Energy Action : How to Make the Most of Falling Electricity Prices

With wholesale electricity prices likely to remain lower for longer, it makes sense to procure flexibly to take advantage of expected future price falls.

Corporate renewable power purchase agreements (PPAs) have become immensely popular in recent years. They have become a common way for corporates of varying size to manage their power procurement and to meet RE100 or net zero emissions targets. On the flip side, PPAs support the investment in large-scale renewable energy infrastructure that Australia needs to transition to a lower carbon future.

Since 2017, 88 renewable PPAs (excluding those made confidentially) have been signed. They directly contract more than 3.4GW of power and underpin the construction of almost 9GW of wind and solar generation. Last year alone, 26 agreements, contracting 1.6GW of renewable energy, were signed.[1]

Beware of the risks

PPAs are complex and several risks must be managed. In 2018, for example, we noted that while forward contracts signalled declining wholesale electricity prices for the next three years, long-term PPAs were being offered based on the much higher prices then prevailing.

It was a prescient warning. With renewable energy generation surging amid demand softened by mild weather and the COVID-19 pandemic, prices are at decade-lows and expected to remain low for some time.

AGL is a high-profile casualty of locking in renewable energy prices. In February it announced a $1.9 billion pre-tax loss relating to provisions on 'onerous' contracts it made between 2006 and 2012 to support wind farms.

Flexible alternatives

The point is that otherwise stable companies could come under significant financial pressure if they lock themselves into long-dated PPAs and lose the ability to benefit from long-term declines in electricity prices. They may lose competitiveness due to having higher input costs than industry peers.

Apart from exploring self-generation options, companies can consider progressive pricing agreements. Progressive procurement provides greater flexibility to purchase in quarterly blocks to take advantage of market price movements.

Progressive procurement is particularly effective in reducing electricity purchase costs in a declining market and is ideal now due to the price backwardation that has emerged since November 2019. Our expert advisory and energy trading staff can assist by offering quarterly market updates and recommendations on when and how much to purchase.

Another alternative is our solar auctions. Our system independently models your optimal on-site solar system and requirements. A panel of more than 15 qualified suppliers are invited to bid for your contract. You can choose from a contract for an outright purchase, a finance offer, or a lease agreement.

[1] https://businessrenewables.org.au/demand-for-corporate-ppas-rockets-ahead-in-2020-but-what-comes-next/