Where the money comes from, where it goes, and what closes the gap and why all parties want to take part
The offtaker keeps paying the fossil plant under the existing PPA. For the agreed share, the plant buys less fuel and passes a stream payment to the renewable generator.
ARC value, and grid value where it is recognised, close any remaining gap. The next slides put a number on each flow, using one example: a firm stream inside a coal PPA.
For each MWh of the stream, the PPA pays $95, as before. The plant keeps $41, enough to cover its fixed costs, debt service and margin.
The other $54 goes to the renewable generator: fuel the plant no longer buys, risk it no longer carries, and capacity value that moves with the firm obligation.
To deliver a firm stream, the renewable generator needs about $81 per MWh, including the cost of the risk it takes on. The $54 passed on by the plant covers two thirds of that.
Grid value, where a regulator or system operator recognises it, and ARC value close the remaining $27.
On one scale, the deal is easy to see. The $54 the plant no longer needs is what the renewable generator receives.
In this example, that leaves the generator $27 short per MWh. ARC value, and grid value where it is recognised, close that gap.
Each renewable MWh leaves about 0.95 tonnes of the plant's recorded emission right unused. Once delivery is verified, that is issued as ARCs.
Spread over those tonnes, the ARC value the generator needs works out at about $20 per tonne where grid value is recognised, and about $29 where it is not.
Two things shrink the gap. When fuel gets more expensive, the plant saves more on every MWh it does not generate, so it can pay the renewable generator more. When storage and firming get cheaper, the generator needs less to deliver the stream.
In this example, each change on its own cuts the gap roughly in half. Together, the payment from the plant would cover the whole stream, with no ARC or grid value needed.
A 24/7 firm stream needs substantial storage, so it costs the most to deliver. It also moves the most capacity value, because the generator takes over the firm obligation. A 12-hour firm stream needs less storage and still moves much of that value.
A shaped stream follows solar output and costs the least to deliver. The fossil plant keeps the firm obligation, so little capacity value moves with it. A 12-hour daytime stream matched to solar is often the easiest place to start.
The same amount in every hour of the day.
The same amount through a set daytime window.
Follows solar output, smoothed by a small battery.
The renewable generator takes on the delivery obligation for the stream. If it delivers less than agreed, it buys replacement power, so the buyer still receives the contracted supply.
That risk is priced in. It is part of the $81 the generator needs, and the reason the plant passes on $2 of risk relief.