Before entering into a PPA agreement, it is important to evaluate risks, including potential technical and financial risks. Technical risks represent sources of uncertainty regarding project operations; these risks can impact a project’s ability to meet the city’s needs. For physical PPAs, the volume and shape of the generated power are particularly important factors to consider.
Review the Technical Risks
Volume risk refers to the uncertainty regarding the volume of electricity produced (measured in kWh) by renewable projects over the long term. While wind and solar output can now be forecast very accurately in the short term (i.e., over the next 24 hours), long-term output is inherently uncertain due to fluctuations in local weather patterns. You should evaluate and consider the range of likely outputs from a project when determining how large a contract to sign. Project developers should be able to provide statistical analyses of the potential range of annual production to help you in this process.
In this context, “shape” refers to the line on a graph representing renewable power production over the course of a day. The shape the line defines is usually lopsided, because a renewable project will produce more power at certain times of the day when the wind blows or the sun shines. These periods may not align exactly with the periods of high electricity demand from your city. The risk associated with this supply/demand difference is shape risk. The image below illustrates how a project’s generation will fluctuate above and below an organization’s energy usage. For more information on how to understand and mitigate shape risk, see the World Business Council for Sustainable Development’s Innovation in Power Purchase Agreement Structures report.