Are PPAs an attractive option in EMEA's volatile 2023 Energy Market?

Renewable energy production is accelerating rapidly,?breaking capacity records?annually despite recent headwinds, says Robert Brown MIET , Senior Director Sales & Marketing, ENGIE Impact .

Corporate power purchase agreements (PPAs)?are a key driver of investment in renewable energy. Despite volatile markets and increasing PPA prices, the number of contracts signed in the EMEA region continues to rise. We believe that the increased price of PPAs can be justified on a case-by-case basis, and that PPAs remain a comparatively affordable energy option delivering long-term benefits.

The decline in renewable energy prices has made PPAs an attractive option for corporate decarbonisation efforts, enabling companies to mitigate energy price volatility with long-term contracts that provide certainty about renewables supply and potentially reduce future electricity costs.

The recent increase in PPA prices

The cost of renewables, as determined by the levelised cost of electricity (LCOE), has fallen sharply during the last decade. IRENA (International Renewable Energy Agency)?found that the global weighted average LCOE of newly commissioned, utilityscale solar PV projects declined by 88 per cent between 2010 and 2021, while that of onshore wind fell by 68 per cent and offshore wind by 60 per cent.

From 2021 to 2022, however, global factors such as post Covid pandemic effects on supply chains and the conflict in Ukraine created turbulence on the energy markets. Wholesale electricity prices in Europe increased by up to 700 per cent from their longstanding average, and PPA prices followed this trend.

Illustration of unprecedented volatility on wholesale energy market and effect on PPA prices

(see image - https://library.meucnetwork.co.uk/images/ENGIEImpactFig1.png).

The Dutch TTF Natural Gas is a good proxy for european gas prices that drives wholesale electricity prices. The average european pay-as-produced PPA price for solar PV follows the electricity wholesale price, with less volatility. Sources: Refinitiv (Thomson Reuters) Eikon – as of 2023.03.071; Pexapark – as of 2023.03.07

Is it reasonable for PPAs to have increased in price?

The?IEA estimates?that investment costs of new utility-scale PV and onshore wind plants increased by 15 per cent to 25 per cent from 2020 to 2022, partly due to higher material costs, higher labour and transport costs, rising interest rates and higher balancing and shaping costs. So, while renewables developers factored an opportunity cost into their sale of energy to the grid at inflated wholesale prices, increases in the capital expenses needed to develop renewable assets have been the key determinants of the PPA price surge.

Continue to explore opportunities in the PPA market

Eligible companies should seize the opportunity to contract PPAs. Not only is it?an economically?sound decision?even amid the volatile energy market, but?companies still must work to achieve their carbon targets.

Given that the price of a PPA is driven by market dynamics, nobody can drastically change the price of a PPA in a contract negotiation. However, comprehensive analyses help mitigate the price risks associated with them. The tools ENGIE Impact uses enable us to navigate market complexity include:

? Estimating the economic value of various PPAs based on electricity price forecasts for a specific market and aligning it with the corporate procurement strategy.

? Monitoring the wholesale forward energy market to determine whether it’s a good time to enter the PPA market.

? Strategising the decision-making process considering short-term PPA market trends and aligning internal stakeholders.

? Negotiating risk-related costs such as cannibalisation on a case-by-case basis, subject to market correlation, to decide from which country to source a virtual PPA.

? Evaluating and managing price volatility risk, choosing from different pricing structures, including discount-to-market with floor prices, which enables a company to access a discount compared to wholesale market prices.

? Adjusting the timing of the sourcing effort as needed and informing key stakeholders on the process evolution to maintain consensus.

As with any decarbonisation strategy, the key to contracting an advantageous PPA deal is to first build consensus inside the company about whether it is a good time to enter the PPA market. This requires identifying the potential benefits and risks of a PPA contract, knowing the company’s risk aversion, and then finding the best PPA type and market from which to source. Once the market trend and risk mitigation strategies are established, start the acquisition process, keeping in mind that it will take time and that company-wide consensus will have to be maintained throughout the process.

To learn more about how ENGIE Impact partners with clients take their decarbonisation programmes from strategy to reality, please reach out to Robert Brown: [email protected] or Tel: 01322 627 700

This article appeared in BUU Winter 2023 - read more ?? https://meucnetwork.co.uk/buu-winter-2023/