Tools to understand and manage risk have become essential to the continued growth of renewable energy
The only certainty in renewable energy markets is uncertainty. True — we’re going through a period of volatility right now since the pause in economic activity reduced demand for energy. But I’ve lived and breathed risk in renewable energy for nearly a decade now. While it’s the coronavirus impacting the markets this quarter, market volatility is perennial.
Whether it is managing summer price spikes in ERCOT, declining natural gas prices, or ever-increasing solar penetration in CAISO, clean energy buyers and sellers know the challenge is to accept that risk, and manage it effectively.
At the end of the day, clean energy buyers want to sign contracts that work for extended periods of time with minimal surprises. Wind and solar developers want to find power buyers or hedge providers that offer them enough certainty to support project financing. Brokers and advisors need to understand energy market risk profiles before walking into a client’s office (or starting a Zoom call).
The coronavirus is just the newest curveball — of many — that the market throws at our view of expected value in clean energy markets. Understanding and managing risk requires a sophisticated look at long-term project performance under all of the scenarios the market can muster: Demand spikes, demand lulls, generation spikes, generational lulls, and so forth.
To enable this type of analysis, my colleagues and I have collected a decade-plus of weather and price data from an array of sources for 15,000 operating projects and greenfield locations across the U.S. We’ve harnessed that information to map and analyze the value and risks of our clients’ next wind or solar project. For the first time, we’re making this market transparency and asset insight available by subscription through our Renewable Energy Market Analytics Platform — or “REmap” for short.
We believe REmap can help companies all along the supply chain, from developers to operators to C&I buyers, brokers and advisors, understand historical energy market trends, perform due diligence and contextualize current events, and evaluate risk management options.
But an understanding of the risks you hold as a renewable energy buyer or seller isn’t sufficient. Tools are needed to keep the risks you decide you want to hold — and shed the ones you don’t.
PPAs and why you deserve better
Clean energy buyers, in particular, are increasingly looking to manage the risk inherent to their Power Purchase Agreements. The virtual Power Purchase Agreement (vPPA) is a familiar tool for Fortune 500 companies looking to meet their sustainability goals.
And vPPAs have proven quite effective at achieving that goal. Unfortunately, vPPAs have underperformed the financial goals that many buyers have set in parallel with their sustainability goals.
Because of the vagaries of weather patterns and commodity markets, for many buyers a vPPA results in, at best, a flawed hedge on energy costs, and at worst, a speculative position on power markets. And that’s a challenging position to be in, with energy prices at or near all-time lows around the country.
Clean energy buyers need ways to keep meeting their sustainability goals — but not at the expense of their financial goals. We’ve found that two ways to achieve this are Volume Firming Agreements (VFAs) and Settlement Guarantee Agreements (SGAs).
On the path to greater security
A Volume Firming Agreement allows a clean energy buyer to hedge its energy consumption costs more effectively than they could with a vPPA on its own. VFAs have been used since 2018 to control for shape and volume risk in renewable energy deals. Financially, a VFA converts the variable generation profile of a weather-fueled wind or solar project into a fixed shape that can more closely match the buyer’s consumption profile.
A Settlement Guarantee Agreement, in contrast, locks in the future dollar value of vPPA settlements, transferring the future settlement volatility risk to an insurer that’s in business to absorb risk.
It’s certainly true that energy markets are volatile today. They were also volatile during the natural gas price collapse of 2008; the heat waves of 2011 and 2019; and the polar vortex of 2014.
Risk is a fact of life in our industry, but we can’t let it stop us. That’s why REsurety’s focus has always been to drive a more financially resilient clean energy industry by offering tools to understand and manage that risk, even now from our home offices.
A more fine-tuned understanding of what our product is worth – today and tomorrow, no matter what comes – will help renewable energy emerge as a bright spot in the economic recovery. And when this crisis is over, we’ll be even better prepared for the next one.
Disclaimers: Certain risk management tools offered by REsurety involve utilizing products regulated by the US Commodity Futures Trading Commission (“CFTC”). Such tools involve risk and are not suitable for all clients. All information, communications, publications, reports, and other materials, including this document, which may be utilized or distributed by REsurety, should be construed and considered solicitations relative to entering into a derivatives transaction. Trading commodity interest products, which include swaps, involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. REsurety does not distribute research reports, employ research analysts, or maintain a research department as defined by CFTC Regulation 1.71.