On Wednesday 6 April, Glennmont Partners from Nuveen held a webinar on European Market Outlook: Navigating Volatility. The event was chaired by Glennmont CFO, Francesco Cacciabue. Speaking were Francesca Tadeschi, Director of Energy Markets and Analytics at Baringa, and Salvatore Lima, Senior Originator for South-West-Europe at Alpiq. They discussed the causes behind recent power market volatility in Europe and the wider world, how policy is affecting these trends, and forecasts for future market prices.
Francesco Cacciabue, CFO at Glennmont, opened by providing an overview of the two main factors behind the recent surge in energy prices. First, the re-opening of the global economy as the COVID-19 pandemic moved to an endemic led to higher demand for energy. This was then compounded by the failure of the EU’s economic integration policy with Russia, and its attempts to foster good relations between the two powers via mutual trade.
From there, attendees heard from Francesca Tadeschi, Director of Energy Markets and Analytics at Baringa. Francesca began by going into further detail over the role of COVID-19 and the Ukraine crisis in causing sustained volatility in both energy and commodity prices. She placed the latter as a turning point for European energy policy – signalling an end to dependence on Russian fossil fuels and accelerating the renewables transition.
Francesca also recapped how prices are formed across the liberalised electricity market in Europe, with factors affecting prices including time frames, system tightness, weather patterns for renewables, and installed capacity. Crucially, she pointed to natural gas being the key price-setting technology for much of Western Europe.
Finally, Francesca spoke of the implications for renewables investment. In the short term, high prices are forecast to continue, though with some bottlenecks expected to be eased. In the medium term, she expects stronger fundamentals for investment either via higher market signals or an increase in central support mechanisms, and in the long-term investment signals should remain strong, supported by a more market-based ecosystem. Policy direction was pinpointed as the key unknown within these predictions, and in particular how the EU will continue its economic response to Russia’s actions in Ukraine.
Salvatore Lima, Senior Originator for South-West-Europe at Alpiq spoke next, on the topic of Power Purchase Agreements (PPAs). He explained recent trends in corporate PPAs, starting from a pre-pandemic landscape of small but growing interest from corporate buyers, apart from a handful of big multinationals. The energy price rebound in 2021 then alarmed corporate buyers, then since mid-2021 interest has grown for medium and long term PPAs in particular. More recently, he described how market swings have led to further hesitancy.
Alongside volatility in demand for PPAs, Salvatore also gave attendees insight into how elements of PPA contracts are changing. In particular, Alpiq have seen tenors move from a standard or fixed period of c.10 years, to a short or medium period (5-7 years), or combination of both with different pricing structures. In terms of contract type, a full risk package is increasingly being given to the offtaker on certain contract elements such as COD delay, and the price structure has moved from a fixed price for the whole tenor to a mix of prices. PPAs for renewables now also have seasonality interests incorporated, to take into account changes in amounts of wind and sunlight across the year.
Salvatore ended by giving a case study of a wind farm where Alpiq were the offtaker in a PPA between Aventron and Chiesi Farmaceutici.
The session closed with a discussion between panellists and questions from the audience, on topics including what the energy mix will look like post-2030, the use of gas as a transition fuel, levels of CapEx renewables, decreasing reliance on Russian gas keeping prices high and the role of hydrogen in the energy transition.
October 4, 2022