Pricing bundled renewable energy credits using a modified LCOE for power purchase agreements

Abstract

Throughout the world, various policies and regulations exist that govern the buying and selling of energy. In the United States, government mandates have been developed in the form of State-specific Renewable Portfolio Standards (RPSs) that require specific percentages of renewable energy consumption. RPS laws are managed through Power Purchase Agreements (PPAs) and bundled Renewable Energy Credits (RECs), other parts of the world use similar instruments. Both PPAs and RECs typically use a Levelized Cost of Energy (LCOE) calculation to determine the price of energy and may contain limitations on how much energy can be purchased. Conventional LCOE calculations do not account for asymmetry in cash flows that arise from PPA and REC imposed penalties, which can lead to significant errors. The objective of this paper is to use a modified LCOE to demonstrate the impacts of energy purchase limits and the combined effect of multiple energy generators entering into an energy purchase agreement with one buyer. The Maryland Offshore Renewable Energy Credit (OREC) is used as an analysis vehicle, which demonstrates that the effective LCOE can decrease by as much as 36% or increase by as much as 15% when RPS and REC energy purchase limits introduce cash flow asymmetry.