Power Purchase Agreements and Managing Imbalance Risk

Power Purchase Agreements and Managing Imbalance Risk

Contract value:£0 – £50,000. Background DECC is delivering a major programme of Electricity Market Reform (EMR). The components of the programme include a Contract for Difference support mechanism (the CfD).

Reference number: TRN548/12/2012

Deadline date:19/01/2013

This deadline is for… Close of business

Contract value:£0 – £50,000

Location where the contract is to be carried out: London

Is this suitable for smaller suppliers? Yes

Is this contract suitable for a voluntary, community and social enterprise organisations? No

Name of the buying organisation: Department of Energy and Climate Change (DECC)


Description of the contract

A. Background DECC is delivering a major programme of Electricity Market Reform (EMR). The components of the programme include a Contract for Difference support mechanism (the CfD). In response to concerns raised by stakeholders (principally independent wind developers) the department issued a call for evidence to assess the likely development of the Power Purchase Agreement (PPA) market under EMR. The concerns raised were that it is already harder to agree a PPA on bankable terms (i.e. the market is tighter with higher discount and a reduced risk appetite on the part of lenders and PPA providers) and that the situation was likely to deteriorate further as we move towards EMR and the CfD regime. The evidence provided suggests that there are a number of temporary factors including the end of the RO and PPA providers’ reluctance to offer floor prices due to impacts on credit ratings. The Department responded to the evidence received in the technical annexes that accompanied the Energy Bill . This sets out that there appear to be two issues that may be of an enduring nature: • The uncertainty associated with imbalance risk including the impact of increased intermittent generation and Cash Out Reform; and • Limited competitors in the PPA market. B. Work required and expected outputs The Department wishes to commission advice in order to assess: • The likely development of a competitive PPA market under EMR • the significance of imbalance risk and the most efficient arrangements for allocating imbalance risk in the context of the delivery of the Government’s energy policy objectives including de-carbonisation and affordability. We envisage that this work would be divided into three inter-related work packages as set out below. The Department reserves the right to sub-divide the contract along these lines, potentially awarding one or more contracts. If there are inter-linkages between the work packages in your tender (e.g. the output of one work package is an essential input to another), then please make this clear in your response. 1. Work package 1 – PPA market competition: • Assess the likely levels of competition taking account of factors that are constraining today’s PPA market • Assess barriers to entry to the PPA market for independent market participants (including aggregators) • Identify and where possible quantify the factors that will drive PPA discounts and risk allocation • Assess the role that contractual arrangements between generators and large end users could play in the current market and under the CfD. • Assess minimum requirement for PPAs demanded by banks and how these impact on competitiveness of PPA market (such as price floors, contract lengths, creditworthiness of off-taker etc.). How are these requirements going to change after the introduction of CfDs? 2. Work package 2 – Imbalance risk • The significance of imbalance risk in project economics and the pricing of PPAs. Particularly considering differences between renewable/non-renewable and intermittent/despatchable generation • The significance of imbalance risk to consumers including likely development over the next 15 to 20 years • The likely scale and nature of imbalance risk over the next decade • The costs and benefits of different approaches to risk allocation including the impacts on meeting the Government’s objectives for low carbon generation and legally binding targets, and the impact on consumers 3. Work package 3 – Mitigation strategies to address imbalance risk: • Commercial mitigation strategies (e.g. contracting approaches, risk sharing etc.); and • Technical mitigation strategies (e.g. site selection, technology choices, control and forecasting systems) The output for each of these work packages should be a final report providing a detailed assessment of the issues identified above, including quantitative and qualitative analysis. You should also allow for meetings at DECC to discuss progress during the contract period and to present findings. C. Capability sought Given the breadth of the work involved, we expect to draw on teams with experience in each of the following areas: • Energy Market evaluation • Contractual arrangements in the energy market • Understanding of imbalance risk and approaches to its management • Economic advice • Understanding financial approaches to risk management and investment decisions • Technical/engineering advice relating to energy generation • Legal issues Expected Outputs The outputs should provide both quantitative and qualitative analysis. Outputs: 1. Draft assessment of significance of the problem to developers and consumers and its development 2. Draft assessment of the costs and benefits of approaches to risk allocation 3. Draft assessment of commercial and technical mitigation strategies 4. Final report incorporating including executive summary and conclusions in order to meet the project objective


Classification of the contract

66000000 Financial and insurance services


Additional information

Contract type: Services – Unspecified

Is it a framework agreement? No

Is this contract related to a programme of funding? No

Contract will be awarded based on: Most economically advantageous tender in terms of: The criteria stated in the contract documents

Estimated length of contract: 2 Months


Who to contact

Contact name Phil Hicken or Matthew Coyne

Organisation name Department of Energy and Climate Change (DECC)

Address , 3, Whitehall Place, London, United Kingdom, SW1A 2AW

Telephone 0300 068 5265/6059

Extension number:


Web address www.decc.gov.uk


How to apply

Suppliers are required to submit their proposals through the Government Procurement Service web portal. Tender submissions must be received by DECC not later than close of business on 19 January DECC reserves the right to invite the highest scoring suppliers to give a presentation before a final decision is made. Suppliers must note that DECC reserves the right to withdraw this contract opportunity without notice and will not be liable for any costs incurred by suppliers during any stage of the process. Suppliers should also note that, in the event a tender is considered to be fundamentally unacceptable on a key issue, regardless of its other merits, that tender may be rejected. Tenders submitted after the stipulated time and date advised will be rejected, unless clear evidence of uploading by the stated deadline is made available to DECC. If you require further information concerning the tender process, or the nature of the proposed contract, please in the first instance email: phil.hicken@decc.gsi.gov.uk and matthew.coyne@decc.gsi.gov.uk. No questions will be answered that provide a competitive advantage to any party pre-qualifying or tendering. Should questions arise during the tendering period, which in our judgement are of material significance, we will inform all suppliers to explain the nature of the question, and our formal reply. All suppliers should then take that reply into consideration when preparing their own bids, and we will evaluate bids on the assumption that they have done so.

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