Connecting Renewables and the Power Purchase Agreement

Tim Foster

2

Overview

• Connecting to the Grid

– The Regulated Distribution Network Operators– Connection Offers– Typical Technical Issues

• Metering

• Power Purchase Arrangements

3

SmartestEnergy

• Licensed Electricity Supplier

• Leading independent provider of Power Purchase Agreements in the UK

• 1200+MW, 400+ sites

• AD, CHP, landfill, wind, waste to energy, mine methane, hydro, biomass

• Fixed price off-take or trading services

• Licensed Gas Shipper and Gas Supplier

• Electricity Supply Contracts – fixed price or flexible

• Load Management and Demand Side activities

• Our business is focused on power purchase arrangements for the embedded generation sector

4

It is never as simple as just plugging it in…..

5

The Changing Shape of the Electricity Supply Network

Transmission-connected generator

Distribution network

Transmission system

Grid supply point

Wind farms

Customers/

PV generatorsCHP

Distribution connected generator

6

Where do you to Connect?

275 kV132 kV

132 kV33 kV

33 kV

11 kV

11 kV

400 V

Distribution

Transmission500 MW

20 MW

5 MW

5 kW

Typical Connection Levels

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Connecting to the Grid – The Regulated Process

• 14 Distribution Network Operators (DNO)

• 1 Transmission GB System Operator (NGETL) and 3 transmission owners (NGETL, SP Transmission Ltd, Scottish Hydro-Electric Transmission Ltd)

• Licences to distribute / transmit electricity - Regulated by Ofgem

• Remit to operate economically, efficiently and in a non-discriminatory fashion

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The Connection Agreement

• Agreement between the Generator and the Distribution Network Operator or the Transmission Network Owner that allows the import/export of electrical energy to/from a site

• DNOs / NGET obliged to offer terms to connect to network

• The Generator must submit a competent application and pay fee

• DNO Obligated to make offer within 3 months

• Offer open for acceptance for 30 days or 3 months

• Disputes can be referred to Ofgem

• The Connection Offer includes:

– Outline of connection solution– Outline of DNO works, reinforcements and construction

programme (contestable and non-contestable works)– Technical and communication requirements– User’s construction obligations– Outline of operational constraints– Price

9

Typical connection issues that are encountered

• Historical “passive” DNO network designs coupled with the proliferation of “distributed generation” can give rise to Network constraints or reinforcement

• Historically burden of cost upon developers

– Move to “shallow-ish” charging helping certain developers.

• Some typical issues:

– Thermal ratings– Voltage rise issues– Fault level contribution– Reverse power flows

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Thermal Characteristics and Limits

Transformers

Overhead line

• Overheating leads to insulation failure• Reverse power flow capability?

Switchgear

• Overheating leads to insulation failure

Cables• Overheating leads to insulation failure

Safety clearance

11

Voltage Rise

Distance

Voltage

Max

Min

Summer

Winter

No Generation

Distance

Voltage

Max

Min

Generation

Power Flow

12

Generation Contribution to Faults

• Contribution of current to a fault on network can lead to an overstressing of existing switchgear and is a major limiting factor to the connection of embedded generation

Fault CurrentFault CurrentGG

Fault CurrentFault Currentgg

Primary Substation

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The Grid Connection Agreement

• The DNO Connection Offer will set out the necessary works and cost for connecting to the Grid

– The connection route may not be that obvious– Considerable amount of technical information needed to complete a

“competent” application – Check what work is contestable – i.e. trenching cable across your

land– Possible to challenge the offer through specialist Consultancies

• Connecting to the Grid involves ongoing costs

– A generator pays a proportion of the cost up front – “shallowish” charging

– Ongoing charges are recovered via Generator Distribution Use of System (GDUoS) charges

• Capacity Charge - £/kVA/day• Utilisation charge – p/kWh of energy exported

14

You’ll also a Meter

• Meter requirements depend on the generating capacity

– Greater than 30kW – a half-hourly meter (HH) is required

– Less than 30kW – a non half-hourly (NHH - monthly, seasonal or annual reads) is required

• NHH metering is arranged by your electricity supplier

• HH metering is the Generator’s responsibility

– The Generator must enter into a Meter Operator contract with their chosen meter supplier

– Western Power Distribution, Metering Services, SSE Metering Services, Siemens

15

Elements of the Power Purchase Agreement

• The Power Purchase Agreement values the revenue streams for a renewable generator

– Decision on type and term is usually dictated by the risk/reward appetite of the Financier

• The PPA articulates the price structure for the following key elements:

– Electricity (Power)– Embedded benefits– Climate Change Levy Exemption Certificates (LECs)– Renewable Obligation Certificates (ROCs)

• The PPA will also document;

– Payment terms, transfer of benefits, change in law, early termination, generator obligations (forecasts), new benefits, limits of liability, dispute resolution, etc..

16

The Wholesale Electricity Market

• Market quoted from day-ahead right out to 30th September 2012

• Prices feed straight into Short-term PPAs

• Long-term PPAs based on reference/index to electricity markets

17

Embedded Benefits

• An embedded generator will receive a number of benefits because it is located within a distribution system

– Distribution and Transmission losses

– Distribution Use of System– Transmission Use of System

Charges (Triad) –– Balancing System Use of System

charges– Elexon Charges

• Embedded benefits typically add c.a. £1-2/MWh to the revenue stream for a generator

• Triad can be a significant windfall

– 2006/07 triad charge for the South West is £22.22/kW

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

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Pea

k S

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(M

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28th November 59,406MW

5th January 58,511MW

2nd February58,660MW

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Climate Change Levy

• Climate Change Levy was introduced to encourage energy efficiency

• Companies can comply to legislation in a number of ways

– Pay the CCL – currently £4.30/MWh (will rise by inflation from 1st April 2007)

– Enter into a negotiated agreement – i.e. rebate of 80% of CCL

– Present a Levy Exemption Certificate (LEC)

• LECs are generated by accredited generation stations

– Renewable– Good quality CHP– Market price typically 80-85% of CCL

• £3.44 - £3.65/MWh

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Renewable Obligation Certificates

• ROCs are issued on a technology-specific basis

• Four main options:

– Fixed price• Fixed, final payment monthly upon transfer of

ROCs• Smartest takes risk on recycle value• Provides certainty and cash flow for Generator

– Market Related• ROC Price is linked to a public market reference –

i.e. eROC auctions • Some variation in cash flow as the auction price

does vary– Processing Fee arrangement

• Buyout price paid in full monthly upon ROC transfer • Recycle payment, less Processing Fee per ROC,

paid when Ofgem publishes Buy-Out fund • Generator takes risk & cash flow delay on recycle

– Admin Percentage arrangement• Buyout price paid in full, less Admin % per ROC,

monthly upon transfer of ROCs• Recycle payment, less Admin % per ROC, paid

when Ofgem publishes Buy-Out fund • Generator takes risk & cash flow delay on recycle

£52.95£18.65£34.302007-08CP6

£35.762008-09CP7

£37.192009-10CP8

£16.04

£10.19

£14.17

£22.99

£16.52

Recycle

£49.28£33.242006-07CP5

£42.52£32.332005-06CP4

£45.56£31.392004-05CP3

£53.50£30.512003-04CP2

£46.52£30.002002-03CP1

Out-turnBuyoutROC history

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

CP1 CP2 CP3 CP4 CP5 CP6 CP7 CP8 CP9 CP10 CP11 CP12 CP13 CP14

Renewable Obligation Progress

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The Short Term Power Purchase Arrangements

• Short-term PPA typically;

– A generator is priced on it’s shape against a wholesale market price– Prices generally include embedded benefits and provision for

imbalance (non-delivery)– Prices from day-head out to 3 years (6 seasons)– Prices will mirror wholesale power market volatility and movement– ROC purchased at a fixed price, percentage of Buyout / percentage

of recycle or processing

• The Short-term PPA provides a succession of market related contracts

– Usually favoured by equity investors or investors looking for higher risk/reward

– May not be strong enough to secure debt– Will give a higher return on a like for like basis

21

Typical Long Term Power Purchase Arrangements

• Long-term PPA typically;

– First year(s) power price is fixed anytime between Financial Close and Commercial Operation Date

– Electricity price indexed against an industry report NOT RPI– ROC at a percentage of Buyout and a percentage of recycle– LEC and Embedded benefits– Contract Terms to cover changes in regulation, new benefits, change

in law, etc.

• The Long-term PPA lays out the likely minimum price expectation over a contract term that allows debt to be secured

– Lending is against the creditworthiness of the purchaser of the power– Financiers wish to see risk taken by power purchaser in return for

discounted energy/ROC price.

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SmartestEnergy

• SmartestEnergy offers PPAs from 1 year to 10 year duration

• For further information, indicative structures and prices please contact;

Tim Foster

tim-foster@smartestenergy.com

Tel: 0207 4480900