On 23 June 2021, Glennmont Partners from Nuveen held an online webinar exploring current trends and dynamics regarding renewable energy power purchase agreements across Europe. As Europe looks to accelerate its decarbonization agenda, the role of market-driven power purchase agreements (“PPA”) can continue to unlock gigawatts of subsidy-free renewable energy generation. Looking at current examples in European offshore wind, Nordic onshore wind, and Iberian solar photovoltaic power, the webinar outlined trends, challenges, and the potential future of PPAs and power prices.
Luca Pedretti, COO & Co-Founder at Pexapark
Luca gave an overview of the European PPA market which totals over 30 GW of long-term renewable energy offtake since 2018, with over 9 GW in Iberia and 6.5 GW in the Nordics. Corporate off-takers accounted for over 50% of all PPAs, with technology groups like Facebook, Google, Amazon and Microsoft taking the lion’s share. More recently, utility PPAs are reclaiming a larger share of the PPA market as power plants (generators) are moving towards shorter duration contracts and looking to hedge the offtake risk more actively themselves to capture greater merchant upsides.
The market for offtake customers is still very large with over 972 TWh of annual industrial demand across Europe vs. only 26.9 TWh of PPAs closed to date. This is before accounting for potential growth in electricity demand as Europe looks to increase its penetration of electric vehicle, heat pumps and more generally decarbonize society.
Luca gave his projection that large renewable energy portfolios owners may look to become mini-utilities, with integrated risk management and trading systems that allow them to compete with traditional players and capture greater rewards.
Duncan Dale, Vice President at Statkraft
Duncan explained the utility perspective of offtake risk and the difficulty of matching the market liquidity of supply and demand for PPAs. In particular, Duncan gave the example of Quality Factor risk, which is the difference between the anticipated generation weight/time average price at start of the PPA (the price fixing moment) and actual captured generation weight/time average prices achieved by the project over the course of the PPA.
Longer-dated PPAs have greater Quality Factor risk for offtakers like utilities, making it difficult to price to the risk – and hence lead to lower PPA price levels, especially for pay-as-produced offtake arrangements. Duncan pointed to solutions that Statkraft offers, the like their pan-European trading platform UNITY which matches supply and demand of over 20 GW of 3rd party generation across Europe. This tool uses artificial intelligence to maximize value and combines intermittent power with flexible generation to ensure stability of power system.
Duncan furthered exampled that many corporate offtakers look to point to “additionality” (or new-build assets), which means that there can be timing mismatch between when a corporate offtaker is looking to enter a PPA and when a renewable energy development is ready for a financial investment decision.
March 3, 2022