The rise of hybrid PPAs in the renewables industry

Leaders in renewable energy transitions around the world all face a similar challenge: how to maintain a stable grid when it is powered by intermittent renewables resources such as wind and solar. 

It is because of this growing necessity in various energy markets that energy storage solutions have risen in importance and are now recognised as critical components of any successful plan to shift to renewables, writes Jack Rankin.

The rapid growth of the Battery and Energy Storage Systems (BESS) market, designed to store substantial energy volumes, has revolutionised the renewables landscape. 

By capturing surplus energy generated by renewables during peak periods, energy storage enables power grids to access these reserves during periods of low generation, effectively mitigating the intermittent nature that has traditionally plagued renewable sources.

Following the widespread deployment of standalone storage assets that rapidly spring into action when the grid requires support, a new phase of renewables-plus-storage is now on the verge of becoming mainstream. 

While the phrase ‘renewables-plus-storage co-location’ is now common in the industry, the convergence of these two distinct business models presents a series of intricate challenges that must be addressed – primarily, how co-located assets are monetised.

Power purchase agreements (PPAs) have grown significantly as the energy contracts of choice. However, in the dynamic landscape of renewable energy, the tide of innovation has ushered in a new era of energy procurement and investment strategies. 

At the forefront of this transformation are hybrid Power Purchase Agreements (hPPAs), a new type of agreement that has gained substantial momentum due to its potential to both optimise value and address the multifaceted complexities inherent in the renewables market.

The benefits and challenges of hybrid PPAs

Research has found significant potential in hybrid PPAs. 

A notable prediction made in a recent European PPA Market Outlook 2023 report is the emergence of renewables-plus-storage projects, setting the stage for the ascendancy of hybrid PPAs. 

The realization of this prediction is now evident, with hybrid PPAs starting to take centre stage as a powerful mechanism for harmonising the benefits of co-located energy assets. Much of the market, however, remains uninformed on the different possible types of hybrid PPAs.

The interest in hybrid PPAs was highlighted in a recent survey conducted by Pexapark on renewables-plus-storage co-location. The survey findings yielded crucial insights into the foremost challenges industry stakeholders are encountering. 

Among these, over 50% of respondents identified revenue modeling as the most formidable challenge in co-located projects. The complexity of dissecting and quantifying revenue streams stemming from the interplay of multiple contracts has emerged as a significant obstacle. 

As such, it is important to understand the various types of hybrid PPAs and how each scenario impacts pricing. Below, we look at three types of hybrid PPAs and the benefits and drawbacks of each.

Renewable PPA & Storage Capacity Agreement/Optimisation Agreement

This hybrid PPA scenario involves two separate contracts: The conventional renewable PPA for the generation asset and a separate agreement for the storage asset. 

These assets function autonomously, driven by separate contractual frameworks while reaping the technical and financial benefits of being in the same location. This is beneficial as it makes identifying the value generated by each asset a much simpler task, which in turn makes financing of the assets more straight forward.

However, the route to harnessing these benefits is not free from challenges. Ensuring the harmonious coexistence of two independent contracts requires extensive planning and execution. For instance, businesses must have the strategic foresight to be able to address scenarios where the generation asset impedes interconnection and affects the storage asset’s export capabilities.

This hybrid PPA is also quite flexible regarding the separate contract for the storage asset, which can be either an ‘optimisation agreement’ or a ‘storage capacity agreement’. 

An Optimisation Agreement delegates the bidding strategy to storage optimization companies, harnessing grid services efficiently. Conversely, the Storage Capacity Agreement involves the buyer facilitating the readiness of the storage asset to meet his needs, akin to a rental service catering to third-party demands.

Shaped renewable PPAs

The ‘shaped renewable PPA’ stands as the second kind of hybrid arrangement. Under its umbrella, two assets converge with shared contractual agreements, creating a hybrid shaped pay-as-produced (PAP) PPA. This distinctive structure is meticulously designed to mirror the demands of specific buyers, aligning with their preferences for profiles akin to fixed-hourly delivery or baseload output.

What sets shaped renewable PPAs apart is their potential for interoperability across various systems. This structure relies on using storage strategically, which not only mitigates profile and volume risks but also delivers a ‘shaped’ energy profile. As a result, the seller embraces the profile and volume risk while harnessing the prowess of storage to temper these uncertainties.

The intricacies of pricing in this model reflect its flexibility. Unlike traditional fixed pricing, the shaped renewable PPA leverages variable pricing, assigning distinct values to each delivered MWh based on timing. This dynamic pricing mechanism ensures that potentially, every hour could bear a different price tag contingent on energy delivery timing.

The allure of such a structure holds profound implications for potential buyers. Corporates with an interest in 24/7 energy delivery find value in the hourly matching of green energy throughout the day. Furthermore, the paradigm shift towards shaping portfolios with a blend of solar, wind, and storage holds the promise of delivering continuous power to corporates.

Shaped renewable PPAs offer a multitude of advantages. Sellers are able to command a premium for baseload delivery while strategically mitigating profile and volume risk. There are also different options for how the energy can be delivered – either physically, or through financial interaction with the spot market.

Despite these benefits, there are still downsides to this type of hybrid PPA structure. The inherent volatility introduces an element of price risk, especially in settling open positions in the spot market. The dynamics between the two assets needs requires significant expertise. An additional negative for the asset owner is that extra arrangements may be needed to use the storage asset when the buyer does not need it.

Blended renewable and storage premium PPAs

Much like the aforementioned shaped renewable PPAs, blended renewable & storage premium PPAs adopt a Pay-as-Produced (PAP) volume structure and merge the contractual frameworks of two assets. Unlike its predecessors, however, this hybrid model introduces a premium rate for all the MWh to be delivered. For paying this premium, the buyer is given the liberty to tailor the charge/discharge schedule of the storage facility throughout the tenure of the PPA entirely to their own needs.

This type of hybrid PPA structure is beneficial for parties that seek dynamic control over energy delivery timings. Utilities, traders, and energy-intensive corporates are able to easily capitalise on the flexibility it offers. 

For utilities and traders, access to the storage asset for trading purposes is of paramount interest. This hybrid model effectively emulates the benefits of a separate floor-price optimization agreement, eliminating the need for additional contractual complexities.

Energy-intensive corporates with time-sensitive energy needs would also benefit from this structure and be willing to pay a premium for the privilege of receiving an optimized shape. 

This optimisation is especially useful for cost savings, as it gives corporates the option to avoid having to procure energy during peak hours when prices surge. 

For sellers, the benefit of blended renewable & storage premium PPAs reside in their inherent simplicity. It essentially amalgamates the essence of a Premium PAP, affording clarity and streamlined comprehension. Sellers shield themselves from price, volume, and profile risks, ensuring a harmonious amalgamation of revenue streams.

Hybrid PPAs – The path towards a resilient energy future

The increased focus on hybrid PPAs heralds a paradigm shift in the realm of renewable energy contracting. Beyond co-locating assets, these innovative structures represent a holistic approach to energy procurement, where transparency, collaboration, and tailored solutions merge to unlock maximum value. 

As the insights from Pexapark’s survey show, revenue modeling and contract relationships emerge as pivotal points of focus. Hybrid PPAs offer companies the tools to tailor their energy procurement strategies to match their unique preferences. 

In a rapidly evolving energy landscape, it is imperative for the market to be educated on how to benefit the most from their co-located assets. By unlocking these benefits fully, hybrid PPAs solve the intermittency issues that have plagued renewable energy sources for so long. 

As hybrid PPAs persist in driving transformation within the energy sphere, an educated market shapes a future characterized by increased sustainability, efficiency, and adaptability to the ever-evolving demands of the renewable energy sector. (Courtesy www.powerengineeringint.com)