Industry Analysis
May 20, 2024

Quantifying Economic Curtailment Risk

As solar continues to penetrate ERCOT, economic curtailment risk is becoming an increasingly important factor in solar PPA negotiations.

Economic curtailment risk refers to instances when electricity supply outstrips demand and the grid sends negative price signals to discourage further generation.

Parties negotiating a PPA have several options to help protect offtakers from incurring significant losses during these times. One option is to not settle whenever prices are negative.

Because this term transfers risk away from the offtaker, it also increases the PPA price. The graph below shows by how much.

It shows the value of not settling when prices are negative over the course of a 10-year solar PPA at North Hub, assuming a January 2025 start date and a unit contingent structure.

A year ago, protecting against economic curtailment risk would have added about $3 to the PPA value. Today, it would add closer to $6.     

A significant driver of economic curtailment risk is the growing abundance of solar power during midday hours, when demand tends to be rather muted.

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