Energy Important Concepts

Key Energy Terms

• COD (Commercial Operation Date):The date when an energy asset becomes operational.

• NCF (Net Capacity Factor):A ratio of actual electric energy output divided by the maximum possible energy output over a time period.

• Units of Power:

  • W (Watts): Basic unit of power for energy transfer.

  • KW (Kilowatts): 1000 watts.

  • MW (Megawatts): 1000 kilowatts.

• PPA (Power Purchase Agreement):Governs the sale of energy to the end user, such as a utility or commercial/industrial consumer.

• MWh (Megawatt Hour):Represents a million watts of electrical power for one hour; output measured in MWh or KWh.

• EPC (Engineering, Procurement, and Construction Contract):Governs the entire construction of a solar photovoltaic asset.

• O&M (Operations and Maintenance Contract):Dictates operational outflows of the project regarding maintenance of the solar asset.

• PPA Term:Duration and terms of the PPA agreement.

• P50, P75, P99:Production estimates provided in an engineering production report; P50 is mean production, while P99 indicates tail risk.

• DC vs. AC:

  • DC (Direct Current): Produced by solar panels.

  • AC (Alternate Current): Used on the grid.

• Degradation:The reduction of power production of solar panels over time due to environmental factors; PV panels come with warranties assuring a certain level of production over x years.

• DC to AC Ratio:Ratio of output DC power to interconnection AC power; standard is approximately 1.25, but can vary.

• Construction Cost:Total cost of constructing an asset, has significantly reduced over the last 5 years.

• Loan to Value (LTV):Maximum funding from a lender versus market value.

• DSCR (Debt Service Coverage Ratio):Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) divided by principal and interest payable.

• Base Rate:In USA projects, this is often LIBOR.

Margin and Swap Rate

• Margin:Added to the base rate indicating the total borrowing cost, compensating lenders for jurisdiction risk.

• Swap Rate:Adjusts the floating base rate, adds premium due to market dynamics.

• Total Effective Rate:Includes base rate + margin + swap rate.

Battery Energy Storage Systems (BESS)

• Functionality:Charges energy from grids or generation sites, storing it for future discharge when needed.

• Market Strategy:

  • Imports energy when supply is abundant at low prices.

  • Exports energy at high prices when supply is scarce.

• Importance:Allows homes and businesses to use clean energy when it’s not being generated (e.g., at night).

• Lithium-ion Batteries:The most common chemical compound used in batteries today.

BESS Categories

1. Rated Power:Maximum charge/discharge rate (instantaneously) measured in MW.

2. Energy Capacity:Total stored energy capacity measured in MWh.

3. Duration:Time a BESS can discharge at full power.

Engineering, Procurement & Construction (EPC) Contract

• Risk Management:Throughout the construction phase, risk is managed by a single contract with a single EPC entity, as opposed to multiple independent contracts.

• Contractual Roles:Signed between the project developer and the EPC contractor; manages all subcontracts and supply chains from design to client handover.

• Joint Ventures:In complex projects, multiple organizations may these to fulfill the EPC role.

• Cost Relationship:EPC contracts typically more costly than the sum of multiple “multi-lot” contracts.

Power Purchase Agreement (PPA)

• Structure:Contract between energy producers and suppliers for power generation.

• Components of a PPA:

  1. Power Purchase Price:Pre-agreed price per MWh for generated energy.

  2. Imbalance:Difference between forecasted and actual energy generated.

  3. Embedded Benefits:Includes taxes, subsidies, system charges, etc.

• Risk Premiums:Suppliers charge premiums to cover market risks; risk premiums vary according to generation profiles.

PPA Structures

1. Indexed PPA:Power price tied to energy market indices with upfront pricing.

2. Fixed PPA:Pre-agreed price per MWh; more risk for the supplier.

3. Flex PPA:Parties can lock in prices based on market rates, suitable for proactive generators.

Power Measurement

• Power (MW) vs. Energy (MWh):

  • Power denotes the rate of energy transfer

  • Energy denotes total consumption: 1 MWh represents sustaining 1 MW for one hour.

Energy Market Economics

• Generation Stack:Reflects varied costs of producing 1 MWh dependent on technology.

• Cost Considerations:Short-run marginal cost of operation determined by factors like fuel, carbon output, efficiency.

• Merit Order:The cheapest energy sources are used first when meeting demand.

• Price Determination:Electric prices are based on the marginal production cost, set by the resource used when demand changes.