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Virtual Power Purchase Agreements

Model Possible Future Scenarios

One of the key elements of a VPPA financial analysis is the estimate of future wholesale electricity prices at the point of sale. These future prices can then be compared with the expected PPA price to evaluate the overall VPPA profitability for your city. This process should ideally be conducted by an expert in energy markets; further, since modeling future energy prices is a notoriously difficult thing to do accurately, you may want to consider reviewing multiple forecasts and/or evaluating several scenarios.

There are a few common methods to estimate how future energy prices may change over time:

  • Long-term price forecasts

    Specialized consulting firms such as Ventyx (ABB), Wood Mackenzie, and Platts (McGraw Hill Financial) provide long-term price forecasts that can be used to evaluate future energy prices. While obtaining forecasts directly from these vendors may be prohibitively expensive, your project developer may be able to supply them to you.

  • Projections based on recent market performance

    You could create your own projections based on recent prices and assumptions regarding future price movements.

  • Projections based on natural gas forward curves

    In many markets, natural gas generators are often the “marginal generators,” meaning that wholesale electricity prices are largely determined (or at least influenced) by the price of natural gas. As there is a long-term futures market for natural gas, it is possible to use these forward prices as a basis for estimating future electricity prices in your markets.

  • Worst-case scenario development

    Some teams choose to develop a worst-case scenario instead of, or in addition to, forecasts produced via anticipated future market prices. A worst-case scenario provides the financial team with a maximum potential cost for the transaction, which allows your city to evaluate whether it is prepared to absorb the highest potential losses.

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