Forecast Electricity Needs and Run Financial Models | Clean Power Hub

Forecast Electricity Needs and Run Financial Models

To move forward with a renewable energy procurement, you must be able to clearly present to stakeholders and decision-makers how the new procurement will affect your company's financials. Therefore, modeling out various cost scenarios is a crucial step in the procurement process. You must consider and include all costs and forecast your company's electricity needs to your best ability. A thorough financial model will help you make your case for the new procurement method.

Main Points

  • There are certain costs to consider depending on the country, local authority, utility, financing institutions and more. To understand the full cost of procurement, you must create a financial model.
  • All organizations have certain electricity needs that help determine what procurement method makes the most sense for their own context. There is even a chance your company is unable to forecast electricity needs at all, which will impact your procurement decision.
  • A shift in policy could change the cost of procurement, renewable energy project development, utility green pricing program offerings, or more. Therefore, staying up to date with policies will help you mitigate risk.

First, Read About Price Forecasting

No matter which procurement method you are considering, you must measure the cost of the alternate procurement method versus the cost of a business as usual scenario (i.e. continuing to procure traditional energy sources from your current supplier).

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.

Now, Understand Cost Modeling

To model costs, you must work with a consultant or internal analytics department. Asking the right questions will help you to ensure the consultant is including the appropriate inputs and assumptions in the model.

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?

Read Excerpt: Renewable Energy Procurement by the City of Melbourne and Carbon Neutral Cities Alliance.

And See This

Entering a third-party PPA or directly investing in a self-generation asset requires a long term commitment. To understand the advantages and disadvantages of either investment, procurement professionals must understand their company’s electricity load.

Next, Read This

Recall that the levelized cost of energy (LCOE) is a tool that businesses and policymakers use to compare the costs of various electricity generation sources, such as wind and solar photovoltaics. Businesses can use the LCOE to compare the cost of a renewable energy investment to purchasing a standard utility tariff. To calculate the LCOE, you must determine capital and operating expenditures (CAPEX and OPEX), the weighted average cost of capital (WACC), and the capacity factor of the power generating asset.

And See These Case Studies

All kinds of companies - including hospitals, malls, and office buildings - have benefitted from these rooftop solar cost-savings in the Philippines.

Now, Consider Transmission and Distribution Costs

There are transmission and distribution costs associated with several procurement options, including an off-site PPA.

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.

Finally, Watch This

It’s important to remember to keep an eye on shifts in policy, as certain policies may open the door for your organization to procure significant amounts of renewable energy, potentially at lower costs.

Suggested Actions & Next Steps

  • Research: Using the list of financial institutions, utilities and local policies that you identified in previous sections, research the fees associated with a procurement mechanism of interest (utility fees, net-metering options, applicable interest rates, etc). Reference financial resources and tools from USAID and CEIA developed for the Vietnamese and Southeast Asian context.
  • Investigate: Understand your corporate’s future electricity procurement needs and sustainability priorities: How much electricity does your company consume in a typical year? Is it intermittent or constant? Do some of your facilities consume more energy than others?
  • Forecast: Work with an analyst to model costs for a business-as-usual and hypothetical renewable procurement scenario according to electricity needs for the next 5-10 years. The hypothetical scenario should reflect costs for the procurement methods you are considering, including all fees you noted in Suggested Action 1.
  • Evaluate: If you are considering developing a turnkey purchase on-site, you must compare whether to directly invest or obtain third-party funds.
  • Remember: Check in on your policy landscape once more to see if any financial incentives influence the exercise above.
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