Jan Cihlar and Corina Melchor from Altenex Energy unpack the outlook for Europe’s corporate renewable PPA market, a market that is expanding as project and PPA volumes increase.
European electricity markets are increasingly dominated by renewable energy, often deployed by project developers via power purchase agreements — typically a 10-15-year agreement for buyers to procure electricity directly from producers.
Corporate PPAs (cPPAs), in which a corporate entity is the buyer, are increasingly popular, which was demonstrated in robust resurgence in 2023.
This includes physical — also known as ‘sleeved’ — PPAs, where the renewable electricity is delivered via the grid, and virtual PPAs, which serve as financially settled contracts without electricity delivery.
So what’s the status of Europe’s corporate renewable PPA market?
After a year of electricity price volatility, the European cPPA landscape has rebounded impressively in 2023. We’ve seen an increased number of projects marketed by developers, with 57 deals executed in the first two quarters, according to Edison Energy Insights.
This uptick has been driven by a convergence of favourable PPA pricing, market conditions, and ambitious climate targets set by corporations for 2025 and 2030. With typical PPA lead times currently at two-to-three years (longer for offshore wind), buyers’ activity has accelerated to meet these deadlines.
Spain maintains its leadership in the cPPA market. Historically, Spain has had the most active cPPA market in Europe, with 80 deals to date and annual production of 16,000GWh as of January 2023. However, the use of cPPAs has expanded recently in France, Finland, and Poland.
While the PPA market remains exclusive to large companies, this could change as Europe addresses credit barriers that impede potential buyers. The European Commission has proposed that member states reduce the risk of buyers defaulting, such as with guarantees that tie the offtake agreement to a set market price to avoid speculation.
The guarantor state thereby takes on some of the risks normally borne by the buyer. Already implemented in Norway and Spain, and in development in Germany and France, this initiative is poised to broaden the pool of cPPA buyers and catalyse regions with limited or no PPA activity.
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PPA supply side
Increasing renewable energy targets from European countries are driving massive deployment. The recently approved Renewable Energy Directive III (RED III) set the EU-wide target for the share of renewables in final energy consumption to 42.5% by 2030, with potential for an additional 2.5% increase.
Member states must now submit updated National Energy and Climate Plans, outlining their contributions to this EU objective. In many countries, achieving these plans will necessitate a renewable share of total electricity generation as high as 80% by the end of the decade. That, in turn, requires significant additional deployment of solar, wind, hydro, and geothermal resources.
PPAs are likely to play a key role not just in traditional renewable bastions, but also in countries with historically low renewables deployment and high grid GHG emission intensity.
Project developers continue to optimise their route to market. Project developers are navigating three primary routes to market: merchant (generating returns from the spot market), governmental offtake agreements (e.g., Contract for Difference, CfD), and PPAs. Recent undersubscribed auctions for CfDs in various countries underscore the need for innovative strategies.
Low prices offered by governments, and significant grid connection queues, were the main culprits. The upcoming Electricity Market Directive aims to address this and allow developers to split their projects across merchant components, CfDs, and PPAs. This new option could generate further momentum in the PPA market.
Offshore wind holds great potential, but its deployment lags other renewables. Offshore wind carries a price premium compared to onshore wind and solar PV in Europe due to its size, production profile, and learning curves.
Developers often compete in government auctions for deployment rights. As seen when Polenergia withdrew from a Lithuanian tender, unfavourable pricing can result. In Germany, developers face complex negative bidding auctions, straining the supply chain and profitability.
Recent auction winners bp and Total must pay the German government more than €12 billion over 20 years for site and grid access. As Europe aims for 160GW offshore wind by 2030 – only 32GW had been deployed by July 2023 according to Wind Europe – addressing these issues is vital. Combining revenue models such as merchant, PPA, and potentially CfDs, could be key to progress.
PPA pricing
EU PPA prices continued to decline this year. Edison Energy’s EU PPA Index price, which represents a weighted average of all PPA prices across Europe, experienced a notable decrease of 15% through the first half of 2023.
Notably, Spain maintains its reputation for offering attractive prices, demonstrating a slight reduction from €48/MWh to €47/MWh in the most recent quarter.
The emergence of negative pricing and the renewables cannibalisation effect introduces newer risks to PPAs. Instances of negative pricing have become increasingly prevalent across the majority of European countries.
In 2023 YTD, Denmark, Finland, the Netherlands, and Norway each experienced over 200 hours of negative spot market prices — a trend that continues to intensify.
Moreover, the cannibalisation effect leads to wind and solar capture prices often being below average electricity prices. This has been most prevalent in Spain, where solar PV capture prices decreased from 102% of the average electricity prices in 2018, to 80% in 2023.
The market and regulations are expected to address these trends over time by improving system flexibility with energy storage and increased interconnections.
In the meantime, corporate buyers must rely on precise tools to assess and manage risk, such as fundamental market modelling, and caps on maximum negative price settlements.
Guarantees of Origin (GO) pricing remains elevated compared to historical levels. GOs provide additional value to buyers, as they are incorporated into the majority of PPAs and ensure the green claims that buyers make.
GO prices have experienced significant volatility, climbing from just under €2/MWh at the outset of 2022 to nearly €10/MWh in Q4 2022, then declining to around €6/MWh by the close of the same year, according to Veyt.
We expect the short-term price to stay around this level, a significant uplift from pre-energy crisis levels. In the long-term, supply of GOs could significantly outpace demand and thus depress prices.
What to expect for cPPAs
First, due to various EU and national regulatory reforms, such as updated NECPs, ease of permitting, and allowing developers to combine CfDs and PPAs, we anticipate a significant surge in renewable energy project deployment. This growth is expected not only in well-established markets, but also in emerging regions.
However, meeting these aspirational targets may be challenging. For example, to achieve the 2030 target of 160GW for offshore wind, deployment would have to quadruple the current rate.
PPAs are poised to drive an uptick in renewables deployment, particularly with the new regulations. PPA volumes are expected to escalate, spanning mature markets such as Central Europe, and burgeoning markets such as southeast Europe, with its sizable industrial and manufacturing sectors, albeit less decarbonised grids to date.
Finally, businesses that have yet to embark on their renewable procurement journeys will be challenged to meet 2025 and 2030 sustainability and climate targets. The present cPPA process — from the decision to initiate the search for a PPA, to the operationalisation of the asset — can be a multi-year endeavour.
Keep an eye out for virtual green gas purchase agreements encompassing biomethane and hydrogen. This indicates that as companies ramp up their Scope 2 decarbonisation efforts, they are beginning to explore options beyond electricity.
ABOUT THE AUTHORS
Jan Cihlar is a Clean Energy Advisor at Altenex Energy, a subsidiary of Edison Energy.
Corina Melchor is the Senior Clean Energy Advisor for Altenex’s European Energy Advisory.
