Help CenterWhen electricity supply outstrips demand, the grid sends negative price signals to discourage further generation. This is called economic curtailment risk.
Below is a price curve from March 25, 2024 at West Hub. Note the midday hours were economically curtailed, meaning prices were negative.
Parties negotiating a PPA have may options to address economic curtailment risk. Our model accounts for three of them:
1. No Floor
The buyer pays the full PPA price even when the hub price is negative. Here, the buyer alone bears the economic curtailment risk.
2. Floor: Adjusted Settlement < $0
The buyer decreases the PPA payment 'dollar-for-dollar' when the hub price is negative. For example, if the PPA is $40 and the hub price is -$2, the buyer pays $38. In other words, the buyer and seller share the economic curtailment risk.
3. Floor: No Settlement < $0
The buyer does not pay when the hub price is negative. The seller alone bears the economic curtailment risk.
The chart below shows the monetary value of these approaches in connection with a 10-year solar PPA at West Hub.
Because the first option (No Floor) puts all the risk on the buyer, no premium is added to the PPA price.
Because the second option (Floor: Adjusted Settlement < $0) distributes the risk between the two parties, a moderate premium is added to the PPA price (+$2.12).
Because the third option (Floor: No Settlement < $0) puts all the risk on the seller, a substantial premium is added to the PPA price ($2.12 + $7.76 = $9.88).