INTERVIEW - LevelTen expects European renewable PPA prices to keep rising

Prices for renewable power purchase agreements (PPA) in Europe will continue to increase, pushed up by rising costs, strong demand for clean energy and constrained supply, according to PPA market platform LevelTen Energy.

LevelTen Energy’s PPA price index earlier this week showed that European renewable PPA prices jumped 11% in the third quarter of 2022 from the preceding quarter and 51% from the third quarter of 2021, reaching EUR 73.54 (USD 71.91) per MWh, amid a raging energy crisis.

Subscribe for Renewables Now's Corporate PPA Newsletter here for free!

Renewables Now sought additional comments on the market development from the index provider.

Q: How do you expect PPA prices to develop in future?

A: PPA prices have been rising in Europe for over a year, and we expect that trend to continue for three main reasons:

The first is that costs in general are rising and aren’t expected to drop any time soon. That includes both financing and operational costs. For example, the price of commodities like steel and aluminum have risen over the past year, and polysilicon reached a ten-year high. Inflation and the lingering impacts of COVID-19 have driven up the cost of labor and shipping. Rising interest rates have increased financing costs. Developers have had to raise PPA prices to keep the project financially viable.

The second reason is that demand for clean energy continues to skyrocket, and has only accelerated due to the energy crisis. Corporations are turning toward PPAs to lower the volatility of their electricity costs and meet their sustainability commitments. Governments are sponsoring auctions, CfDs, and other schemes to support Europe’s energy independence and keep prices from rising further. Utilities and retail electricity providers are turning to renewables to keep prices low for their customers and court sustainability-driven customers.

Finally, supply is constrained; developers are struggling to keep up with the demand because they face hurdles that make it difficult to quickly bring more projects to the market. Securing land, permits and interconnection rights remains extremely challenging in most markets; the process can take years.

LevelTen Energy also says that no peak PPA prices can be projected because PPA prices can rise and still be desirable as long as the price of electricity also rises. From a financial perspective, the value of a PPA depends on the market price of electricity for the duration of the contract, which is typically over 10 years.

"For a brand perspective, the value of bringing new clean energy online through a PPA has never been higher. Corporations can not only achieve their sustainability targets, but also contribute to Europe’s energy independence by supporting clean energy through PPAs," the firm further said.

Q: Besides permitting and interconnection issues, will the supply chain be able to accommodate the growing demand for projects?

A: Land, permits and interconnection rights are all major hurdles that make it difficult for developers to quickly build enough projects to meet the demand. There are other, more recent reasons why there’s less PPA supply available to corporate offtakers. The first is that developers are reserving more capacity for the spot market due to the incredibly high electricity prices we’ve seen in the last six months, lowering the amount of capacity available to corporations. The second is that there’s more competition for supply from public entities, including governments and regulated utilities, reducing what’s available for private organisations. There is hope that this crisis will fuel a lot of investment in renewables, and down the road that capacity will become available for corporate offtakers. But investment is only one piece of the puzzle; policymakers also need to accelerate permitting and interconnection processes to truly ease bottlenecks in supply from a project perspective.

Developers are facing issues with project supply chains that have increased development costs and in some cases delayed construction. In particular, the solar industry is grappling with a polysilicon supply chain that has been completely disrupted due to the forced labor occuring in China. This certainly presents a challenge for development at the moment, but we expect supply chain issues to be resolved faster than issues like permitting and interconnection.

Q: Are there any changing buying strategies or preferences for certain sources such as solar that can be built faster or offshore wind where deployment is expected to accelerate?

A: Execution speed matters a lot more now than it did two years ago. LevelTen Energy partners with sustainability and energy advisors who represent a wide array of clean energy buyers. This quarter we surveyed them to see how their clients are adapting procurement strategies given the latest market conditions. The most common response was that they are “accelerating the procurement process to lock in deals.” Corporations that can move quickly to secure approvals from their legal and finance teams will have an advantage in scooping up the best contracts on the market today, before prices rise further, and before competition for those deals gets even tougher. Buyers with 2025 targets need to act now to secure supply while it is available.

When it comes to the types of projects corporations are entering into contracts with, a big factor is simply what’s available in the market. The vast majority - 90% - of projects with offers on the LevelTen Energy Marketplace are solar, largely due to land scarcity and permitting challenges that prevent more wind projects from being developed. The significant expansion of offshore wind planned in the North and Baltic Seas could eventually make more wind capacity available, but it remains to be seen how much of that will be available for corporate offtakers. As more corporations set 24/7 carbon-free energy targets, we expect the demand for wind PPAs to increase significantly, as they are capable of generating power during evening hours when solar isn’t available, increasing competition for the few projects that are available.

Q: Your report says that the solar markets in Italy and Greece are becoming more active. Do you expect this trend to continue and accelerate? And do you see the potential for such development in other markets?

A: Italy’s solar industry in particular has displayed immense growth over the past decade, and Italian offers have consistently made up a large portion of LevelTen’s total offer pool in Europe. But the Italian market, like any, is not without its flaws. In recent years, inefficient permitting and interconnection processes have created massive application backlogs, with lengthy queues developers are sometimes forced to wait in for years at a time. Last fall, the Italian government passed the Decreto Semplificazioni Bis (Act No. 108), which is designed to simplify the approval process, and offers hope that more supply will be made available soon. There is a lot of demand for renewable energy in Italy, but bottlenecks to development remain, contributing to the 28% increase in P25 solar prices we saw this quarter.

This quarter Italy fell from having the most overall offers on the LevelTen Energy Marketplace to the sixth-most, with Poland and Greece’s surging solar markets surpassing it in offer volume this quarter. While Greek solar offers represent solid values, both buyers and sellers there should be aware of how the Greek market differs from other European ones. Greece’s credit rating is not as strong as some other European nations, which negatively impacts the credit of companies operating there who may be looking to procure. Developers should not expect an abundance of investment-grade local counterparties, which may require them to relax their counterparty risk approach, and buyers should be ready to provide a letter of credit if a parent company guarantee is not enough. The Greek market has great potential, despite its small size, and is an exciting new frontier for renewable PPA development in Europe that we hope will continue to mature and thrive.

Romania’s development activity and corporate procurements have grown in the last year, particularly for wind projects. As the Eastern European renewable landscape continues to mature, Romania will be an interesting market to watch.

(EUR 1 = USD 0.978)