Power purchase agreements and commitment towards buyers

Stillwater geothermal power plant of Enel, Nevada, (source:
Alexander Richter 26 Jul 2010

Power purchase agreements are an important tool for developers to raise finance, but they also require reliability on behalf of the developer to provide that electricity when going online.

Power purchase agreements (PPA) are important for developers to secure financing, they are also important for utilities to plan ahead. A Power Purchase Agreement “is a legal contract between an electricity generator (provider) and a power purchaser (host). The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.” (Wikipedia)

In the United States, Renewable Portfolio Standards require utilities to source a certain amount (around 20%) of their electricity from renewable sources. Geothermal energy has been a somewhat popular choice as it provides a baseload capacity that other renewables can’t offer.

At the same time the period until the utility can source electricity from a geothermal project is rather long, as it can take a few years until a project comes online. For other renewables that time is a lot shorter making it in a way easier to plan.

So while it is of utmost importance for developers to trust those PPAs, in many cases actually banks have hesitated to finance projects given the credit ratings of utilities, as important is it for the utility to trust the developer to provide the contracted amount of energy.

In news from Nevada’s largest utility NV Energy, the utility talks about “the “inferior” performance of a geothermal company from which NV Energy buys power, and it noted that just half of the renewable energy the utility has contracted for has actually been delivered. The rest has been delayed or canceled, and that’s made it tough for the utility to meet the state mandate requiring it to obtain a certain share of its power portfolio from renewables.” (NV Energy, release)

While these news are not good, they highlight the fact that both parties need to plan realistically and developers need to have planning security. In geothermal development there are a number of issues that can delay projects, such as financing obstacles, re-financing risks, delays in approval processes in governmental incentive schemes, insecurity in availability of tax credits etc are things that make life for a geothermal developer not necessarily easier.

In the release by NV Energy, there are also interesting facts mentioned, e.g. the current prices that the utility pays, namely around 8.6-13.5cents per kWh (86-135$/ MWh), the approval of PPAs with Ram Power Corp.s Calayton Valley geothermal project, as well as Ormat’s McGinness Hills and Hot Sulphur 2 geothermal plants.

“Nevada’s renewable portfolio standard requires NV Energy to obtain 12 percent of its power from renewables in 2010, and 25 percent of its power from green sources by 2025.

Through 2009, geothermal and wind project cancellations, delays and production problems cost NV Energy more than 8 million kilowatts of portfolio credits. From 2006 to 2008, a number of geothermal suppliers fell short of contracted supplies because of resource shortages and equipment problems. If the projects in service had met their contractual supply amounts, NV Energy would have exceeded its 2009 portfolio standard of 12 percent by a wide margin, the order said. (NV Energy reached the 10.5 percent mark.)

What’s more, only a third of renewable projects NV Energy contracts for actually get completed on time, the order said. Another third are delayed, sometimes for years, and roughly a third are canceled.”

Source: Draft order by NV Energy for the Public Utilities Commission (Jul. 23, 2010)