Here’s how renewable energy contracts work to protect ratepayers, utilities, and renewable energy developers through the power purchase agreement (PPA)

Here’s how renewable energy contracts work to protect ratepayers, utilities, and renewable energy developers through the power purchase agreement (PPA):

How Utilities Actually Buy Renewables

Utilities put together their portfolio of renewable energy contracts so that they will be able to deliver the capacity needed for each time of day, combining wind and solar and some baseload renewables: geothermal, hydro, and landfill gas.

Utilities contract for solar to cover daytime needs and wind for various other timesdepending on their geography: in some places, wind picks up at night; in others, in the early morning. Otherwise, utilities might have the total number of megawatt-hours (MWh) they need, but it might not be when they need them. For example, they don’t want all the megawatt-hours between noon and 2:00 pm.

So the contracts specify when they will be delivered these megawatt-hours, so that they don’t wind up being shipped all the megawatt-hours that they need in a year … at the times of each day when they don’t need them.

renewable energy contractsImage Credit: Chauncey Davis

Do Utilities Care About Capacity Factor ?

Solar PV generally is considered to have a capacity factor of between 20 and 30 percent, because it is not generating at night and is generating less when it’s cloudy than when it’s sunny (thin-film solar like industry-leading First Solar is most tolerant of overcast conditions). Coal plants, by contrast, have a capacity factor in the 50s.

But complaining about a low capacity factor in a weather-dependent resource like solar is beside the point. Utilities do not buy solar for night. In most wind resource regions, there is plenty of night wind.

Solar capacity factor might be 50% in variable weather, and 0% after dark. But if you want it for the daytime, then it can supply close to 100% of your needs in some regions.

(On average over a year, though, this combination of daytime + night + cloudiness results in 20–30% capacity factor depending on location).

What Is Capacity & Capacity Factor Again?

Capacity factor is the ratio by which you ship power over the course of time. For example, if you only operate a peaker plant for 3 hours out of every 24 hour day, then your capacity factor is just 12.5%.

Arguments against renewables often bring up the fact that solar and wind have a lower “capacity factor” than a baseload source like geothermal or nuclear power.

For every megawatt of power capacity in a solar or wind farm, a lower percentage of electricity is generated because a solar or wind project doesn’t operate around the clock, rain or shine.

Capacity is an instant measure of how much power in megawatts is needed at any one time to meet the maximum draw on the grid that there might be. At any one time, utilities must have a certain amount of megawatts of projects in operation to be able to meet the load, and that is their capacity, which is typically measured in megawatts (MW).

Utilities need to order enough capacity to meet whatever their particular varying load need is 24 hours a day.

So, Aren’t Utilities Losing Money Contracting For Solar?

keith-harkins-siemens-solar-south-africaImage Credit: Keith Harkins

No. A utility does not expect to pay for solar PV after sunset. Renewable energy contracts sell power only by the megawatt-hour actually delivered to the grid.

Utilities write contracts for delivery in megawatt-hours that they then can send to ratepayers, because that’s how their customers buy their product; in kilowatt-hours (kWh), not in kilowatts (kW). So, utilities order in bulk, in megawatt-hours (MWh), not in megawatts (MW).

A price per MWh is agreed in advance via a contract with the utility called a power purchase agreement (PPA). The utilities that need power for daytime needs — like shopping malls, workplaces, and air conditioner load on hot afternoons — are the ones that put out requests for solar bids.

But What Happens If The Sun Doesn’t Come Out For Weeks?

The contract usually specifies that if deliveries go under a minimum of generation, the utility will be made whole. Here’s how.

Developers estimate the number of MWh they expect to be able to deliver over an average year, given weather variability, based on scientific measurements taken at the site for up to a year. So, they have a scientific basis for being able to commit to expected and minimum solar generation.

Under most PPAs, when that solar generation falls short of a minimum promised amount, the developer must reimburse the utility for what it had to buy to replace this lost energy. The reimbursement is designed so it will cover the utility’s cost at the per MWh rate plus any extra cost to buy energy from elsewhere.

What If A Solar Project Makes More Energy Than The Utility Wants?

Under most contracts, a maximum generation allowable from the solar project is also specified.

This provision is because the utility is also buying power from elsewhere, and if one generator starts producing an unexpected surplus, then they may have to shut down generation somewhere else.

Depending on the local power market, a contract might specify that when a solar farm produces too much solar, the seller will get only half or a third of the per-MWh payment, or may even have to shut down.

Does More Renewable Energy Hurt The Economics Of Baseload Power?

Yes. As more renewables are added, the capacity factor of natural gas and coal plants in many markets goes down, because then, coal and natural gas plants get used to fill in rather than providing baseload power.


With the growth of renewables beginning in 2007 in the utility-scale market, more coal plants are run less than 30% of the time, and fewer are run for more than 70% of the time. This reduced capacity factor from 67% to 55% on average, and it reduced market interest in building new coal plants. It isn’t financially sensible to build a complex thermal plant that only runs a third of a day.

This is why some of the new power plants now being built to be peaker plants sell power at very high rates — as much as 21 cents a kWh. They must still recoup the cost to build a thermal power plant, but over many fewer income-producing hours of generation in a year.

What’s Wrong With Renewable Power That It Has To Use Power To Run The Plant?

Actually, all thermal power plants — whether coal, nuclear, natural gas, geothermal, and thermal solar like Ivanpah (thermal solar has a thermal power block back end) — use similar percentage of power to run the plant. It is called parasitic load.

This question came up a lot in misinformation about the Ivanpah thermal solar plant. The plant’s gross generation is 392 MW, but the net generation to the grid is 377 MW. The difference is the parasitic load consumed on site. Many armchair critics founded their arguments against Ivanpah by calculating expected generation to the grid based on generation from a 392 MW capacity plant.

All thermal electricity plants (including coal, nuclear, and natural gas plants) have power needs on site. They need electricity to run startup motors for thermal power station turbines, for lighting, etc. A typical coal plant needs to drive high-powered fans and pumps for combustion and draft air supply, feedwater, condensate, and cooling water or cooling air.

transformer-central-de-ruien-belgiumImage Credit: Generator transformer at the Ruien coal power plant Wikipedia

Due to their greater complexity, it is thermal plants that have the most parasitic load. Parasitic load can account for up to 20% of the gross output. But the parasitic load in thermal generation just never came up as an issue in the popular press until it could be used as a blunt instrument to hit solar projects with by political opponents.

But actually, the parasitic load for solar electricity is much lower than thermal, which is why solar PV is growing so big so fast. Rather than physically pushing massive turbines to generate a current as in thermal methods, electricity is simply generated at the molecular level within each solar panel. But even solar PV needs some onsite electricity, especially if it has trackers.

When contracts are written, of course, all developers only sell what they expect to generate for the grid, based on their net capacity, not their gross capacity.