Welcome to the 2nd part of our blog series about Power Purchase Agreements. Last week we covered the basics of what a PPA is. This week, we will delve a little bit deeper into the typical terms you will find in PPA agreements and try to translate what they really mean into plain English.
Overall, PPAs can run for pages and have lots of different terms which can be hard to understand, and the same thing can be expressed in different ways by different companies. They can be similar to mortgages - pretty complicated, hard to understand contracts with large financial implications! At Open Utility we have seen a lot of PPAs so know how to compare them and make sense of it all. Below are some of the typical terms which will vary in a PPA for small to medium sized generators (10-500kW).
Before we go too far, let’s clarify that the PPA contract is in addition to any government subsidies received for a project so it’s a real value add. Those subsidies are Feed-in-Tariffs (FiTs) for small/medium projects and Renewable Obligation Certificates (ROCs) for larger projects.
Generating Capacity: Refers to the technology you are installing and what the maximum output it can generate under ideal conditions. For example, a ‘50kW wind turbine’ has a generating capacity of 50kW, though it will on average produce less than 50kW (since this would require the wind to be blowing a gale all the time). Generation capacity is the first step towards calculating your annual energy production.
Annual Energy Production (AEP): A calculation of how much energy a technology will produce over a 12 month period. Each technology has a capacity factor (or load factor) which implies how much of its generating capacity it will produce on average. For example, for wind this is typically 30% and for solar 10% (solar is less because the sun only shines for part of the day and other reasons).
For a ‘50kW wind site’: 50kW x 30% x 365 days x 24 hours = 131,400 kWh per year
For a ‘50kW solar site’: 50kW x 10% x 365 days x 24 hours = 43,800 kWh per year
% Export: How much you generate minus how much you will use on site gives your export capacity. Both your generation and your consumption are estimates, but are still required, because the result is the amount of power your energy company will actually pay you for putting on the grid.
If you have the 50kW solar site above, and estimate your onsite annual usage at 5000kWh, you would expect to export: 43,800kWh - 5000kWh = 38,300 kWh.
This equates to 88% export, or 12% onsite usage.
Export price: Simply, how many pence you will be paid for each unit of electricity you export to the grid. This is the term that can vary greatly depending on what kind of contract you want. You can fix a single price for each unit for the whole contract, get rates that track the price of electricity on the market, or get seasonal (summer/winter) or annual rates. Things can get really difficult to compare here because of the variants and the difficulty most people will have knowing if they are “getting a good price”. For small to medium size generators (less than 500kW) usually a single fixed price makes the most sense because it makes different offers easier to compare. The export rate will make up the bulk of your income from the PPA contact, though keep in mind that the PPA always sits alongside the income you earn from FITs or ROCs.
Embedded benefits: We all pay to use the grid as consumers through our energy bills - in fact, it can be up to 25% of our bills. So generating power locally has value beyond just the energy itself - it means less strain on the grid and reduces the need for more cables and pylons. The level of embedded benefit varies according to your generator type (intermittent or dispatchable), and which distribution grid region - for example, the grid costs more per kWh in Cornwall than in London. Energy companies generally share the income stream with you, typically keeping 10-20% of the embedded benefits as part of the their fee structure. These are sometimes lumped into the Export price (see above) or can be broken out separately.
LECs: Energy companies pay you for your Levy Exemption Certificates, which are given by Ofgem to people who produce renewable energy. They are like vouchers that commercial energy consumers can pay for to avoid paying the Climate Change Levy (CCL, a tax like VAT applied at the point of purchase to commercial energy users). So the energy suppliers are willing to buy your LECs from you and resell them onto their business energy customers, who avoid paying the full Climate Change Levy. Suppliers will usually pass most of the benefit back to the generator, though typically they will keep 10-20% of the value of the LECs.
REGOs: Get ready for a mouthful - Renewable Energy Guarantees of Origin! Again, these are certificates which have a value for energy companies and they are willing to pay you to get their hands on them. REGOs are also certificates issued by Ofgem which are like a stamp of approval that your energy is renewable. The energy company which is buying your power will want these to be able to count your green energy towards their claims in marketing and publications; for example, when they say “20% of our power is renewable”, they need to have REGOs for the 20% to back up those claims. REGOs are usually either lumped in with LECs or provided for free to the energy company.
MPAN: No shortage of acronyms in the energy industry are there? A Meter Point Administration Number is a unique 13-digit number which applies to your electricity meter. It tells the energy companies lots of useful information, like what part of the country you are in, what type of customer you are, how they should calculate your bills and what part of the grid you connect to. An MPAN is important for calculating the Embedded Benefits you will be offered and thus important to have to hand when requesting PPA quotes.
FiT: Not strictly part of the PPA agreement, but the Feed-in-Tariff is the government subsidy paid to small scale renewable energy generators. This is paid for every unit of green power generated (even if you use it on site). The FiT is physically paid by the energy companies (they are then reimbursed by the government) so generators usually choose to be paid their FiTs by the same company they sign a PPA with to minimise the admin.
Duration: PPA contracts can vary widely in duration, from 6 months up to 15 years or longer. This all depends on the priorities of the generator. Shorter contracts can help you track rising annual energy prices and prevent you being locked in for too long. Longer contracts can provide greater long term assurance of the rate you will receive at the risk of missing out on price rises. Similar to locking in mortgage rates, there are risks and rewards to both and it all depends on your individual risk appetite. Projects which are externally funded can sometimes require a longer term PPA to be in place, whereas individual developers might prefer shorter contracts that get them a better return.
There is a lot more to PPAs than just the above but this should give you a good idea of some of the key terms. An easy way to compare available offers is by using our PPA comparison service. We will do all the shopping around and analysis for you and come back to you with the results so you can decide who to sign up with.
Next week will be the final instalment of the PPA blog series and we will cover “How to get the best price for your PPA”.
If you have any questions about what we have covered in this blog, feel free to email us at firstname.lastname@example.org