Solar operators take on price, timing risk to secure offtakers

Asset managers are building wholesale market expertise and creating time-sensitive labor and cleaning strategies to meet the risk demands of offtakers, leading operators told the PV USA Operations conference.

Falling solar costs and growing demand from utility and corporate offtakers are placing new pressures on asset management and operations and maintenance (O&M) groups.

U.S. utility-scale solar installations are forecast to hit a record level of 12.6 GW in 2020, according to Wood Mackenzie Power and Renewables. Annual corporate demand for solar power is set to surpass wind power demand in 2021 and hit almost 10 GW by 2023.

Wind, solar corporate demand (aggressive forecast)

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Wood Mackenzie report 'Analysis of commercial and industrial [C&I] wind energy demand in the U.S,' August 2019.

Power market competition has sliced solar PPA prices, prompting owners to seek efficiency gains along the full life of the plant.

U.S. one-axis tracker utility-scale PV O&M costs fell from $20/kW/year in Q1 2017 to $14/kW/year in Q1 2018, including inverter replacement costs, the National Renewable Energy Laboratory (NREL) said in its latest annual U.S. Solar Photovoltaic System Cost Benchmark report. Fixed tilt utility-scale PV O&M costs fell from $17/kW/yr in 2017 to $13/kW/yr in 2018, the study said.

Utility and corporate offtakers are requiring PV plant owners to take on more operational risk, driving new contractual frameworks and requiring asset managers to become more comfortable with market risks, industry experts told the conference in San Diego on November 7.

"That creates a lot more work on the asset management side," Lee Connor, Asset Manager at EDF Renewable Energy, said.

"The way we make money is becoming a lot more complicated," Connor said.

Performance risk

Under increasing pressure to hit renewables targets, utilities are building in more restrictive performance guarantees into O&M contracts, Lee Zanone, Senior Director, Operations and Asset Management at 8minuteenergy, a solar and storage developer, said. In September, the Los Angeles Department of Water and Power (LADWP) agreed a record low PPA price at below $20/MWh for 8minuteenergy's planned 400 MW Eland solar plus storage facility. The project will include up to 300MW/1200 MWh of storage capacity.

"It used to be that we had a lot of annual generation flexibility, based on the change in sunlight,” Zanone said. “Those are getting super narrow."

                  US annual corporate renewable energy deals

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Source: Business Renewables Center

Offtakers are also demanding tough performance guarantees in the distributed generation sector, David Fernandez, COO, Goldman Sachs Renewable Power, said. Goldman Sachs Renewable Power has deployed over $1.4 billion of capital, mainly to U.S. distributed solar assets, and will have a further $4 billion to invest following recent equity commitments by Goldman Sachs Asset Management (GSAM).

"Offtakers are getting smarter," Fernandez said.

"They are putting a lot more pressure on the sponsor equity...The risk is shifting that way," he said.

Tracking markets

PPAs may include prices linked to market-based strike prices, placing some of the market risk on the operator, Zanone told attendees.

"We are forced to be a lot more of a real-time market player," he said.

Utilities are increasingly looking to use PV plus storage projects as a dispatchable asset, which brings added market complexity.

PV plus storage projects can use flexible dispatch to capture higher market prices and these projects are trending towards a "wholesale market dispatch ownership model," Zanone said.

"That's the way we've seen the market going, we've seen these hedge deals where it is halfway there to real-time pricing," he said.

Creative contracts

Asset managers have had to become more sophisticated and more creative to respond to offtaker demands.

"Now we have to be able to monitor the real-time market, we have to be able to come up with creative solutions on how to work around congestion and always be ahead of the curve," Connor said.

"Maybe you buy congestion revenue rights and you are able to protect yourself for six months, but then everyone else does the same thing," she said.

Asset managers need to understand the tariffs and rules implemented by the independent service operators (ISOs), to protect their projects, Connor said.

"It's something we've spent a fair bit of time doing,” she said.

Asset managers must allocate labor and other resources according to more detailed timing clauses set out in O&M contracts, Zanone said.

This could include deploying more labor or implementing specific cleaning strategies at specific points, to optimize high value periods, he said.

"[It's] scoping your operations to maximize your reliability and responsiveness when you are making money," Zanone said.

Tech advantage

For larger plants, operators can deploy software solutions to optimize labor deployment and minimize costs. Operators such as Southern Power, Invenergy, Duke Energy and Enel Green Power are also deploying drones and advanced imaging technologies at solar sites to detect faults and cut inspection times.

Large solar plants are ideally suited to maximize the economies of scale gained through analytics and predictive technologies, requiring relatively little manpower during operations, Connor noted.

"It's a huge advantage if you look at solar versus wind," she said.

Further technology development is required to provide an all in one solution, Connor warned.

"We have leaps and bounds to go before we actually have an automated all-encompassing asset management platform that you can use to manage your project," she said.

Compliance calls

Increasing grid complexity and renewables integration will continue to put pressure on asset managers, experts said.

"From a compliance standpoint, everybody is more sophisticated,” Zanone said.

“Everybody wants more information about the project. Tax equity, debt, offtakers, ISOs, [North American Electric Reliability Corporation]...every single counterparty related to a project asks for more information," he said.

"But- the asset management line item doesn't move up,” Fernandez noted.

“Despite all of the things that we have got to do, that cost is not going up.”

New Energy Update