Articles

Beyond Price: The Role of Financial Modelling in OEM Selection and Contract Negotiation – Part III

Indexation in Procurement: Turning Uncertainty into Foresight

Introduction

Selecting the right supplier for renewable energy projects is one of many critical decisions a developer will make. While OEMs compete fiercely on price and margins, developers who focus solely on Capex risk overlooking crucial factors like technology, yield, timing, and financial exposure. In a landscape shaped by uncertainty, whether around permitting, grid connection, or offtake agreements, financial modelling becomes more than a tool. It becomes a strategic compass.

This article series explores how financial modelling can support developers in making confident, value-driven decisions at every stage of procurement. From early-stage benchmarking to late-stage investment analysis, the right model at the right time can reveal the true economic impact of supplier choices.

But modelling is not just about the output of numbers from a preferred metric, it’s about navigating complexity. Each part of this series addresses a different dimension of that challenge:

Part I: Focused on choosing the right financial metric; CAPEX, LCOE, or IRR based on project maturity and data availability.
Part II: Explores the concept of time value of money and how payment schedules, bond structures, and cancellation risks shape supplier attractiveness.
Part III: We explore how indexation modelling can be used not just to compare offers, but to steer procurement strategy and how prices evolve over time.

Throughout the series, we explore how financial modelling can help developers navigate complexity, informing decisions on cash commitment timing, bond exposure, and long-term risk, by translating commercial terms into quantifiable outcomes.

By moving beyond price alone, developers can better align their investments with project performance, market dynamics, and risk tolerance, ultimately securing more reliable returns over the project’s lifetime. And just as importantly, robust modelling helps avoid two common pitfalls: prematurely dismissing a supplier based on overly simplistic analysis or falling into the sunk cost fallacy when more advanced modelling reveals a mismatch between expectations and reality.

Part III: Indexation of offers

In renewable energy procurement, price is never just a number, it’s a moving target. As projects evolve, so do the costs associated with main equipment, shaped by market dynamics, commodity trends, and contractual structures. Among the most tangible of such mechanisms is indexation: the practice of linking equipment prices to external indices such as inflation or commodity prices.

In recent years, indexation mechanisms have shifted from a technical contractual feature to a strategic necessity. This surge in their use is a direct response to a period of unprecedented volatility in global energy and commodity markets, which has fundamentally altered risk assessments for both suppliers and developers.

Some key drivers of increased need for indexation clauses include:

Geopolitical Instability: Events like the Russia-Ukraine war triggered massive, unpredictable swings in energy costs and key commodity prices (like steel and aluminum). Indexation allows suppliers to share this unmanageable risk rather than absorb it all.
Post-Pandemic Economic Shocks: The COVID-19 pandemic disrupted global supply chains and fueled worldwide inflation. Fixed-price contracts became riskier for manufacturers facing soaring costs for raw materials and logistics.
A Shift in Risk Appetite: After experiencing these major shocks, equipment suppliers are no longer willing to bear the full risk of long-term, fixed-price agreements. Indexation has become a standard mechanism to ensure their own financial stability and project viability.

In essence, indexation is no longer just a contractual clause, it’s a strategic response to a world where volatility is the only constant, protecting both buyers and sellers from unforeseen economic extremes.

And for procurement teams and developers, the increased usage of indexation mechanisms poses increased complexity on high-ticket assets as well.

Figure 1: Illustration of a indexation graph with a weighted average and a forecast period

Figure 1 illustrates how indexation can shift meaningfully over a relatively short period. Around August (A), the indexed price increased immediately from the baseline, only to decline through the end of the year before being forecast to climb sharply again in early 2025 (B).

These fluctuations are not just technical noise — they shape the context in which negotiations take place. A downward trend may create uncertainty about where the indexed price will settle, while an upward trend can prompt developers to pay closer attention to the timing of signature and how future index movements may affect the baseline price. Furthermore, a supplier could choose to anchor their contract price to a low index value to increase the likelihood of benefitting from commodity increases. A lack of visibility thus poses an immediate price risk on the buy-side.

From a modelling perspective, NTP timing becomes a critical variable. Baseline Capex assumptions must reflect not only the current index level but also where the index is expected to be at signing. Failing to account for these intra-year swings can lead to under- or overestimation of final turbine supply prices. By highlighting these inflection points, the analysis helps developers anticipate how indexation paths influence both commercial dynamics and the financial baseline used for investment decisions.

Figure 2: Example of 12 months back-cast.

Back-casting volatility to quantify value at risk

To complement forward-looking indexation modelling, we also apply a backward-looking lens to understand how volatile key cost drivers have been over the past 12 months. Typically, most forecast providers lack the ability to assess and forecast volatility; often leading to fundamental trends being visible, but without underlying volatility risk. By back-casting price movements, we can estimate the share of a contract’s value that has historically been “at risk” due to fluctuations in inflation or in commodities such as steel, aluminum, and copper.

To make this assessment practical, we test value at risk on contracts using historical 6 and 12-month volatility in the underlying indices. The illustration above shows a mock example using steel, aluminum, copper, and CPI, highlighting how past market movements would have affected an indexed contract over a one-year period.

By combining volatility (min/max of 6 or 12 months lookback) with contract weighting (how much of the price is pegged on a particular index), developers gain an intuitive view of potential cost swings and contract exposure. This approach doesn’t predict future outcomes, but it does quantify how sensitive a contract is to real-world market movements — effectively creating a backward-looking value-at-risk metric for procurement.

Bringing clarity to business cases

At Blue Power Partners, we support developers with a suite of modelling approaches that make indexation both intuitive and actionable. Rather than relying on a single tool, we apply a flexible methodology that incorporates key variables, such as commodity indices (e.g. steel, cast iron, fuels), inflation metrics (e.g. consumer price index), and OEM-specific indexation formulas, to simulate how equipment prices and their contractual “should-cost” will evolve over time.

These inputs are translated into clear, illustrative outputs that help developers assess offers not just at face value, but in terms of their long-term financial exposure. For instance, two suppliers may present similar headline prices, yet one is tied to a volatile commodity while the other is fixed. Modelling reveals which offer is more resilient under different market conditions, a critical insight during negotiation.

Beyond comparing offers, indexation modelling helps identify breakeven thresholds between suppliers and clarify how pricing interacts with project timelines. Furthermore, it enables a clearer view on expected IRR development from early negotiations to NTP, transforming procurement from a static snapshot into a dynamic, forward-looking strategy.

Indexation as a tool for negotiation

While indexation modelling provides a structured view of how prices should evolve, real-world procurement rarely follows a straight path. In practice, suppliers may adjust their margins to secure contracts, especially in competitive environments or during strategic bidding rounds.

This becomes evident when indexation tools forecast a higher price than what is ultimately received. The discrepancy doesn’t necessarily signal a flaw in the model, rather, it reflects the natural difference between a contractual “should-cost” and an actual, negotiated cost.

Understanding this dynamic is crucial. It highlights that indexation modelling should not be used in isolation, but as part of a broader procurement strategy that includes market intelligence, supplier behavior, and negotiation tactics. By combining index forecasts with commercial insight, developers can better interpret offers, anticipate supplier movements, and structure contracts that reflect both market logic and strategic opportunity.

Turning insights into value

Drawing on experience across the full project lifecycle, from origination and development to construction and operation, Blue Power Partners supports clients with financial modelling that reflects the realities of renewable energy projects.

Our valuation and procurement teams work closely with developers throughout the procurement process, helping to structure and interpret commercial data in a way that supports informed, value-driven decisions. Whether comparing multiple OEMs or validating a single offer, our role is to provide clarity through modelling, ensuring that decisions are grounded in robust analysis and aligned with long-term project goals.