Industry Analysis
Jun 4, 2024

Why Buyers Typically Discount ERCOT PPAs with Later Start Dates

Why do buyers typically discount ERCOT PPAs with later start dates?  

According to RenewaFi’s Price Tracker, a 10-year solar PPA at North hub would be worth about 9% less with a 2027 vs 2025 start.

For developers, that means pushing the COD out by 2 years could cost about $4/MWh (see chart below).

Several variables help explain why:

  1. Backwardation vs. contango in future power pricing: Over-the-counter (OTC) forwards or futures typically reflect whether the market is expecting power to be less or more valuable in the future. If the market is expecting lower pricing in the future (backwardation), buyers will factor that expectation into their pricing.
  2. Missed summers: For some renewables PPAs, the buyer makes nearly 100% of their profits during volatile and high-priced summer months. If near-term summers are expected to have higher and more volatile prices relative to subsequent summers, a later PPA start date will “miss out” on those potential near-term profits, putting downward pressure on the PPA price.
  3. Uncertainty: Because the market changes every day, it's very difficult to simulate or forecast the future. The later the start date, the more risk a buyer takes on. As with any investment, buyers tend to demand higher potential returns to offset higher risk exposure.
  4. Economic curtailment: In certain markets with strong solar growth like ERCOT, some buyers fear that electricity supply will, with increasing frequency, outstrip demand during midday hours, when solar tends to be producing at high levels but electricity demand is relatively low. During these times, electricity prices can fall below zero. For those who believe the growth of renewables will outpace demand, this risk increases at later start dates and significantly deteriorates the value of PPAs with late start dates and long tenors.  
  5. Internal approval constraints: Some originators are not allowed to expose their firms to power risk more than 12-15 years out. If the contract being considered is a long-term PPA, the buyer may not be able to continue to push out a start date without internal hurdles, especially during the approval process.

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