Jargon Busting Season One

The renewable energy industry is filled with complex terms, concepts, and acronyms that are commonly used in everyday discussions.

Over the past year, we initiated the first season of our Jargon Busting campaign, where we dissected various terminologies to enhance the accessibility of our industry.

While we have concluded the final episode for the year, we will kick off the next season of Jargon Busting sometime next year, where we will focus on terms used in trading electricity.

In this blog, we will share all the terminology that we have covered this year, enabling you to find simplified meanings for some of the intricate industry jargon in one convenient place.

• Episode 1: Contracts For Difference (CfDs)

CfDs are the government’s main mechanism for supporting low-carbon electricity generation. They incentivise investment in large-scale renewable energy projects by providing developers with direct protection from volatile wholesale prices.

Asset owners enter into a private law contract with the BEIS-owned Low Carbon Contracts Company (LCCC), whose primary role is: to issue contracts, manage them without construction, and make payments once delivered.

Projects are paid a flat (indexed) rate for the electricity produced over a 15-year period - equal to the difference between the ‘strike price’, determined by competitive auction, and ‘reference price’, the average UK market price.

Eligible generators can apply to an Allocation Round by way of ‘sealed bid’. There have been five ARs to date.

• Episode 2: Renewable Energy Guarantees of Origin (REGOs)

REGOs provide transparency to consumers about the proportion of electricity generated by renewable sources.

One certificate is issued per Megawatt hour (MWh) of renewable output. Their primary use in the UK is for fuel mix disclosure (FMD), whereby licensed suppliers outline their energy sources.

EU member states' ceased recognising UK certificates on 1st Jan 2021. Our government recently reciprocated, decoupling REGOs from the wider Guarantees of Origin (GoOs) market since April 2023.

Since 2019, prices have rocketed 10,000% from lows of 17p to highs of £24.80 per certificate. Despite falling from the October peaks, a clear upward trend in prices has can be observed.

• Episode 3: PPA Types

Pay-as-produced or pay-as-generated:

PAP PPAs are the most common contract type as generators can lock in predetermined prices. They allow an off-taker to purchase all, or a %, of the power output at a fixed cost, however the buyer holds the volume risk if an asset underproduces.

Baseload or fixed-volume:

The off-taker buys a fixed volume of electricity for a specified period (monthly, seasonally, annually) over the lifetime of an agreement. The generator is responsible for under-delivery but could reap the rewards of selling excess power onto the market.

Route-to-market or market-access:

Buyers and sellers exchange cash flows based on an agreed ‘strike price’. RTM allows generators to sell the full output of their facility at a discount to the prevailing market price, as referenced by an exchange such as N2EX.

• Episode 4: Sleeved PPAs

In a sleeved PPA, a utility manages the exchange of funds and electricity between a renewable energy (RE) and the corporate buyer to purchase all or some of the electricity generated at a predetermined price.

The utility purchases the electricity directly from the RE project and “sleeves” it to the buyer at the point of consumption, charging a fee for this service.

Should the acquired renewable energy fall short of meeting the buyer's energy demands, the utility is also accountable for delivering the extra power required.

The "sleeved” element highlights that the agreement is structured as a “sleeve”, alternatively referred to as a Special Purpose Vehicle (SPV), which is separate from the developer and utility. SPV allows for the transfer of ownership, liability, and project risks to the SPV, protecting both parties against adverse consequences.

The main benefits of a sleeved PPA is that there is no need for the corporate buyer to constantly stay up-to-date with wholesale power market dynamics. Additionaly, the buyer will not be affected by wholesale power market price fluctuations as it is the suppliers responsibility to bear the market risk.

• Episode 5: Feed-In Tariffs (FITs)

FITs were a subsidy initiative designed by the government to encourage the development of small-scale renewable energy generation.

These incentives came in the form of long-term contracts, typically spanning a duration of 10 to 25 years, with contract length dependent on factors such as the renewable technology type, capacity, and any previous accreditations. FITs are composed of two fundamental components: the Generation Tariff, a fixed amount paid to the generator for all the renewable energy produced, and the Export Tariff - an additional payment for any excess electricity exported to the grid.

The costs of the FITs scheme are shared across all licensed electricity suppliers in Great Britain proportionate to their share of the electricity supply market.

While the scheme has been discontinued since April 1st 2019, existing FIT accredited installations will continue to receive FIT support payments for the duration of their respective contracts.

• Episode 6: Commercial Operation Date (COD)

A COD refers to the specific date that a renewable energy facility successfully completes commissioning tests, becomes fully operational, and starts generating power to earn revenue.

Within the framework of a PPA contract, there are usually two COD's: the Targeted COD and the Guaranteed COD.

The Targeted COD is the date that all parties aim for a facility to commence operations, and when the obligation for off-takers to purchase the generated energy begins.

Should the facility fail to become operational by the Targeted COD, it’s customary for the generator to pay delay damages for each day of delay.

The Guaranteed COD serves as the final deadline. If the facility remains non-operational beyond this date, the off-taker retains the right to terminate the PPA contract, with the generator being responsible for termination damages.

• Episode 7: Levelised Cost Of Electricity (LCOE)

The LCOE is an important metric used in investment planning and comparing different methods of electricity generation. It serves a fundamental role in the evaluation of prospective energy-generating assets.

When calculating the LCOE, two key components are considered: the generator's building and operating costs, and the total electricity generated throughout the generator's operational lifespan.

The LCOE is used to determine a project’s viability and profitability. If the LCOE indicates that a project won’t break even or generate profits, investors can opt out and explore alternative projects.

Financial analysts also use LCOE to assess and compare the competitiveness of different energy-producing technologies, ranging from fossil fuels to the wide spectrum of renewables.

• Episode 8: Cannibalisation

In the context of renewables, cannibalisation refers to the decline in wholesale electricity prices due to the surplus of renewable energy exceeding the demand for power.

As more of the same type of renewable generators are integrated into the grid, the risk of cannibalisation intensifies, leading to a further decline in electricity prices.

An example of cannibalisation occurs when the output of solar farms diminishes the wholesale electricity value, particularly during the daytime hours of 7am to 3pm. With solar installations on the rise, the energy surplus negatively impacts the profitability of solar installations by reducing the revenue per unit of electricity produced.

• Closing Comments:

We've delved into a lot of industry terms throughout this campaign, and we hope that we have contributed to a better understanding of our sector.

There's plenty more ground to cover, so rest assured that we will cover some more terminology next year!

As part of our service to PPAYA Ltd. platform members, we are pleased to provide you with a detailed market report, highlighting all key updates and market changes, indicating how this will affect the coming days/weeks ahead.

Sign up to our platform for free today to keep up to date with these changes and discover more about how we can help you secure the best price for your Power Purchase Agreement.