“It’s tough to make predictions, especially about the future.” 

-Yogi Berra 

If you’re a corporate energy buyer with one or more virtual power purchase agreements (vPPAs), you should have received your last invoice for 2024. For most of the PPA contracts that Verse oversees, it was an expensive year!

You may be asking, how did we get here? Let’s wind the clock all the way back to when you signed this PPA. 

Laying the PPA Groundwork

For any organization, signing a contract for renewable energy is a major milestone. The long-term commitment to clean energy is a strong signal and demonstrates an organization’s environmental leadership. Simultaneously, the financial commitment is a noteworthy line item for any finance team. It’s a commitment that will often last 15 years or more, totaling many millions of dollars. 

Understandably, there is a lot of attention and groundwork required to align stakeholders prior to executing a renewable PPA, particularly on its economic merits and potential risks. Once the PPA is signed, it typically takes more than two years before the project is ready to produce energy. While the buyer generally receives regular updates on construction progress, engagement with the deal at this point typically decreases…that is, until the project starts to approach its commercial operation date (COD).  

At this stage, the buyer needs to prepare to receive, validate, and process invoices and manage the associated Renewable Energy Certificates (RECs), sometimes referred to as Environmental Attribute Certificates (EACs). On top of the operational aspects of managing the PPA, leadership starts paying close attention to how actual financial performance compares to the expectations that were set at contract signing. 

A PPA is a Bet on the Price of Power 

In addition to acquiring the green power attributes, when an organization signs a PPA, it’s essentially making a bet on the price of power. Ideally, prior to signing and during the stakeholder alignment phase, the buyer will have had robust internal discussions about the possible range of financial outcomes. In our experience, this uncertainty is often characterized using the Goldilocks method: 

• Bear case: Low energy prices — High PPA cost 

• Bull case: High energy prices — Low PPA cost 

• Base case: We’ll call this the penguin case, since everyone loves penguins 

The forecast that was used when signing the PPA represents a single snapshot in time. A buyer should be aware of the key input assumptions that went into this forecast and refresh these forecasts regularly to incorporate the latest market information and expectations (we recommend monthly). 

Good Data Keeps the Penguins Marching 

Where we see the greatest opportunity for buyers is in harnessing the “March of the Penguins”: The continuous stream of snapshots of our best estimate of PPA performance. Energy markets are increasingly volatile, and revenue forecasts become stale quickly. From PPA execution through the contract lifetime, energy markets are always evolving. PPA revenue forecasts should, too. 

So, what market data do we have at our disposal to keep the penguins marching? 

First, in deregulated energy markets, the independent system operators (ISOs) operate a clearing market (think Econ 101 with a supply and demand curve and the equilibrium price where they cross).  Every day and throughout the day, the ISOs publish the market clearing prices that generators will receive, and that load will pay. These published prices are also the ones used for financially settling virtual PPAs. Without going into the many factors that influence market prices, trust us that these prices are volatile, and this volatility isn’t going away anytime soon.  

To get a sense for the range of prices observed in North American deregulated markets, see the below widget to view the around-the-clock (ATC) electricity prices across the U.S. over the past five years. From the dropdown, you can select a region and a settlement point. Check out ERCOT in February 2021 (with “Outliers” toggled on) — that was winter storm Uri, and it was a doozy! 

Move Over, Crystal Ball 

After analyzing what has happened before, we look to the future.  There are active futures markets where traders can buy and sell energy for delivery.  Distinct from fundamental forecasts, which are bottom-up predictions of market prices over the long term, futures markets reflect the latest market sentiment where buyers and sellers are willing to put their money where their mouth is on a daily basis. They are an important consideration for forecasting project revenue from the market, especially in the short term when more trading activity is taking place. 

Lastly, we have project-specific information. Understanding overall market dynamics is a great start, but to obtain a high-fidelity forecast of the financial performance of a PPA, we need to unpack the key commercial terms of the vPPA such as the settlement point, technology type, the physical location on the grid, economic curtailment provisions – the list goes on. If the project is already operational, actual generation data provides great insight into how these many factors combine to determine overall vPPA performance.  

If you’re like most vPPA buyers, all of this represents more complexity than you bargained for when you first started this journey. In the minutes since you began reading this blog post, new power price and plant generation data has become available. How are you supposed to keep track of – and make sense of – all these data streams? 

Fortunately, solving these problems is exactly why we started Verse! We’ve built a suite of intuitive software applications to take the complexity out of procuring clean power. In our next blog post, we’ll share more details on the specific pain points we alleviate for corporate buyers like you!