What are PPA Prices shown on PexaQuote and the Market Price of Risk?

Given the long-term nature of PPA agreements and the intermittent character of renewable energy the valuation and pricing of PPA contracts are associated with risks. Pexapark’s approach derives the PPA price based on an Expected Value – the intrinsic value of the contract - and a Market Price of Risk

PPA Price (Risk-Adjusted Fair Value) = Expected Value – Market Price of Risk

Pricing of structured products is generally based on the assumption that they can be perfectly replicated via tradable products, not leaving any residual risk. Since PPA offtakers are left with residual risks, which are unhedgeable, offtakers demand risk compensation, which is being priced into the value of PPA contracts in the form of a what Pexapark calls “Market Price of Risk”.

In other words, offtakers (both utility and corporate offtakers) bid at a PPA Price, which incorporates compensation for taking an unhedgeable risk. This compensation is the Market Price of Risk (previously known as “Liquidity Premium”). Pexapark calibrates the Market Price of Risk to match observed market price evidence (transactions, committed bids and offers and indicative quotes).

The PPA Price refers to the value of renewable electricity, excluding the following components:

For PPAs transactions which counterparties are paying premiums such as Additionality, this is covered through our Reported Price Range.

The Reported Price Range represents a spectrum of reported PPA transaction prices and PPA bid prices from corporate and utility offtakers collected by Pexapark. It reflects the upper and lower limits of collected price points for a specified period, based on our observed market price intelligence. This intelligence includes data from recorded transaction prices and bids collected through our monthly PPA price polling and our price reporting.

Pexapark’s reference prices offer a daily benchmark for the fair, risk-adjusted market value of PPAs, using a consistent and trusted methodology suited for continuous PPA valuation and price discovery. While these reference prices offer a baseline, actual PPA prices offered by individual PPA offtakers may be higher or lower than those displayed on PexaQuote.

Therefore this additional pricing data provides you with insights into the spread of PPA offers in the market and provides insights into market dynamics such as participants willingness to pay a premium (or discount) for additionality or other asset-specific factors.

Based on monthly forward prices pi, monthly volumes Vi and capture factors ci, the fair price is given by the following formula:

where the numerator expresses the expected value of deliveries over the entire tenor of the PPA and the denominator expresses the expected total volume to be delivered by the PPA. (Note that discount factors were omitted in the formula for better readability).

From a simplified perspective, the Market Price of Risk can be seen as the difference between a utility bid and the maximum bid that a corporate should be ready to pay. As briefly noted above, the Market Price of Risk is effectively an adjustment against risks that cannot be hedged. To understand how these risks are quantified, a closer look at the management of PPAs by utilities is required: with very little demand for 10-15yr fixed price electricity contracts in their own portfolio, utilities need to hedge the price risk of their PPA contracts in traded markets. To this end, utilities take to a hedging technique called stack-and-roll. Stack-and-roll hedging effectively means selling the aggregate, cannibalization-adjusted (ie value-neutral) volume of an e.g. 10yr PPA in the 1-3 year tenor range, where liquidly traded contracts are available. As time goes by, the hedge size will, subject to pro-rata reduction, be rolled forward, ensuring ongoing value-neutrality. This hedging approach has two important implications:

Below graph shows the impact of both components on pricing.

Adjusting the red curve („Fair value”) which shows the unadjusted transaction fair price for the cost of position rollover results in the pink curve (“Fair value less cost”). It is seen that the cost is roughly linearly dependent on tenor. Meaning, the longer the PPA contract, the more costs are incurred. Applying the (substantially larger) contango risk discount to the pale-pink curve results in the white curve (“PPA bid”). This price level is where utilities would bid for a PPA offtake, based on their specific portfolio situation.

The starting point of a corporate offtaker is completely different – owing to the nature of the business, e.g. data centers or heavy industry, corporate offtakers start with a natural short position. Where a PPA offtake increases the portfolio risk of a utility, it instead provides risk relief to a corporate offtaker, reducing their short position. Neither of the above-described adjustments applies: Position rollover is not required, as energy is consumed as and when it is produced. The 1:1 temporal match of production and consumption also eliminates contango risk, rendering the related adjustment superfluous. A corporate offtaker should therefore be willing to potentially pay a higher price for the benefit of portfolio risk reduction. The Market Price of Risk is the maximum level of premium that a corporate offtaker should be willing to pay over and above the PPA bid of a utility. That said, many corporate offtakers use professional tender processes, often managing to obtain prices as low as those transacted by utilities.

Utility pricing and corporate pricing are two ends of the pricing spectrum of PPAs: A utility provides risk management as a service and opportunistically shows offtake prices, i.e. it can be considered as showing bids to the market (as market makers do in liquid markets). In contrast, a corporate is actively seeking to reduce portfolio risk by purchasing renewable energy and should be willing to pay up to the fair value to reduce portfolio risk. It is therefore broadly expected that transactions take place in this “bid-ask” range, which is as wide as given by the Market Price of Risk.

The difference between Pay-as-nominated and Pay-as-produced PPAs lies in the volume that is used for PPA settlement. In Pay-as-nominated PPAs, the producer commits to delivering a specified volume of energy forecasted ahead of delivery, and is responsible for the volume deviations if the actual generation differs. In contrast, Pay-as-produced PPAs involve the producer being paid for the energy actually produced and delivered by the producer. The settlement is based on the metered amount of electricity generated.

In short, the difference between a PaN and a PaP is who is taking the volume risk of deviation between forecast and actual production. This is not exactly equivalent to balancing risk, given that any expected deviation between nomination and expected production can still be corrected by adjusting the position in the intra-day markets, to optimize and avoid imbalance costs.

Pexapark’s reference prices are based on a pay-as-produced (PaP) structures, assuming the volume settlement is based on the actual / metered amount of electricity generated by the asset.

Balancing services can also be contracted independently, often with third parties. These contracts may have varying tenors compared to the primary PPA and can include additional route-to-market services such as market access, forecasting, and reporting.
​