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October 24, 2022

Net Zero Consortium for Buyers U.S. VPPA Opportunity Index: 2022 Q3

Whether working with fellow SR Inc Member-Clients in the Net Zero Consortium for Buyers (NZCB) or with independent buyer advisory services, all SR Inc Member-Clients of sufficient scale are interested in the VPPA market as they move towards 100% renewable energy.  Every quarter since 2019, SR Inc has therefore been pleased to offer the NZCB VPPA Opportunity Index that enables a comparison of potential wind and solar VPPA performance across U.S. hubs using common analytics.  In the third quarter of 2022, corporations continued to compete to pay rising prices for long-term REC procurements from renewable projects they helped cause.  This increased demand has enabled developers to pass on increased supply chain costs to corporate off-takers without decreasing corporate demand.

The Index reflects both prior actual (backcast) performance and forward carefully modeled pricing.  The Opportunity Index is based on proprietary SR Inc analytics and key data sources including those provided by SR Inc partners LevelTen Energy and REsurety.  We call readers’ attention to the fact that the Index is based upon VPPA offers, not executed transactions, that were made over the prior quarter.  As such, these VPPA prices do not fully reflect the now substantial monthly price increases in executed transactions driven in part by Russia’s war of aggression in Ukraine, continued supply chain challenges, and tariff-related issues with imported solar modules.  The impacts of the recently passed Inflation Reduction Act are also not likely to be felt for some time as developers continue to evaluate official guidance on tax credits.  To illustrate the fluid nature of the proposals in the market, in an RFP SR Inc issued in Q3, more than half of all bids include indexed prices tied to major cost changes (prior to financing).  Due to demand outstripping supply, we are also seeing later CODs (the average COD SR Inc is seeing today is Q4 2025), so buyers are initiating procurements earlier to accommodate the longer lead time today.

Key findings from our Q3 analysis include:

1. Wind VPPA prices across the country were up 18% on average from the previous 12 months, while solar VPPA prices were also up 24%.
2. In the past quarter, average realized wind prices in Q3 2022 were up a whopping 129% across active hubs from Q3 2021 and solar prices were up 126%.
3. Our longer-term view Opportunity Index shows that average modeled cashflow through 2037 per 10MW VPPA across hubs improved $7K in Q3 versus Q2 for wind and improved $25K for solar.
4. In Q3, wind VPPAs modeled to be less expensive in 44% of all hubs versus buying unbundled RECs (based on the current cost of a 10-year strip of RECs at $4.30/REC), and solar VPPAs modeled to be less expensive in 88% of all hubs.
5. The average modeled hub annual cashflow for a 10MW wind VPPA would have been $29K less expensive than buying the equivalent number of unbundled RECs, and the average modeled hub annual cashflow for a 10MW solar VPPA would have been $171K less expensive than buying unbundled RECs.
6. Price modeling shows that ERCOT (Texas) solar continued to present strong opportunities for positive cash flow in Q3. The average modeled ERCOT annual cashflow for a 10MW solar VPPA was $295K.
7. MISO Louisiana ($339K per 10MW), MISO Arkansas ($128K per 10MW), MISO Indiana ($88K per 10MW), and MISO Illinois ($75K per 10MW) solar also presented strong possibilities for positive annual cashflow in Q3.
8. For wind VPPAs in Q3, price modeling shows that ERCOT Houston ($359K per 10MW), PJM AEP-Dayton ($188K per 10MW), and MISO Illinois ($19K per 10MW) presented the best opportunities for positive annual cashflow.

The NZCB VPPA Opportunity Index is an intentionally simplified rendering of complex markets, but NZCB participants find it helpful in beginning to gain an understanding of VPPA market dynamics and financial implications for implementing their renewable energy strategies through VPPAs and aggregated VPPAs.  In pursuing any specific VPPA opportunities, NZCB participants require very detailed and custom analytics performed with senior expert assistance before transacting.  This assistance requires financial, legal, and market expertise to drive timely procurement strategy development and implementation, transaction structuring, contracting, and negotiation services to create a successful and auditable corporate procurement process in rapidly changing markets

*Methodology

• To calculate average annual cashflows, SR Inc multiplies 1) the difference of technology-shaped realized market prices (2015-2022) & forecasted technology-shaped electricity futures market prices (2022-2037) versus top quartile VPPA prices in each hub by 2) the typical total annual production for 10MW offtakes for wind and solar, respectively.
• SR Inc uses 36K MWh production per year for 10MW of wind and 24K MWh per year for 10MW of solar to provide “apples to apples” comparisons for both technologies across hubs.
• The top quartile VPPA price assumes a scaled offtake of at least 50MW, but SR Inc uses 10MW because it is typically the minimum individual corporate offtake required within 100+ MW aggregated procurements REPS manages for NZCB participants.

Data Sources

• The NZCB Opportunity Index is developed from proprietary analytics and multiple data providers, which include:
  • LevelTen Energy PPA Price Index top quartile VPPA pricing data for Q3 2022 (all proposed projects of 8+ years)

• • REsurety REmap actual average, technology-shaped realized market prices for 2015-2022 and technology-shaped future market price forecasts for 2022-2037 (as of October 17, 2022) based on multiple electricity futures markets.

If you have any additional questions, or would like to learn more about the NZCB, contact info@sustainround.com.