Context

An offtaker is an entity which contracts, via Power Purchase Agreements (PPAs), to purchase power generated by producers for a defined time period at a defined price. At the utility scale end of the spectrum offtakers are most often electricity distribution companies (discoms), and the risk associated with entering into PPA’s with them (Offtake Risk) may be best understood by separating it into its two constituent parts. First is the risk that the power plant may be restricted from operating at its optimal Plant Load Factor (PLF), which is also often called curtailment risk. Second is the risk that the power once generated and dispatched, may not be paid for in a timely manner. The first risk is driven by both technical and commercial considerations whereas the latter risk is largely a function of the offtakers ability to meet its financial obligations. From the power producers’ perspective, the former results in an irrecoverable hit to projected revenue (unless contractual protections exist for recovery), whereas the latter pushes projected cash inflows further out into time. Both erode investor returns.

Relevance & Impact

Total project risk under any generation source falls into three broad buckets, Execution Risk, Operation & Maintenance (O&M) Risk and Offtake Risk. In comparison to coal & gas fired plants, RE (solar & wind) plants have the following features:

  • Far easier to construct both in terms of complexity as well as time taken (Execution Risk)
  • Far easier to operate and maintain once built (O&M Risk)
  • With the first two buckets being fairly empty from a risk perspective, it leaves the last bucket, namely offtake risk, accounting for an overwhelming share of total project risk in RE

The ability to measure the various components of offtake risk of renewable energy projects at the time of project evaluation varies from project to project, but available information is generally insufficient at best. As such, much more needs to be done to enable those who deploy capital towards this unique generating source to better measure risk, so that they may in turn better determine the returns they should target.

Who should care

Investors in RE companies

Investors in RE Yieldcos/InvITs

RE project developers

RE project lenders

Policymakers


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Posted On
16 July 2019
Tags
Wind
Solar
PPAs
Discoms
State Policy
Curtailment Risk
Payment Delays
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