Public Sector Network Tender Alert

 

Power Purchase Agreements and managing imbalance risk

A. Background DECC is delivering a major programme of Electricity Market Reform (EMR). The components of the programme include a Contract for Difference support mechanism (the CfD). In response to concerns raised by stakeholders (principally independent wind developers) the department issued a call for evidence to assess the likely development of the Power Purchase Agreement (PPA) market under EMR. The concerns raised were that it is already harder to agree a PPA on bankable terms (i.e. the market is tighter with higher discount and a reduced risk appetite on the part of lenders and PPA providers) and that the situation was likely to deteriorate further as we move towards EMR and the CfD regime. The evidence provided suggests that there are a number of temporary factors including the end of the RO and PPA providers’ reluctance to offer floor prices due to impacts on credit ratings. The Department responded to the evidence received in the technical annexes that accompanied the Energy Bill . This sets out that there appear to be two issues that may be of an enduring nature: • The uncertainty associated with imbalance risk including the impact of increased intermittent generation and Cash Out Reform; and • Limited competitors in the PPA market. B. Work required and expected outputs The Department wishes to commission advice in order to assess: • The likely development of a competitive PPA market under EMR • the significance of imbalance risk and the most efficient arrangements for allocating imbalance risk in the context of the delivery of the Government's energy policy objectives including de-carbonisation and affordability. We envisage that this work would be divided into three inter-related work packages as set out below. The Department reserves the right to sub-divide the contract along these lines, potentially awarding one or more contracts. If there are inter-linkages between the work packages in your tender (e.g. the output of one work package is an essential input to another), then please make this clear in your response. 1. Work package 1 – PPA market competition: • Assess the likely levels of competition taking account of factors that are constraining today’s PPA market • Assess barriers to entry to the PPA market for independent market participants (including aggregators) • Identify and where possible quantify the factors that will drive PPA discounts and risk allocation • Assess the role that contractual arrangements between generators and large end users could play in the current market and under the CfD. • Assess minimum requirement for PPAs demanded by banks and how these impact on competitiveness of PPA market (such as price floors, contract lengths, creditworthiness of off-taker etc.). How are these requirements going to change after the introduction of CfDs? 2. Work package 2 – Imbalance risk • The significance of imbalance risk in project economics and the pricing of PPAs. Particularly considering differences between renewable/non-renewable and intermittent/despatchable generation • The significance of imbalance risk to consumers including likely development over the next 15 to 20 years • The likely scale and nature of imbalance risk over the next decade • The costs and benefits of different approaches to risk allocation including the impacts on meeting the Government’s objectives for low carbon generation and legally binding targets, and the impact on consumers 3. Work package 3 – Mitigation strategies to address imbalance risk: • Commercial mitigation strategies (e.g. contracting approaches, risk sharing etc.); and • Technical mitigation strategies (e.g. site selection, technology choices, control and forecasting systems) The output for each of these work packages should be a final report providing a detailed assessment of the issues identified above, including quantitative and qualitative analysis. You should also allow for meetings at DECC to discuss progress during the contract period and to present findings. C. Capability sought Given the breadth of the work involved, we expect to draw on teams with experience in each of the following areas: • Energy Market evaluation • Contractual arrangements in the energy market • Understanding of imbalance risk and approaches to its management • Economic advice • Understanding financial approaches to risk management and investment decisions • Technical/engineering advice relating to energy generation • Legal issues Expected Outputs The outputs should provide both quantitative and qualitative analysis. Outputs: 1. Draft assessment of significance of the problem to developers and consumers and its development 2. Draft assessment of the costs and benefits of approaches to risk allocation 3. Draft assessment of commercial and technical mitigation strategies 4. Final report incorporating including executive summary and conclusions in order to meet the project objective

Ref: TRN548/12/2012,

Contact:

Department of Energy and Climate Change (DECC)
,3, Whitehall Place
London
SW1A 2AW
Phil Hicken or Matthew Coyne
0300 068 5265/6059
phil.hicken@decc.gsi.gov.uk and matthew.coyne@decc.gsi.gov.uk.
United Kingdom

Contract value: 50000.00GBP

Published: 21 Dec 2012, Receipt by: 19 Jan 2013