Edward Kee

Power Purchase Agreements

Oct 2015 ANL/IAEA

The NECG slides that follow are not a complete record of this presentation and discussion. The views expressed in these slides and the discussion of these slides may not be comprehensive and may not reflect the views of NECG’s clients or the views of my colleagues.

© 2015 NECG

Oct 2015 1ANL/IAEA

Electricity industry structure important– My session earlier today covered this in more detail– In some cases, a PPA may be possible

PPA offers options– Alternative to self-build/ownership– Off balance sheet financing by buyer– Attract outside investors– Manage nuclear project risks

Oct 2015 2ANL/IAEA

Overview & Context

PPA approach not without risks

PPA may be more expensive than direct ownership

PPA details reflect competing demands– Requirements of lenders and investors– Potential for delays and cost overruns– Requirements of power buyer/user– Grid and system operations – over life of PPA

Oct 2015 3ANL/IAEA

Overview & Context (cont.)

Oct 2015 4ANL/IAEA

Government utility

TRANSMISSION

$

MWh

RETAIL SERVICES

DISTRIBUTION

Government

governmentsubsidies

CONSUMERS

$

System Dispatch

Nuclear ProjectElectricityMinistry

Ultimate credit sourceInvestors

PPA

Nuclear Plant

Investors

Oct 2015 5ANL/IAEA

Regulated utility

TRANSMISSION

RETAIL SERVICES

CONSUMERS

DISTRIBUTION

Investors

System Dispatch

Nuclear Project

$

MWh

IRP & rate-making process

Utility Regulator

Ultimate credit source

PPA

Nuclear Plant

Oct 2015 6ANL/IAEA

Electricity markets

GeneratorGenerator

Generator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorGenerator

GeneratorTRANSMISSION

$

MWh

RETAIL SERVICESCONSUMERS

DISTRIBUTION

Electricity Market

Utility regulator

Market oversight

Ultimate credit source

InvestorsNuclear Project

Generator

Hedgecontract

14 Oct 2015 7Middle East Nuclear Power Briefing 2015

Cooperative model

TVOU.S. G&T Coops

Member agreements + long-term projected demand

Cooperative members

CONSUMERS

Nuclear Project

Costs

MWh

Ultimate credit source

Electricitymarket

PPA = alternative to nuclear plant ownership

Costs and benefits of ownership should be compared to PPA outcomes

Nuclear project finance tightly linked to PPA– Guarantees of payments/obligations may be needed– PPA details must be crafted to meet

lender/investor/sponsor requirements

Oct 2015 8ANL/IAEA

PPA

Longer development/construction period

Greater risk in development and construction

Longer term/tenor (high capital + long asset life)

Low-probability, high-impact nuclear events

Externalities (Decom, SNF, TPL insurance)

Nuclear regulatory cost issues

Nuclear fixed/variable costs & dispatchOct 2015 9ANL/IAEA

Nuclear PPAs ≠ conventional PPAs

Short-run marginal cost - key power plant attribute

Difference in total cost due to small change in output for a short period (e.g., 1 MW for 1 hour)

For fossil fuel units, SRMC is fuel cost (maybe some variable O&M)

For wind, solar, run-of-river hydro, SRMC = ZERO

For most nuclear power plants, SRMC = ZERO

Oct 2015 10ANL/IAEA

SRMC

Batch refueled light water reactors (PWR/BWR)

Plants operate as much as possible during 18 to 24 months between refueling outages

Refueling outages involve maintenance activity in addition to fuel change – not easily rescheduled

Nuclear fuel cost incurred before fuel is loaded

Only a very large/long outage might result in delay of refueling outage

Oct 2015 11ANL/IAEA

Nuclear SRMC = ZERO

100% 100%

0%

70%

Nuclear Fossil fuel

Total costMarginal cost

Oct 2015 12ANL/IAEA

Illustrative – marginal cost comparison

Utility meets time-varying demand by dispatch

Fossil-fueled units– Large part total generating cost = fuel (marginal cost)– Change output levels significantly in short time– Able to shut down overnight or in off-peak seasons– Avoid large part of total costs by shutting down

Nuclear plant costs all fixed – no benefit to operator/owner from operating at less than 100%

Oct 2015 13ANL/IAEA

Dispatch issues

Oct 2015 14ANL/IAEA

SRMC Dispatch (unit 1 = nuclear)

X Generator SRMC

2 3 4 5 6 7

Demand Supply

Short-run Marginal Cost (SRMC) 1

All payments for power on $/MWh basis

Transforms PPA price into SRMC for buyer

Buyer dispatch with PPA based on this SRMC– May mean lower operation of unit in PPA– Lower revenue for PPA seller– Typically leads to PPA terms that require buyer “must

take” power (i.e., no dispatch)– Issues for all plants, not just nuclear

Oct 2015 15ANL/IAEA

“Single Price” PPA

Oct 2015 16ANL/IAEA

Single-price PPA – turns fixed costs into marginal costs for power buyer

Nuclear costs (all

fixed)

Nuclear costs (all marginal)

PPA with one-part pricing; all revenue is obtained when power is sold at $/MWh

Nuclear operator

sees costs that are all

fixed

Utility power buyer sees

costs that are all marginal

Approach used in more mature PPAs– Fixed capacity payment ($/MWe/month) – based on

project fixed costs– Variable payment ($/MWh) – based on project

variable/marginal costs

Allows PPA dispatch similar to owned units

Avoids need for “must-run” PPA provisions

Typically includes availability tests to qualify for fixed capacity payments

Oct 2015 17ANL/IAEA

“Two-Price” PPA

A nuclear PPA with a pricing approach tied to project costs suggests a single fixed payment (the opposite of the single variable payment approach)

PPA provisions related to operating effectiveness and incentives for performance– Financial incentives/penalties– Based on capacity factor over month or year– Risk for owner/operator may be issue– Exceptions for regulatory requirements?

Oct 2015 18ANL/IAEA

Nuclear PPA – capacity payments?

Ownership equivalents– Cooperative arrangements– Regulatory participation agreements– Pass-through PPA between affiliates

Other– Stipulated price agreements – conventional PPA– Tolling agreement (power buyer pays for fuel)– Hedge Agreement / Contract for Differences (CfD) in

electricity markets

Oct 2015 19ANL/IAEA

High-level PPA approaches

PPA Issues and Approaches

Pricing and payment structure– Performance incentives and risks– Financial incentives and penalties– Plant operating schedules & outages

Contract timing & term/tenor

Spent nuclear fuel & decommissioning fees

Contract re-openers/contingencies

Oct 2015 20ANL/IAEA

Participation agreements– Buyer takes all available power and pays all costs on a

pro rata basis)– TVO, Palo Verde, SERI (Entergy), Vogtle 3&4

US merchant nuclear PPAs (part of sale)

Exeltium & Blue Sky (European fwd power sales)

UK EMR – Hinkley Point C CfD

Oct 2015 21ANL/IAEA

Nuclear PPA examples

© Copyright 2015 NECGAll rights reserved.

Edward Kee

Nuclear Economics Consulting Group+1 (202) 370-7713edk@nuclear-economics.comwww.nuclear-economics.com

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