INTERVIEW - Permits, grid, regulations seen as key PPA hurdles, RE-Source says

Power Purchase Agreements (PPAs) have become key tools for businesses seeking to secure renewable energy sources. However, barriers to their broader adoption persist, including lengthy permitting processes, the need for grid modernisation, and regulatory uncertainty. In a recent interview with Renewables Now, Annie Scanlan, Policy and Impact Director at RE-Source, an European platform for corporate renewables sourcing, elaborates on the challenges facing the PPA market.

Challenges in permitting and grid infrastructure

Permitting processes are one of the major barriers to the development of renewable and storage projects in Europe, which has a knock on effect for the PPA market, Scanlan says. “Delays and uncertainties in obtaining permits can hinder project timelines and increase costs, deterring investors and stalling progress towards the renewable energy targets,” she explains. Simplification and speed for permitting is therefore crucial.

Modernising and expanding grid infrastructure is also critical, as grids are the backbone of the energy transition and industry decarbonisation. Issues such as slow grid connection permitting and curtailment affecting the delivery of Guarantees of Origin (GOs) directly impact energy buyers. “Corporate renewable energy buyers support the Action Plan for Grids and the ambition to scale-up the use of renewable energies and emphasise the importance of boosting power grid investments and to accelerate the uptake of renewables by corporate offtakers,” Scanlan adds.

Regulatory certainty, risk mitigation and shaping costs

She further underscored the importance of regulatory certainty, which creates an investment-friendly environment and said that governments must avoid market interventions to maintain stability. “Corporate renewable PPAs are becoming a key driver for investments in new renewable energy installations in Europe and the achievement of the EU’s climate-neutrality target.”

Educating industry players can also help, as many companies have limited knowledge about the benefits of PPAs and the process of signing them. Facilitating the issuance of GOs, which are central to PPAs by certifying renewable electricity purchases, is equally important. “The GO system in Europe is quite complicated. Not every country is an AIB member, making cross-border GO cancellations difficult,” the expert notes.

Mitigating credit risk is another critical factor. While some member states have implemented guarantee schemes to address non-payment risks, these have not achieved high participation rates. Scanlan suggests that exploring and developing more accessible derisking instruments could significantly enhance PPA market adoption.

Addressing shaping and firming costs, or the costs to match variable renewable generation to the demand of the industrial plant, for instance, is also necessary. Stalled industrial electrification has led to insufficient demand for electricity, contributing to negative prices—a major issue for the PPA market, Scanlan commented.

Market trends

According to RE-Source’s PPA Deal Tracker, annual PPA announcements reached 10.4 GW in 2023. Scanlan predicted that the market will continue to show year-on-year growth this year and that the PPAs for green hydrogen production and multi-buyer PPAs could be growing trends.

Based on the latest RE-Source 2023 data, Spain and Germany are the PPA market frontrunners, collectively accounting for approximately 50% of the total volumes in 2023. Spain retained its position as the largest market with around 2.77 GW signed under PPAs last year.

Several factors contribute to Spain's showing, the RE-Source representative says. The country benefits from low electricity costs and a strong government commitment to the energy transition. Spain's abundance of renewable resources supports its ambitious goal of having at least 81% of its electricity come from renewable sources by 2030, up from around 50% today. Additionally, Spain is a strong demand centre and one of the ‘oldest’ PPA markets.

EU electricity market design

The reform of the EU electricity market design aims to foster the use of PPAs and asks member states to put in place instruments to help derisk them. In particular, the Electricity Market Design (EMD) encourages member states to establish PPA guarantee schemes or other financial instruments to address counterparty risk. “While existing guarantee schemes in some EU countries have limited success, exploring and developing more accessible derisking tools is crucial for expanding the PPA market,” according to Scanlan.

It is also important to support all routes to market. “While PPAs offer long-term private partnerships, contracts for difference (CfDs) remain a valuable tool for financing new renewable projects. Balance of all routes to market is key, and CfD design should be very carefully done so as not to crowd out PPAs.”

Scanlan again highlighted the importance of long-term regulatory stability.

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