Are green buyers aware of the potential for negative energy prices during their 20-year VPPAs?

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By Dick Brooks

The ever insightful Will Driscoll has created another interesting article aimed at educating green energy buyers of the risks associated with long term energy contracts. Citing a report from the Rocky Mountain Institute, Will points out that buyers of these contracts could face “significant financial downside” as more solar on the grid could drive down wholesale prices. So true Will! I also found the RMI blog associated with this report to be very insightful.

Certainly, Will and RMI have done an excellent job at pointing out some of the real risks in these long-term power purchase agreements, but there are a few more risks, which were not covered in these artifacts that are noteworthy and could be substantial.

 

Negative Energy Prices

There are times in the New England Control Area where energy prices are negative; I believe the current floor is -$150. What does this mean? It means that a power producing entity “pays for the privilege” to produce power during times when an ISO determines that there is too much generation on the system. Energy producers are charged the negative energy price for their output during those times that energy prices are negative. The bottom line is “A Green buyer can face significant financial losses due to negative energy prices”, if they do not curtail the power output of their VPPA’s. However, it doesn’t stop there. These data centers aren’t going to shut down when their power source shuts down, which means they are paying the market price for the energy they consume, and paying to produce power, if they fail to curtail.

 

Performance Penalties

Market Rules contain provisions for cases in which a generator with a capacity supply obligation fails to meet their obligations. These penalties can be quite substantial.

 

Minimum Generation Emergencies

There are times when an ISO must issue curtailment order to generating resources in order to maintain system reliability. During these times a generator must stop producing energy, or face stiff penalties. Once the energy flow stops the Green Buyers must go back to the grid for power and pay the market price, with no offsetting revenue from their curtailed generating resources.

What surprises me most is that many of these Green Buyers, i.e. Google, Amazon and Microsoft, et al, are the very face of creative destruction and have been the source of so many disruptive technological changes over the past 20 years. Surely, they must be aware that a lot can change in 20 years – especially in the energy industry with all of the technological advances and investments that are occurring presently. Green buyers could help themselves and others by aiming to change the industry in profound ways that will produce a long-lasting solution that is designed to deal with the dynamic changes that are happening now, and will surely come during their PPA contracts.

 

Dick Brooks is a senior consultant at Reliable Energy Analytics