Valuing Utility-Scale Solar Power
As utility-scale solar continues its rapid expansion, the number and types of participants has expanded as well. New players have varying levels of understanding of the wholesale electricity markets where these solar projects will operate. A solar project is often financed through a purchase power agreement (PPA), which facilitates the deal by locking-in an agreed energy price between the buyer and seller over ten or more years; however, the economic value of that facility ultimately unfolds as the buyer of the solar power resells into the larger wholesale market. In other words, both buyer and seller of the PPA are either explicitly or implicitly betting on the value of the wholesale energy (and possibly capacity) from the solar project for years into the future when setting the initial PPA price.
Fundamental analysis (the supply/transmission/demand) of the different electricity markets provides a means of projecting the value ultimately obtained by the solar project. This widely-accepted methodology has been used by investors, regulators, and credit agencies to value generation in electricity markets for decades. A key component of the analysis is to forecast the energy and capacity prices over and beyond the time-frame of the PPA. Through application of scenarios, varying assumptions of natural gas prices, technology changes, or carbon costs can impact both the value and riskiness of the solar energy produced. This framework yields many insights, including the ability of the project to hedge risks, to compare geographic locations of solar facilities, and to provide assistance during negotiations. Ultimately, fundamental analysis aids both the buyer and the seller of a PPA by identifying the long-term underlying value of the asset.