Hub Settlement vs. Nodal Settlement (Energy Markets)

Sure. So up front, PPA is almost always a “virtual” PPA, aka financial swap. Offtaker pays developer/project owner a fixed amount per MWh, and receives the floating price. There are nuances and exceptions to all of this, but 95% of the time this is the starting point. The project only factors in to determine the volume during each settlement period, almost always hourly. And end of month these hourly settlements are summed, and one party owes the other some amount.
So the offtaker wants the floating price to be high, and from their perspective thats where it ends.

For the developer, the PPA is a hedge. The project will sell into the grid at the floating price (will come back to nodes in a second). If prices are high, they lose on the PPA, but the project makes more money, so it should net out to the PPA price (do some simple back of the envelope examples).

Now to nodes vs. hubs. The project will get paid the nodal price. This is a function of the physical grid and market regulations, theres nothing that can be done to avoid this (except doing other financial power market machinations to obtain other payments). But as you know, nodes are volatile. And if its a big project, in a remote location, it will affect the nodal price by oversupplying that part of the grid, driving down the price relative to other nodes.

Hubs are just weighted averages of many nodes. So the individual node price movements are smoothed out, and because of that, they are price benchmark for any futures product participants can use to hedge/speculate with.

So the developers would love to settle the PPA contract at the node, and offtakers don’t because any hedge they do with a hub settled futures product is diluted, and they’re exposed to those potentially lower node prices, when they want high prices. So why don’t developers typically get their way but offtakers do? Its just negotiating power. There are more developers and projects looking for offtakers than there are offtakers, so offtakers dictate many of the terms. Another big consideration here is that almost always a PPA is being negotiated before the project is built, and built at a new node. So no historical data to reference. And doing long-term grid modeling at the nodal level is incredibly time consuming and expensive, and a total crapshoot. So is long term hub modeling, but its more reliable to make higher level assumptions at the zonal level and average certain things out, and get a hub price forecast that is somewhat defensible. Developers will pay to do nodal studies, because they care and have the time, but your typical corporate buyer will have neither the time or money or knowledge to even discern a good nodal consultant. Utility offtakers are a bit of an exception because they will have nodal risk, nodal studies, know the grid, etc. But getting a good utility offtaker is hard for various reasons.

The developers never pays anything at the hub under the PPA, they get paid the hub price by the offtaker. But payments do happen twice - the project gets paid the nodal price as dictated by the grid, and then the PPA settlement happens bi-laterally. The grid operator who sets prices has no knowledge of the PPA nor do they care (they actually do but thats not relevant for this).

PPAs are done to give developers revenue certainty, and revenue to protect them in case grid prices go down and they can’t afford to pay back the initial capex of the project. What offtakers get is more varied. For renewables, they get credits and marketing “rights” to say they funded green energy. It can also be a hedge if they have wholesale power demand in the area. They may be mandated to fund new energy builds if they’re a utility or a large energy user mandated by the utility. They may be a more speculative entity who is looking for upside volatility as a hedge to a short energy portfolio or just a way to get cheaper upside exposure than current futures prices. Thats a small percentage of the market though. 95% is corporates for “green” reasons or utilities for green reasons. PPAs are much less common in non renewable projects.

Hopefully this helps. Curious what your interest stems from, since its a pretty small industry. Feel free to DM me if you want.