Tag: PPA

Winter Storm Fern packed a punch last month, dumping well over a foot of snow across parts of the Northeast, and causing around an inch of ice accumulation through parts of the Southern Plains and Southeast. Temperatures plummeted, and approximately 1 million people were left without power.

But the real story of Winter Storm Fern? Power prices. 

The storm demonstrated just how much influence wind, solar, and storage resources have on price formation. Given the high solar and wind penetration, we had our eyes on ERCOT, Texas’s grid. Would solar and wind underperform, pushing expensive natural gas and peaker plants online?

Winter Storm Fern also exposed a critical truth: fuel type dictates price risk during climate extremes. As heat usage spiked, we saw a massive price divergence between two distinct hubs in PJM – which spans from New Jersey down to West Virginia, and as far west as Chicago. This revealed the vulnerability of one hub’s heavy natural gas reliance.

For instant access to our in-depth analysis on Fern’s impact, complete the form below. 

DISCLAIMER: This blog post contains information related to REsurety and the commodity interest derivatives services and other services that REsurety provides. Any statements of fact in this presentation are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor do they purport to be complete. No responsibility is assumed with respect to any such statement, nor with respect to any expression of opinion which may be contained herein. The risk of loss in trading commodity interest derivatives contracts can be substantial. Each investor must carefully consider whether this type of investment is appropriate for them or their company. Please be aware that past performance is not necessarily indicative of future results.

All information, publications, and reports, including this specific material, used and distributed by REsurety shall be construed as a solicitation. REsurety does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. Image: iStock/Petmal.

 Can Buyers and Sellers Fine-Tune Contracts to Share Costs?

In Part 1, we broke down the fundamental disconnect in the U.S. power market: Basis Risk. While most PPAs settle at a regional Hub (an average price point), projects actually generate power and revenue at a specific Node. When the local nodal price fails to keep pace with the hub price, that “gap” can erode margins and threaten a project’s ability to service its debt.

The Core Reality: The Hub is where the contract lives.

• The Node is where the electrons (and the actual revenue) live.
• The Gap (Basis) is what determines if a project stays afloat or sinks.

We walked through the settlement math to show how even a “guaranteed” PPA can be undermined by local price volatility. Understanding this math is the first step toward project survival.

Settling at the Node: Good for the Project, but Buyers Don’t Like It

The obvious solution would be to use nodal, real-time prices to settle the PPA. This structure is designed to mitigate basis risk for the developer, aligning net revenue more closely with the settled PPA payment.

Basis sharing clauses: Mitigate risk to protect RECs

A more typical option to handle basis risk is adding a basis sharing clause to the PPA. These clauses come in many shapes and sizes, but are all intended to distribute risk more evenly. Developers get partial protection from basis siphoning their PPA revenue. Buyers take part of that risk to ensure the project stays afloat, and produces the expected number of renewable energy credits (RECs) for their portfolio rather than curtailing to save cash.

Basis clauses typically cap the amount of basis the developer must absorb. Clauses can include:

• Cap (i.e., ‘floor’): limit on the amount of basis the developer absorbs alone
• Sharing: Once the cap is exceeded, how the basis is split (e.g., 50-50)
• Maximum liability: A cap on the cap, limiting the total exposure for the buyer
• Negative prices: Removes basis sharing if developer does not stop generating.

Let’s try a simple basis clause on our example project: a cap of $5/MWh, 70-30 sharing beyond the cap (developer-buyer), and the project curtails when the floating price (nodal price adjusted by the cap and sharing provisions) goes below $0/MWh.

This basis sharing clause revives the developer’s revenue (green line), losing just 12% from the PPA earnings. The buyer’s settlement increases, but they still receive an average payment of roughly $30k per month with relatively little variation (red line), keeping budgeting reasonable.

The basis sharing clause could be tweaked to further support the developer depending on the project economics. More detailed basis clauses can include limits on either the annual number of basis sharing hours, or MWhs. Clauses must be fine-tuned to balance performance for developers and buyers based on forecast generation and prices.

Stay tuned to learn more about other approaches, like on- site BESS, behind-the-meter datacenters, and financial transmission right (FTR) trading, to solve basis risk. Until then, if you need advice on your current basis clauses – reach out!

DISCLAIMER: This blog post contains information related to REsurety and the commodity interest derivatives services and other services that REsurety provides. Any statements of fact in this presentation are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor do they purport to be complete. No responsibility is assumed with respect to any such statement, nor with respect to any expression of opinion which may be contained herein. The risk of loss in trading commodity interest derivatives contracts can be substantial. Each investor must carefully consider whether this type of investment is appropriate for them or their company. Please be aware that past performance is not necessarily indicative of future results.

All information, publications, and reports, including this specific material, used and distributed by REsurety shall be construed as a solicitation. REsurety does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. Image: iStock/Petmal.