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In today's complex energy portfolio management landscape, independent power producers (IPPs) must balance the need to attract clean energy project investors with the challenge of simultaneously solving for long-term profitability, in which revenue maximization becomes as important an outcome as risk minimization. Achieving this balance can prove complicated, however, as the strategies required to secure project funding may vary or be used differently from those needed to optimize returns once projects are operational.
In this webinar, Dr. Gary Dorris, CEO at Ascend Analytics, joined fellow Ascend risk and portfolio management experts Carley Dolch, Managing Director of Risk Analytic Solutions, Robert LaFaso, Director of Forecasting & Valuation, Dr. Carlos Blanco, Managing Director of Risk Management & ESG, as well as Sameer Soleja, CEO at Molecule, to discuss specific financial and operational strategies IPPs must employ at different stages of the value chain to optimize profitability in energy projects and portfolios.
For IPPs and other developers, adopting a 'profitability' lens, rather than just considering what is needed to get a project funded, can provide significant benefits. Clearly understanding which financial structures are optimal prior to financing can help unlock an additional 60% of asset returns when leveraged during the financing stage, as well as increase project internal rate of return (IRR) by up to an additional 15%. Importantly, this 'profitability' perspective may also allow IPPs to save 5 to 15 full time employees by leveraging existing energy analytics software and risk management experts. In a world where hiring expertise is scarce, this also creates the ability to move quickly and save capital.
Optimizing profitability in energy project and portfolio management requires a multi-faceted approach that leverages merchant upside, embraces portfolio diversification strategies, executes adaptable hedging strategies, and ultimately creates high-value power purchase agreements (PPAs). Succeeding in this approach also requires a powerful energy analytics software solution, such as Ascend's PowerSIMM™ suite, that provides meaningful risk distributions, emissions and REC forecasts, nodal forecasts, the ability to measure actual to budgeted performance, the ability to actively manage forward exposure and day-ahead/real-time (DART) operations, and the ability to integrate with a powerful energy trading risk management (ETRM) system.
Figure 1 illustrates the difference – and high-value outcomes – that can occur when adopting a profitability perspective. In this situation, an Ascend client leveraged a revenue floor structure with merchant exposure which, compared to a standard toll model, more than doubled the expected IRR. Debt structured with cash flow insured by investment-grade insurers and a bid optimization provision removed lenders' rights to accelerate amortization via an upside sweep. This structure allowed the developer to retain the high-value merchant upside.
Understandably, many IPPs and developers seek first to minimize risk. However, it remains crucial to remember the potentially attractive merchant upside in project development, as well as the fact that, ultimately, every project is merchant to someone. Every asset in the US responds to wholesale price signals, and are always valued and paid based on how they perform in the merchant market.
Consequently, battery energy storage system (BESS) projects offer few low-risk investments, and 'low-risk' situations require an off-taker who is happy to take on the risk. In this context, tolling contracts have historically emerged in three situations: either utility off-takers are required to offtake capacity and/or energy from storage, green energy commitments necessitate firm renewables, or the lack of tolling 'buyers' and surplus of 'sellers' pushes the prices into 'obvious buy' situation.
In considering risk, IPPs need a firm understanding of the risk reduction possibilities, as shown in Figure 2. Race-to-the-bottom full-toll agreements rarely produce optimal returns, and fully merchant approaches often push beyond stakeholder risk appetites. A revenue floor structure, like that offered by Ascend's EnSurance™, allows stakeholders to minimize revenue risk while preserving upside exposure. However, this approach may not be suitable for all markets, and requires the type of high upside potential seen in Figure 1.
Energy project developers and portfolio managers should also carefully consider market conditions, both in terms of risk management and optimal project structures. In the US, there essentially exist four market types. The first type, which can be seen in PJM and MISO, generally offer low uncertainty and low value. Optimally, developers would wait to develop storage in this type of market. The second type, in markets like SPP, CAISO, and future MISO, present low uncertainty and moderate value. Here, an optimal structure would be an OTC Hedge on gas/power to firm pricing. The third type of market, seen in ERCOT in 2024, offers high uncertainty and asymmetric value. In this market, an optimal structure would be a partial toll or insurance put to cover debt service. Finally, the fourth market state presents very high uncertainty with high upside and downside relative to type 3, such as was seen in ERCOT in 2023 or in ERCOT to date this year. Here, developers should leverage structures that retain upside and monetize covered forwards as needed.
Diversification, in multiple forms, remains an important way to reduce revenue risk. A combined approach that includes portfolio diversification, technology diversification, and market/nodal diversification can sharply reduce portfolio risk, thus removing the need to give away potential upside in order to secure financing. Having a 'buy and sell' strategy can also be useful: even if an asset is not performing optimally, certain entities may be seeking to acquire assets within a developer's pipeline or looking to divest the very assets that may be on a developer's target list.
Other strategies, such as super-peak hedging in a market like ERCOT, in which storage sells forward into a super-peak contract, can also prove effective at maximizing profitability while reducing risk. An optimal super-peak hedge, backed by the asset, allows investors to lock in returns from forward markets and retain additional upside by rebalancing the portfolio.
Finally, an energy trading and risk management (ETRM) system allows IPPs and developers to glean quantitative insights across the trade lifecycle while ensuring accurate record keeping, reporting at any level of management, and automatic valuation. Combining an ETRM, such as that offered by Molecule, with a portfolio analytics solution like Ascend's PowerSIMM, covers IPPs across the entire trade lifecycle.
The Ascend PowerSIMM™ suite is an energy analytics platform that captures the new and evolving dynamics of electricity markets. Utilities, public power entities, renewable developers, and community choice aggregators utilize PowerSIMM for optimal energy portfolio management, risk management, resource planning, and project optimization.
Access the full webinar now or contact us to learn more.
In today's complex energy portfolio management landscape, independent power producers (IPPs) must balance the need to attract clean energy project investors with the challenge of simultaneously solving for long-term profitability, in which revenue maximization becomes as important an outcome as risk minimization. Achieving this balance can prove complicated, however, as the strategies required to secure project funding may vary or be used differently from those needed to optimize returns once projects are operational.
In this webinar, Dr. Gary Dorris, CEO at Ascend Analytics, joined fellow Ascend risk and portfolio management experts Carley Dolch, Managing Director of Risk Analytic Solutions, Robert LaFaso, Director of Forecasting & Valuation, Dr. Carlos Blanco, Managing Director of Risk Management & ESG, as well as Sameer Soleja, CEO at Molecule, to discuss specific financial and operational strategies IPPs must employ at different stages of the value chain to optimize profitability in energy projects and portfolios.
For IPPs and other developers, adopting a 'profitability' lens, rather than just considering what is needed to get a project funded, can provide significant benefits. Clearly understanding which financial structures are optimal prior to financing can help unlock an additional 60% of asset returns when leveraged during the financing stage, as well as increase project internal rate of return (IRR) by up to an additional 15%. Importantly, this 'profitability' perspective may also allow IPPs to save 5 to 15 full time employees by leveraging existing energy analytics software and risk management experts. In a world where hiring expertise is scarce, this also creates the ability to move quickly and save capital.
Optimizing profitability in energy project and portfolio management requires a multi-faceted approach that leverages merchant upside, embraces portfolio diversification strategies, executes adaptable hedging strategies, and ultimately creates high-value power purchase agreements (PPAs). Succeeding in this approach also requires a powerful energy analytics software solution, such as Ascend's PowerSIMM™ suite, that provides meaningful risk distributions, emissions and REC forecasts, nodal forecasts, the ability to measure actual to budgeted performance, the ability to actively manage forward exposure and day-ahead/real-time (DART) operations, and the ability to integrate with a powerful energy trading risk management (ETRM) system.
Figure 1 illustrates the difference – and high-value outcomes – that can occur when adopting a profitability perspective. In this situation, an Ascend client leveraged a revenue floor structure with merchant exposure which, compared to a standard toll model, more than doubled the expected IRR. Debt structured with cash flow insured by investment-grade insurers and a bid optimization provision removed lenders' rights to accelerate amortization via an upside sweep. This structure allowed the developer to retain the high-value merchant upside.
Understandably, many IPPs and developers seek first to minimize risk. However, it remains crucial to remember the potentially attractive merchant upside in project development, as well as the fact that, ultimately, every project is merchant to someone. Every asset in the US responds to wholesale price signals, and are always valued and paid based on how they perform in the merchant market.
Consequently, battery energy storage system (BESS) projects offer few low-risk investments, and 'low-risk' situations require an off-taker who is happy to take on the risk. In this context, tolling contracts have historically emerged in three situations: either utility off-takers are required to offtake capacity and/or energy from storage, green energy commitments necessitate firm renewables, or the lack of tolling 'buyers' and surplus of 'sellers' pushes the prices into 'obvious buy' situation.
In considering risk, IPPs need a firm understanding of the risk reduction possibilities, as shown in Figure 2. Race-to-the-bottom full-toll agreements rarely produce optimal returns, and fully merchant approaches often push beyond stakeholder risk appetites. A revenue floor structure, like that offered by Ascend's EnSurance™, allows stakeholders to minimize revenue risk while preserving upside exposure. However, this approach may not be suitable for all markets, and requires the type of high upside potential seen in Figure 1.
Energy project developers and portfolio managers should also carefully consider market conditions, both in terms of risk management and optimal project structures. In the US, there essentially exist four market types. The first type, which can be seen in PJM and MISO, generally offer low uncertainty and low value. Optimally, developers would wait to develop storage in this type of market. The second type, in markets like SPP, CAISO, and future MISO, present low uncertainty and moderate value. Here, an optimal structure would be an OTC Hedge on gas/power to firm pricing. The third type of market, seen in ERCOT in 2024, offers high uncertainty and asymmetric value. In this market, an optimal structure would be a partial toll or insurance put to cover debt service. Finally, the fourth market state presents very high uncertainty with high upside and downside relative to type 3, such as was seen in ERCOT in 2023 or in ERCOT to date this year. Here, developers should leverage structures that retain upside and monetize covered forwards as needed.
Diversification, in multiple forms, remains an important way to reduce revenue risk. A combined approach that includes portfolio diversification, technology diversification, and market/nodal diversification can sharply reduce portfolio risk, thus removing the need to give away potential upside in order to secure financing. Having a 'buy and sell' strategy can also be useful: even if an asset is not performing optimally, certain entities may be seeking to acquire assets within a developer's pipeline or looking to divest the very assets that may be on a developer's target list.
Other strategies, such as super-peak hedging in a market like ERCOT, in which storage sells forward into a super-peak contract, can also prove effective at maximizing profitability while reducing risk. An optimal super-peak hedge, backed by the asset, allows investors to lock in returns from forward markets and retain additional upside by rebalancing the portfolio.
Finally, an energy trading and risk management (ETRM) system allows IPPs and developers to glean quantitative insights across the trade lifecycle while ensuring accurate record keeping, reporting at any level of management, and automatic valuation. Combining an ETRM, such as that offered by Molecule, with a portfolio analytics solution like Ascend's PowerSIMM, covers IPPs across the entire trade lifecycle.
The Ascend PowerSIMM™ suite is an energy analytics platform that captures the new and evolving dynamics of electricity markets. Utilities, public power entities, renewable developers, and community choice aggregators utilize PowerSIMM for optimal energy portfolio management, risk management, resource planning, and project optimization.
Access the full webinar now or contact us to learn more.
Ascend Analytics is the leading provider of market intelligence and analytics solutions for the energy transition. The company’s offerings enable decision makers in power development and supply procurement to maximize the value of planning, operating, and managing risk for renewable, storage, and other assets. From real-time to 30-year horizons, their forecasts and insights are at the foundation of over $50 billion in project financing assessments. Ascend provides energy market stakeholders with the clarity and confidence to successfully navigate the rapidly shifting energy landscape.
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