Declining power prices and decreasing PPA rates pose grave threats to power producer’s ability to grow profitably.
San Mateo, CA –Recent studies and interviews with hundreds of energy executives from across the global energy spectrum by Mercatus reveal that power producers are facing unprofitable growth despite increasing business opportunities in the renewable energy and efficiency sectors. While demand for renewables continues to surge thanks to dropping technology prices, power producers today are struggling financially due to business model incompetency.
Due to the rapidly decreasing prices of solar and wind power, energy procurers today are becoming less inclined to enter into long-term power purchase agreements or PPAs. According to data from the Mercatus Investment Lifecycle Management (ILM) platform, off-take rates are in decline globally across all major regions. While this has proved beneficial for energy buyers, it is adversely affecting the power producer’s operating model, which is traditionally based on the assumption of long-term fixed-price contracts. As a result, their profitability now trending downward for IPPs in North America and Europe.
Average Off-take Rates by Region (2015-2016)
Over the last year, European off-take rates saw a 44% decrease year-over-year in 2016. Off-take rates also declined 34% in Africa, 38% in Asia, and 37% in South America. In North America, they increased by just one percent.
According to Haresh Patel, CEO of Mercatus, “The traditional Power Purchase Agreement and current Independent Power Producer business model are both under attack.”
Mercatus also finds that companies that have expanded into distributed generation are suffering from flat-lined and even decreased employee productivity. Companies with distributed generation projects now require roughly 7 times more full-time employees per megawatt than conventional energy sources. As a result, operating expenses are increasing within energy companies, severely affecting their profitability.
Employee per Megawatt by Generation Type
Over the last 5 years, offtake rates have decreased over 90% whereas FTE costs have remained almost the same. This trend reaffirms that as power pricing margins decrease, and employee costs, businesses are increasingly at risk for profit loss.
Source: Mercatus analysis based on customer data
“In this market, efficiency is key. To compete effectively, a lean cost structure and control over operating expenses is essential”, adds Haresh Patel. “Unless power producers turn their focus towards improving their productivity, they are at significant risk for unprofitable growth. “
For more information on this research and findings, visit http://gomercatus.com/blog/power-producers-unprofitable-growth .
Mercatus is a cloud-based software company that serves the unique needs of renewable energy developers and asset owners. Mercatus Energy Investment Lifecycle Management (ILM) is the only integrated software platform that automates the full asset investment life cycle, from origination through end-of-life, enabling energy companies to grow their portfolio faster while lowering their risk profile. Mercatus’ customers are some of the largest energy companies that collectively leverage the Energy ILM platform to manage over 110 GW of projects, across 75 countries, using 8 advanced energy technologies. Mercatus is headquartered in Silicon Valley and has offices in Europe and India.