Forecast Electricity Needs and Run Financial Models

Understanding power price forecasts

While deciding whether to enter into a long term fixed price corporate PPA, companies consider what their long term view on power prices is, for example for 5-10 years into the future, in order to understand the financial implications of a deal. In jurisdictions with wholesale electricity exchanges there is usually a good indication of power prices for the next 1-3 years, but generally no further. Organisations therefore typically have to rely on power price scenarios provided by market experts.

As with all forecasts, they are an assessment of the most likely development of power prices using fundamental supply and demand analysis and often include some downside and upside sensitivities. There is a risk that the forecasted movement of electricity prices in, for example, 15 years’ time is wrong.

When valuing a corporate PPA, the fixed PPA prices should be compared to expected market prices over a long period, (such as the next 5-10 years). Short term periods of price premiums are more likely to be compensated for over this long term timeframe. Corporate buyers will also have enjoyed the benefit of price certainty in the interim.

Cost modelling

The energy market is a complex system with a variety of inputs that impact prices, such as demand (both peak and total), generation mix and policy settings. Individual cost modelling can be valuable to help you understand how changing market dynamics affect your organisation. The impacts will vary depending on your consumption, demand profile and network charges, as well as the mix of small and large accounts across different sites in your portfolio.

It won’t be possible to make a perfectly informed decision, but you need to be comfortable with the modeled inputs and assumptions made about future conditions. You must be able to live with the contracted price if those conditions do not transpire and other scenarios come to pass.

To get the best results from your consultants, be sure to ask:

• What data sources will they use?
• How many scenarios will they model?
• Will they model high, medium and low cost scenarios?
• Can they compare the renewable energy purchase to a business as usual scenario?
• How easily can they adjust the model if new information becomes available?
• How much time will this take and how much will it cost?

In off-site PPAs, customers’ per-kWh electricity bills are composed of both generation fees (the costs for which customers negotiate directly with the genco) and wheeling fees. The retail tariff of a grid-provided, regulated commercial kWh depends on a number of factors. The different tariff costs generally fall within a range but vary somewhat. Figure 6 shows a real-world example of a company’s electricity bill components where the customer must pay wheeling fees because each kWh of its RE is generated off-site and requires transport via the grid to its facility, incurring multiple ancillary costs. Such expenses for using the grid do not exist for electricity consumed from an on-site generation system. The elements comprising wheeling fees are set by rate formulas in CREG Resolution 097 of 2008 (CREG 2008). However, wheeling fees are case specific and can vary depending on factors such as voltage level, transmission line congestion, and size of the distribution network.