The ESEM Regional Reference PPA is designed to help renewable assets secure the long-term price certainty needed for financing. Its standardised structure allows the ESEM Administrator to buy long-dated contracts and resell shorter-dated products as each contract's delivery year approaches. The seller receives a fixed price on its share of reference-fleet generation and pays the fleet’s realised spot revenue, whilst the asset earns merchant revenue separately.
Modo Energy’s forecast shows why long-term price certainty has value. Capture prices vary widely across the forecast, exposing assets to materially different revenue outcomes.
Asset-level risk remains because settlement follows the fleet rather than the asset. In the backcast, the most exposed wind sites faced liabilities of up to $73k/MW/year, whilst constraint exposure reached $40k/MW/year. High-price outages created separate exposure when asset revenue could not offset the fleet settlement.
Executive summary
- The Regional Reference PPA provides renewable assets with long-term price certainty, whilst sellers retain differences between asset and fleet revenue.
- Solar receives more consistent debt-cover support than wind. Solar improves in all four regions in the backcast, whilst wind improves only in Victoria and South Australia.
- Sellers retain material asset-level risk. The most exposed wind sites would have faced liabilities of up to $73k/MW/year in the historical backcast.
- High-price outages create concentrated settlement exposure. The largest shortfall in the backcast reached $16.7k/MW, making uncovered settlements central to contract design.
Fixed revenue reduces the time assets fall short of minimum debt cover
Revenue volatility affects finance when earnings fall short of debt repayments. From 2022 to July 2026, selling the contract would have reduced the time below lenders' 1.1 debt-cover threshold for solar in every mainland region, with mixed results for wind.
Solar receives more consistent downside support because individual assets remain more closely aligned with the regional reference fleet. Wind outcomes are more mixed, reflecting greater variation in resource and output across assets. Queensland wind also contains only three assets, making its result less representative.
The backcast uses historical prices and generation for every NEM wind and solar asset, published build costs and 70% gearing at 6% over 25 years. It sets the strike at the reference fleet’s realised capture price. A ratio of 1.0 means revenue exactly covers debt repayments. Below 1.1, the model assumes lenders retain cash and stop distributions to equity.
Selling the contract leaves three risks with the seller
The fixed payment reduces exposure to revenue volatility in the reference fleet. However, differences between an asset and the fleet leave sellers carrying three sources of risk:
- Asset performance creates basis when asset revenue diverges from the fleet settlement.
- Location adds exposure through constraints and MLFs.
- High-price outages can leave sellers owing the floating payment without offsetting asset revenue.
Asset performance creates persistent basis against the fleet
Everyday differences between an asset and the fleet accumulate over time. Variations in local resources and availability affect how closely asset generation tracks the contracted fleet volume.
The quarterly spread in asset capacity factors reaches 10 percentage points for solar and 16 for wind. Wind therefore carries a greater volume basis relative to a regional fleet index, with seasonal resource patterns widening the gap between assets.
Revenue basis then combines differences in output and capture price to measure the gap between asset energy revenue and the reference-fleet settlement.
Average basis for the median asset sits near zero for both technologies. The worst-aligned solar and wind assets average -$44k/MW/year and -$73k/MW/year, with the shortfall persisting across years. Half of the assets record a negative mean basis, whilst the range for wind is twice as wide as that for solar.
Resource variation explains only part of the difference between assets, with grid location also creating material basis through constraints and marginal loss factors.
Location adds constraint and loss-factor exposure
When constraints reduce asset output relative to the reference fleet, the seller receives less energy revenue against the fleet settlement. The difference becomes a locational basis exposure.
Constraint exposure reaches $40k/MW/year for the worst-sited assets, with all 15 of the largest shortfalls in New South Wales.
The same locational exposure extends to loss factors. The floating leg settles at the regional reference node, whilst asset revenue reflects the marginal loss factor at its connection point. The difference remains with the seller.
Using 2026-27 MLFs, revenue is reduced by at least 9% for half of solar farms, with the largest reduction reaching 18%. Wind records a median reduction of 4% and a maximum of 17%. The exposure persists unless the reference index incorporates loss factors.
Constraints and MLFs create recurring locational basis. A separate exposure arises when an asset is unavailable during a high-price interval.
High-price outages leave the fleet settlement unhedged
Asset revenue offsets the floating payment when generation aligns with the reference fleet. During a high-price outage, the seller still owes the fleet settlement without earning the asset revenue needed to offset it. This creates the contract's largest single-event exposure.
The example shows the largest historical shortfall in the analysis. On 8 May 2024, the New South Wales wind fleet generated through two price spikes that reached $16.6k/MWh, whilst Crookwell 2 remained offline. The asset owed the fleet leg through both events and recorded a $16.7k/MW shortfall, concentrated in a small number of five-minute intervals. Across the fleet, this scarcity underperformance reaches $13k/MW/year for the most exposed assets, concentrated among those most out of step with the fleet during high-price intervals.
Asset-level risk determines how much certainty the contract provides
The Regional Reference PPA reduces exposure to reference-fleet revenue volatility, but asset-level outcomes vary materially. In the backcast, persistent basis produced modelled liabilities of up to $73k/MW/year for wind, constraints reduced revenue by up to $40k/MW/year, and a high-price outage created a further shortfall.
A fleet index makes the contract easier to trade, whilst sellers can manage retained exposure by buying back positions, diversifying across a portfolio or contracting through a retailer.
Fleet composition, MLFs, new capacity, force majeure, uncovered settlements, negative prices and any price cap will determine how much risk remains with the seller. These choices will shape which assets can secure finance against the product and how much risk transfers to the buyer.
