A team of scientists in Portugal has assessed the performance of several corporate power purchase agreement (CPPA) structures and has found that contracts based on a variable price structure achieve higher performance, while those based on fixed-hourly profiles offer the lowest performance.
The researchers stressed that CPPAs, despite their success in the global energy markets in recent years, expose both buyers and sellers of electricity to three types of risk: Price risk, which materializes when wholesale market prices fall below the contract prices; profile risk, which happens when cannibalization occurs within the renewable energy sector; and volume risk, which depends on the intermittency and variability of renewable energy production.
“The company's exposure to these risks depends significantly on the combination of pricing and electricity profile structures negotiated in the CPPA,” they said, referring to the novelty of the proposed approach. “However, there is a lack of scientific literature that explicitly addresses CPPA risk minimization through different combinations of price and electricity profile structures.”
In the paper “Efficient power purchase agreement structures for meeting corporate electricity needs with solar energy,” published in Energy, the scientists presented four different electricity profile structures, two pricing structures, and eight distinct CPPA types.
The eight contracts are as follows: with a fixed price structure and pay-as-produced (PAP) design; with a variable price structure and pay-as-produced (PAP) design; with a fixed price structure and fixed hourly profile (FHP); with a variable price structure and fixed hourly profile (FHP); with a fixed price structure and monthly baseload (MBL) design; with a variable price structure and monthly baseload (BLM) design; with a fixed price structure and annual baseload (BLA) design; with a variable price structure and annual baseload (BLA) design.
For the CPPA PAP design, which the researchers said is more exposed to volume risk, they conducted multiple generation profiles based on weather variability. As for CPPA FHP type, they calculated the fixed hourly profile for each month based on average generation for each hour within the same month. Furthermore, for the CPPA BLM typology, they calculated monthly baseload hourly amount based on average monthly generation, while for CPPA BLA, the profile was based on annual generation average.
“Overall, for each contract type, the primary variation among the simulated contracts is the CPPA price and the residual volume risk considered,” the academics stressed. “In total, 800 contracts were simulated across eight different contract types.”
The analysis was based on three indicators: the net present value (NPV) assessing a buyer's advantages in securing part of its electricity via a CPPA; the contract performance deviation (CPD) measuing the volatility of financial contract performance; and volume residual (VR) evaluating the buyer's exposure to volume risk.
It showed that contracts based on a baseload profile have “superior” efficiency, with the buyers being found to benefit from paying a price premium. “Their performance was also less sensitive to price negotiation compared to contracts linked to solar generation profiles,” the researchers further explained. “However, for companies with higher risk tolerance, PAP contracts can also be viable, as some of them achieved a high performance despite their greater exposure to market volatility.”
Meanwhile, the group also found that FP contracts are ideal for buyers prioritizing financial stability and VP contracts are suitable for buyers seeking to minimize risk exposure. “However, the effectiveness of VP contracts depends on carefully negotiated cap and floor prices, given their high sensitivity to pricing conditions,” it pointed out.
The researchers concluded that a BLM contract with a VP design have the best balance between financial performance and risk mitigation. “This contract type achieved the highest median efficiency scores in the meta-frontier for both output- and input-oriented models and was consistently identified as a benchmark contract by the date envelopment analysis (DEA) model,” they added. “In contrast, FHP contracts proved to be the least favourable CPPA type, offering limited financial and risk management benefits.”
Looking forward, they said they want to investigate CPPA performance with diverse consumption profiles and different technologies.
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