Power and renewables

Key contracting issues for hybrid renewable off-take agreements

Contracting Issues for Hybrid Renewable Projects

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Michael Kleinberg

Michael Kleinberg

Vice President - Energy Storage Advisory

Hybrid renewables are defined as a renewable generation projects, typically solar or wind, coupled with a battery energy storage system (BESS). Despite massive growth in recent years, the energy storage industry is still young and developing under quickly evolving performance expectations, technology capabilities, contract structures, and revenue models.

For contracted projects, the industry has put forth several variations of off-take agreements, or power purchase agreements (PPAs), incorporating a range of important technical and commercial terms such as: 

  • payment mechanisms
  • operating requirements
  • performance guarantees
  • damage structures and events of default
  • periodic testing requirements

One of the most common payment mechanisms for hybrid project PPAs is an energy-only payment, in which the project is compensated, typically at a premium over the solar-only energy price, for all energy delivered to the point of delivery (POD)—regardless of whether the energy was delivered directly from the renewable resource to the POD or first routed through the battery. Alternatively, some PPAs have an energy payment for solar energy delivered to the POD and separate capacity payment for the BESS. Under each payment structure, either the seller or buyer will be responsible for covering round-trip efficiency (RTE) and balance-of-plant losses associated with the project. Additionally, energy required to power the thermal management system of the BESS must be considered. It is critical for the seller to properly identify this responsibility when designing and pricing a project, which will ensure these losses are properly accounted for in the engineering design and financial model.  

Regardless of the payment structure, the PPA will typically allow for off-taker dispatch of the BESS. The parameters and flexibility of off-taker control are captured in the operating requirements of the agreement. The key technical parameters in the operating requirements is the number of annual equivalent cycles, or annual cumulative discharged energy, which is granted to the off-taker. For example, a project with a 25 MW, 4 hour BESS providing for 300 annual equivalent cycles, would allow for the off-taker to direct dispatch of the project up 300,000 MWh (25 MW x 4 hours x 300) of cumulative discharged energy, as measured at the POD. When designing the BESS, this is the operating parameter with the greatest impact on lifetime cost. Additional operating limitations may include a maximum number of daily equivalents cycle or annual average state of charge limits. 

While meeting the operating requirements, the PPA will specify that the project meets several performance guarantees, each of which is generally associated with a damage structure penalizing underperformance. The primary performance guarantees for the BESS include:

  • energy capacity (MWh) – typically assessed annually as part of the periodic testing requirements;
  • maximum charging and discharging rate (MW);
  • annual availability (%) – most agreements specify 97% annual availability of the BESS before damages are incurred; hourly availability of the BESS is typically reported by the seller’s control systems and expressed as the fractional percent of available power and energy capacity relative to the guaranteed levels; and
  • roundtrip efficiency (%) – the ratio of discharging energy to charging energy, expressed as a percentage and typically assessed annually as part of the periodic testing requirements. The RTE guarantee is commonly represented by an annual degrading schedule or in some cases a fixed level over the life of the project.

Other secondary technical parameters present in some PPAs include ramp rate (MW/second) and response time (seconds) guarantees. 

All of these PPA performance and operational requirements mean you must hammer out performance guarantees with the other parties in the project and ensure that the financial and technical requirements align. When taking on long term performance guarantees in a PPA, a developer will typically contract with an integrator or third-party for a long-term service agreement. Further, investor comfort and long term performance will rely on alignment between the battery supplier agreement and the PPA operational requirements. You can find out more about this in my colleague Brian Warshay’s blog: Energy Storage Capacity Warranties: Beyond the Fine Print.

As the battery storage industry matures and storage increasingly serves hybrid purposes, contracts for hybrid projects will hopefully tend toward standardization on achievable performance levels which are economically viable for the seller and off-taker. That will be a welcome advance! 

Contact us:

Michael Kleinberg

Michael Kleinberg

Vice President - Energy Storage Advisory