HH) is required

– Less than 30kW – a non half-hourly (NHH - monthly, seasonal or annual reads) is required

• NHH metering is arranged by your electricity supplier

• HH metering is the Generator’s responsibility

– The Generator must enter into a Meter Operator contract with their chosen meter supplier

– Western Power Distribution, Metering Services, SSE Metering Services, Siemens

14

Elements of the Power Purchase Agreement

• The Power Purchase Agreement values the revenue streams for a renewable generator

– Decision on type and term is usually dictated by the risk/reward appetite of the Financier

• The PPA articulates the price structure for the following key elements:

– Electricity (Power)

– Embedded benefits

– Climate Change Levy Exemption Certificates (LECs)

– Renewable Obligation Certificates (ROCs)

• The PPA will also document;

– Payment terms, transfer of benefits, change in law, early termination, generator obligations (forecasts), new benefits, limits of liability, dispute resolution, etc..

15

Electricity – Wholesale Prices

• For any PPA electricity

is priced/indexed to the

UK Wholesale

Electricity forward curve

• Prices are discounted

to take account of the

risks associated with

non-delivery of

generation output

(“imbalance”) and if

applicable any “floor

price” or structured

payment terms

UK Wholesale annual baseload electricity price

16

Electricity – Pricing Structures and Storage

• The relative value of electricity changes during the day and across months/seasons depending on the supply/demand balance

– Prices will often be in the form of a Seasonal Time of Day (SToD) structure

• The ability to store and deliver energy at a given time gives biogas a considerable advantage over other renewables

• Storage allows

– Guaranteed delivery

– Instant response to price triggers

0

20

40

60

80

100

120

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

Half-Hour Period

Avera

ge P

rice (

£/M

Wh

)

Weekday Weekend

17

Embedded Benefits

• An embedded generator receives a number of benefits because it is located within a distribution system

– Distribution and Transmission losses

– Distribution Use of System

– Transmission Use of System Charges (Triad)

– Balancing System Use of System charges

– Elexon Charges

• Embedded benefits typically add c.a. £1-2/MWh to the revenue stream for a generator

• Triad can be a significant windfall

– 2007/2008 triad charge for the South West is £23.77/kW

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

01 N

ov 0

5

08 N

ov 0

5

15 N

ov 0

5

22 N

ov 0

5

29 N

ov 0

5

06 D

ec 0

5

13 D

ec 0

5

20 D

ec 0

5

27 D

ec 0

5

03 Jan

06

10 Jan

06

17 Jan

06

24 Jan

06

31 Jan

06

07 F

eb 0

6

14 F

eb 0

6

21 F

eb 0

6

28 F

eb 0

6

Peak

Sys

tem

Dem

an

d (

MW

)

28th November

59,406MW

5th January

58,511MW

2nd February

58,660MW

18

Climate Change Levy

• Climate Change Levy was

introduced to encourage energy

efficiency

• Companies can comply to legislation

in a number of ways

– Pay the CCL – currently £4.30/MWh

(has risen by inflation from 1st April

2007)

– Enter into a negotiated agreement –

i.e. rebate of 80% of CCL

– Present a Levy Exemption Certificate

(LEC)

• LECs are generated by accredited

generation stations

– Renewable

– Good quality CHP

19

What is a ROC and how is the value of a ROC is Derived

• The Renewable Obligation

– Obligation on Electricity Suppliers to source an amount of their supply position from renewable sources

• The Obligation can be met by one, (or a combination) of two routes

– Purchase an amount of renewable output embodied in Renewable Obligation Certificates (ROCs)

– Pay the Buyout Price

• The value of a ROC is derived from two elements

– Buyout Price and Final share of the Buyout Fund

UK Demand 321,654,429 MWh

Obligation 15,761,067 MWh

ROCs Presented 10,855,848

Buyout £31.39

Recycle Fund £153,259,789

Recycle £14.12

ROC Value £45.51

20

ROC Out-turn Projections

• The future value of a ROC for each Compliance Period depends on:

– Size of the obligation for that year

– UK electricity demand

– Renewable energy output

• Load factor

• Weather

• Build rate

• Diversity

• Fuel diversion

– Most scenarios show that the UK is unlikely to meet it’s Renewable Obligation and therefore there will always be some recycle

21

The PPA - Electricity

• The PPA outlines the commitment to purchase output from the generator/facility over a term

• Electricity is generally purchased on a non-firm basis (i.e. variability risk priced in)

• Fixed Price PPA

– Multiple years (up to 3-5) are locked in at the start of the PPA

– Current market prices are c.a. £45+/MWh

– Prices can include embedded benefits

• Long Term PPA

– Can includes a floor price (c.a. £20-25/MWh)

– Electricity price indexed against an industry report NOT RPI

– Price set annually

– Discount to index typically 10-15%

22

The PPA – Embedded Benefits and LECs

• Embedded Benefits

– For fixed price PPAs Embedded Benefits are usually included in the price

– For long term PPAs or for new sites Embedded Benefits are “shared” between the Generator and Supplier

• typically 90%/10% of value received

– Triad Benefit is always “shared” between the Generator and Supplier

• typically 90%/10% of value received

• Levy Exemption Certificates (LECs)

– LECs are transferred monthly by the Generator to the Supplier

– Purchase price is a percentage of the prevailing value of the Climate Change Levy (CCL)

– Market price typically 85-90% of CCL

• c.a. £4.00/MWh

23

The PPA - ROCs

• Route to market is dependent on the risk/reward appetite of the generator (or more often the provider of the finance)

– ROCs are “sold” on a forward basis before the out-turn is published via two basic routes

– Both generator and purchaser are “estimating” the out-turn price in order to assess the most favourable route for selling/purchasing ROCs

• Fixed price

– fixed and final payment upon transfer of ROCs

– influenced by purchasers view of build rate, generation volumes, supplier default, cost of cash and margin view.

– Gives cash flow certainty but not necessarily full value

• Processing

– % buyout / %recycle (c.a. 90%/90%) or fixed fee taken from recycle (c.a. £2.50/ROC)

– Buyout payment made at transfer – recycle payment when Ofgem publish recycle fund (typically November after end of Compliance Period)

– Generator take the risk on recycle fund; i.e. build rate, generation volumes, supplier default.

24

Summary - Power Purchase Agreements

• The power purchase agreement encapsulates the risk/reward

aspirations of the generator and are constructed accordingly

• Output needs to be “sold” to a Licensed Electricity Supplier

• Current market prices are very buoyant and there is a great

incentive to build renewable energy generation plant

– Indicatively a three year fixed price PPA will deliver c.a. £90+/MWh

(assuming 1 ROC/MWh)

– This equates to £350k/year of income for a 500kW AD plant (1.5MW

wind turbine) exporting to the grid

– Energy use on site also offers big savings as you are avoiding

distribution and transmission costs

• Indicative prices and structures are easy to provide and early

engagement with an electricity supplier is very useful

25

SmartestEnergy

• For indicative prices, contractual terms,

further information or a general

discussion please contact;

• Tim Foster – Sales & Marketing

Manager

– 0207 4480900

– tim-foster@smartestenergy.com

– www.smartestenergy.com

• SmartestEnergy Informer keeps you in

touch with Industry news and market

information