Since 2016, the corporate Power Purchase Agreement (PPA) market has facilitated approximately 3,600 MW in generation capacity across Australia and with volumes increasing year-on-year. Contracted prices for large corporate users are averaging around $65/MWh over a typical duration of 10 years, or up to $20 /MWh higher if firming is required. Prior to firming costs, these prices represent an apparent discount, ranging between approximately 10% to 20% to the retail price in New South Wales or Victoria today.
However, prices for wholesale electricity over the next three years are declining, with forward energy contracts for Calendar year 2021 ranging between 13% to 22% below Calendar 2020 prices, currently priced at an average of $72/MWh across state markets. Energy Action also expects that prices will continue to decline beyond 2022 as more renewables compete with base load generation with price volatility expected to remain a key feature of the market whilst this transition takes place.
This view is reflected in other long-term industry forecasts, with Bloomberg New Energy Finance forecasting that by 2030 the cost of utility scale solar generation will fall by around 20% in real terms from today’s levels and decline by a further 10% by 2040. This indicates that a long term PPA struck at today’s PPA prices would prove to be uncompetitive in the longer term.
Under these conditions, the commercial viability of aggressively priced and structured PPAs, signed at today’s rates, would be compromised.
Energy Action Chief Executive Officer, John Huggart, said: “We are seeing some market participants facilitating corporate PPAs that push reputable corporates to take on unacceptable commercial risks as they pursue greater price and regulatory certainty and lower emissions. The adverse impact of these risks is likely to be felt mostly amongst medium sized corporates.
“Our market intelligence confirms the presence of live PPA offers out to large business energy consumers priced above the current wholesale electricity rate from day 1 with a long-term escalating cost path. Given wholesale prices are likely to decrease from here, this presents a significant risk from a pure pricing perspective.”
“While Energy Action fully supports the move to a lower carbon future and the associated investment into renewable generation infrastructure, we caution against entering into PPAs without fully considering the longer-term risks. For example, PPAs can expose corporates to inflexible pricing and often unknown firming costs, long-dated contract terms and other project and operational risks.
“Most concerning is that there is the real possibility that energy prices will fall sooner than many energy market participants think, which means that the PPA price could be ‘out of the money’ before the ink dries. This could put significant financial pressure on otherwise stable businesses that can’t benefit from longer-term price relief. These businesses would become less competitive within their industry segment, with input costs being higher than their direct competitors.
“Before entering into a PPA, corporates should carefully examine the terms of the agreement and seek to evaluate their options and mitigate any associated risks. Companies can also consider self-generation alternatives and progressive purchasing agreements which allow quarterly price resets and achieve dollar cost averaging,” Mr Huggart added.
We intend on holding an exclusive Client Briefing Session in September, discussing the Power & Perils of A Corporate PPA. If you're interested in attending please follow the link and register your interest.