Corporate solar purchase agreements could yield a fixed rate of return

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A 7.7% internal rate of return is possible from a solar-plus-storage investment in the ERCOT grid region in Texas, says Lazard in its report Levelized Cost of Storage 2019, if current revenue potential were to continue into the future (see fifth column of the image).

Image: Lazard

https://www.lazard.com/perspective/lcoe2019

For a corporation considering a solar purchase agreement, a positive rate of return may sound better than the possibility of losing money—due to price risk—in an unhedged offsite power purchase agreement.

As solar and storage prices decline, and solar revenue opportunities expand beyond selling power immediately, to include energy arbitrage, and compensation for capacity, ramping, and grid services, at some point a solar purchase agreement at a fixed positive rate of return could be offered.  Here’s what it would take.

To enable flexible operation and ramping, an agreement would involve purchasing solar capacity (on a MW/month basis), not megawatt-hours—as recommended by First Solar.  That implies a new acronym, CPA, for capacity purchase agreement, in place of PPA, for power purchase agreement.

The solar plant would almost certainly include storage, or the option to add storage later, for energy arbitrage.

The solar-plus-storage plant would be operated optimally, to maximize total revenues from different revenue streams—which is different from maximizing output under a PPA.  At least one firm is developing artificial intelligence to manage this task.

The solar plant would be in the grid region with the best combination of a high revenue stream and low costs for construction, operation and maintenance.  Google, for example, surveyed the world to find the four best regions in which to conduct a reverse auction to procure renewable power at the lowest price.

Speaking of which, procurement of the solar plant would involve a reverse auction in the selected region to quickly and efficiently find the lowest price for solar capacity, with standardized bidding requirements to minimize the burden for solar developers to participate in the auction.

Next, at the heart of the matter, is a fixed revenue stream for the CPA, as opposed to varying revenues from selling power wholesale under a PPA.

A fixed revenue stream necessarily implies a financial firm acting as “mastermind” to model in advance the probabilities of various levels of each type of revenue at the solar plant’s location, over the multi-year term of the CPA—factoring in the firm’s own risk premium—to offer the off-taker a fixed revenue stream.  The financial firm’s modeling would need to consider how wholesale prices will likely change as more solar and storage are added in the grid region.

Note that financial firms already offer financial hedges for PPAs.  A fixed revenue stream may be imagined as involving a financial hedge that combines a floor price and a ceiling price (known as a “collar” hedge), but one in which the floor and ceiling prices are the same.  A financial firm that can model and offer a collar hedge—that meets its required expected profits given the projected risk profile—can model and offer a fixed revenue stream.

In common with offsite (or “virtual”) PPAs, the financing and construction of the solar plant is made possible by the corporate off-taker’s contractual commitment to purchase solar capacity (by signing the capacity purchase agreement, or CPA).  That corporate commitment gives the lender confidence to issue the construction loan.

The “mastermind” firm would then operate the solar plant, sell power at wholesale rates (after energy arbitrage permitted by storage), and collect other revenue that might include compensation for capacity, ramping, and grid services.  The firm would collect those lumpy revenues and convert them to a fixed revenue stream, expecting to book profits along the way to compensate for its risks.

At least, that’s one way a corporate solar capacity purchase agreement with fixed revenues could work.  Your crystal ball may differ.

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.