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Photovoltaics and PPAs - Power Purchase Agreements

10 December 2018

Renewable Energy PPAs are imposing themselves in the global market. This power trading formula is also under development in our country.

"In Spain there are already more than 1,500 MW capacity traded under PPAs contracts" is the title of an article issued on 10/10/2018 by the UNEF, from which we extract the following paragraph:

"In the Technical Information Conference, the most relevant current issues that affect current, short-term development and prospects have been raised, such as:

How could the implementation of PPAs, as energy trading alternative, boost the development of the PV sector and bring us closer to the objectives set by Europe?

What would be the short and medium-term consequences of its development?

Could the electricity price affect at consumption level?

What is the difference between financial and physical PPAs for the achievement of the objectives?

What should be the supporting measures of the administration to facilitate the PPAs?

What should be the optimal regulatory framework for its adequate and expected development?

How to reduce the risks derived from PPAs contracts?

What are the elements of credibility and reliability of a PPAs?

What lessons can we learn from other countries with more experience in PPAs? "

PPAs are occupying a leading role in the sector of renewable energies and more specifically in the photovoltaic sector. For all this reasons Grupo T-Solar wants to participate in the debate and take the opportunity to gradually examine its complexity, as well as simultaneously inform about its distinctive characteristics and variants.

Why is this interest for PPAs currently arising? The answer to this question requires us to make a minimum history of the evolution of the power sector in Spain.

During the eighties the power sector framework remained stable. The power technologies of today considered renewable begin to have a development worthy of consideration. Still embryonic, they were encompassed as "unconventional energies" (the title of renewables did not appear yet) and with that name and its distinctive characteristics from "conventional energies" they were included, according to the regulations of that time, in what was called Special Regime (of Power Production), law 54/1997, of November 27th, of the power sector. These unconventional sources of power generation were charged with special rates. This law established the possibility of signing "bilateral contracts", although due to their characteristics they were still far away from today's PPAs.

From this date the power market begun to liberalize. In Spain, the Special Regime market continued to be regulated by premium tariffs (apart from the mentioned liberalization). The European commitment to these clean energies implied a premium tariff system. They are (or were) the so-called FiT-Feed-In Tariff.

With the beginning of this century, there is a significant advance of Renewable Energies -ER in Spain, simultaneously with the progressive liberalization of markets, reduction of established tariff premiums and the elimination of the "Special Regime".

Royal Decree 1663/2000, of September 29th, developed the basic administrative and technical conditions for connecting photovoltaic installations to the low voltage network of the trading companies with power not exceeding 100 kVA.

August 26th, 2005 the Council of Ministers approved the 2005-2010 Renewable Energy Plan.

The "Special Regime" was regulated by Royal Decree 661/2007, of May 25th, which established a system of temporary incentives.

Royal Decree 1578/2008, of September 26th, established a new regulatory framework for premiums for solar photovoltaic technology, based on a mechanism of four annual announcements and variable prices.

In a previous article, PROSPECTIVES OF PV SECTOR (2017-2021) 2nd PART: EUROPEAN MARKET (18/9/2017), we anticipated something that we are now focused: "In other European markets, where solar development stopped with the completion of feed-in tariffs, direct bilateral PPAs will compete directly with wholesale energy markets. "

July 1, 2009, a directive of the European Union forces to differentiate between energy distributor and energy trading companies. This directive aims to liberalize the power market and promote competition because, as the users could not choose directly a power distributor, they would be now able to choose a trading company, similar to what happens in the liberalized telecommunication sector.

Finally, a law dated 24/2013, makes the Special Regime disappear definitively, establishing in Title IV "Production of electric power", the bilateral contracting system (PPAs), which goes beyond of what was established in law 54/1997.

Now in 2018, a new EU Directive on Renewable Energies is drafted.

The data in this section are taken, basically, from the annex of the Monographic Report UNEF on PPAs.

We outline the main points of a PPA.

DEFINITION: It is an Energy Sales Contract / Agreement.

CONTRACTORS:

Producer-Consumer.

Producer- Trading Company

Trading Company A- Trading Company B

TYPES:

a) Material:

-There is physical delivery (direct or indirect) of energy.

-They include at least the purchase price of energy and a temporary period of supply.

-Versions:

On-site: Generation and consumption are directly connected

Off-site: No direct physical connection between generation and consumption.

b) Synthetic / Financial / Virtual:

- There hasn´t to be physical delivery of electricity.

- They are contracts for long-term energy price coverage.

-They are flexible: prices and quantities of energy are adjusted.

-Developers and buyers do not have to be connected to the same network.

PRICE MECHANISMS:

a) Fixed price:

-With an initial agreement on how the price will move (or not) during the life of the contract.

- "Frontloaded" or "Backloaded".

b) PPA price based on spot market:

-It can only be applied in the markets with a fluctuating spot price.

- Including "floor and ceiling clauses".

ADVANTAGE:

a) For producers:

- Availability of financing

- Less project risks

- Diversifies income flows= predictable

- Increase of business development: common projects with other companies

- Terms/ prices: Look for the long term and increasing prices

b) For consumers:

- They guarantee volatile price stability due to price visibility.

- Improvement of environmental sustainability indexes: reducing greenhouse gases emissions, increasing decarbonization

- Improves the brand and leadership of the organization.

- If the chosen technology is solar photovoltaic, it is allowed to guarantee that this power supply will be made from a known, distributed, renewable and native power producer.

- Terms/ prices: Search for short term and low prices.

BARRIERS FOR PPA IMPLEMENTATION IN SPAIN:

1. Regulation.

2. Price volatility

3. Poor consumer information

The regulation affects to:

- ESC (Energy Service Company). Key players in the PPAs development. The Royal Decree-Law 6/2010, of April 9th, title V, article 19: an ESC could build a production facility and be part of a PPA contract.

- Other forms of contracting:

- Self-consumption

- Powershare: shared self-production of energy.

- Self- supply

STAKEHOLDERS:

Financing Entities: "This product is being a key element due to lack of government support, banks and funds are agreeing to contribute with capital using the PPA as a guarantee, which is allowing a development apart from the recent auctions and any other support " Elconfidencial.com 28/1/2018.

Distributors

Administration

Trading Companies

a) Power retail company offer the minimum rate fixed by government

- Supports small consumers/customers who can choose the voluntary minimum rate fixed by the government (voluntary rate for small consumers)

- At present almost, all domestic consumers buy at this rate

b) Trading Companies

- They sell the energy at the rates fixed by themselves

- Energy trading under rules of the free power market

According to the monographic study of UNEF on PPA: "In the power market, however, there are trading companies who are not part of traditional distributors, who also show off incorporating power of renewable origin in their sales portfolio. This opens a business opportunity as photovoltaic solar energy guarantees that renewable origin. However, a big part of these trading companies does not have an adequate financial structure to ensure the viability of long-term projects, which makes it difficult to choose them in order to close this type of contract ".

We attach a very recent (24/11/2018) title of an article of ElConfidencial.com that we consider illustrative for this purpose: "A small and medium company of nine employees wins a mega contract of light over the big electricity companies".

Note on the concept of Utility or Public Service: while in Europe the concept of public means from state or government and would be opposed to private or individual, the Anglo-Saxon meaning of the UTILITY (can be seen in the graphs above), can be translated as (or synonym of) "Public Service" and could be privately owned.

The used sources for preparing this article are basically:

Memory Unef 2018.

Monographic study PPA Unef 2018.

Just as we started this article with a newspaper headline, we ended up with another, in this case of “El Periódico de la Energía”, 01/24/18: The Renewable Energy PPAs are leading the power market: these agreements exceed the capacity of 5.4GW in 2017" (Global level).

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