Market turbulence drives change in PPAs – pv magazine Latin America

Change is the only constant. This is how we would summarize, in one sentence, the conclusions of our report “European Market Outlook 2022”. In essence, this report documents a landmark year of great adaptation, the subplot of the much larger journey of the energy transition.

The changes we have seen in the power purchase agreement (PPA) market have been forced by unprecedented turmoil and volatility. And yet, we have just had another record year, with the most annual renewable PPA transactions completed in Europe, up more than 50% since 2018.

However, the impact that volatility has had on those deals is critical for the post-subsidy trade market. Our report findings clearly indicate that new operating models for renewables are rapidly emerging, putting proactive energy sales and risk management at the center.


record year

The recovery of PPA deal flow after the pandemic, which saw prices plummet, began in the fourth quarter of 2020. The first half of 2021 continued this growth trajectory, sending positive signals to the market that the recovery was coming. to stay, and market participants had adapted to the “new normal”. But the second half of the year was marked by an energy crisis that pushed wholesale electricity prices and price volatility to unprecedented levels across Europe. In October, when the energy price crisis really sank its teeth into the PPA market, the making of PPA deals came to a near standstill as advanced negotiations were interrupted by sudden price volatility.

The most conducive environment for PPAs is when price swings are moderate, but the situation did not normalize for the rest of the year and continued into 2022. Surprisingly, given the current environment, most of the transactions that stopped during fluctuations of prices managed to close before. at the end of the year, making December 2021 the strongest PPA deal month ever recorded by volume.

The corporate PPA market maintained its momentum due to both large buyers, such as Amazon, and a supportive environment that prompted more companies to explore PPAs as a proven, relatively quick and effective route to decarbonizing part of the supply chain. or its operations. For the first time, corporate PPA volume significantly exceeded utility PPA volume.

Most of the PPAs were traded again in Spain, with a total of almost 4 GW of disclosed contracted capacity, a third of the year’s cumulative capacity in Europe. In our last outlook, we expected more PPAs to be agreed in Germany and had anticipated that the potential for solar power in Italy could be realised. But while Germany is on the rise, permitting backlogs are still unresolved in Italy, which is stifling its growth.

Volatility and shocks

Prices are continually subject to fluctuations, measured through volatility, which is a central tool for how utilities and trading houses assess financial risk. In 2021, a series of increases in energy-related commodities such as gas, coal and carbon credits pushed electricity prices and thus PPAs to new highs. Numerous bullish events led to such increases, such as low levels of gas storage in Europe for several years and a demand shift from gas to coal that increased the value of carbon credits.

Annualized volatilities of prior year contracts, a key driver of PPA pricing, reached volatility levels of up to 250% last year, five times the level of typical peaks.

As a result of the fourth quarter price increase, the primary approach that utility buyers use to manage their PPA book risk, known as roll-and-roll hedging, was severely affected. The price correlation between hedges and PPAs was broken. Such price movements resulted in significant market value losses and cash losses on margin payments.


PPA trading involves risk transfers between counterparties. At Pexapark we illustrate price adjustments made by utilities to cover hedging risks and stored as risk discounts for fair value pricing assessment. Due to the current situation, utilities were increasing their discounts in an unprecedented way of up to 40%, or stopping risk taking altogether.

Because utilities and businesses have different risk profiles, and because utilities purchase electricity for their own use and do not have to manage price risks on a daily basis, utilities can outbid utility companies. public in purchase agreements with quality projects. We define the difference in risk profiles as the cost of liquidity. The spread between the two types of buyers reached a high value of one digit €/MWh in key markets. Through 2021, for companies, the gains from signing have outweighed its risks. They are willing to pay a higher PPA price.


Risk management

This caused another change in the market. Long-term payment-for-production (PAP) structures tend to become more expensive for sellers and are rarer in mature markets. The most notable observation of such a trend occurring during 2021 took place in Spain, where project owners and investors found it significantly more difficult to obtain and close a PAP volume structure. Whenever the option was available, it was at a significant discount to sellers compared to alternative PPA structures. This increase in PAP PPA discounts generated an increase in interest and demand for base load PPAs, where a fixed volume is agreed for each hour of a period, be it monthly or yearly.

Short-term, baseload-type PPAs already mark a drastic change from the typical risk profile used for traditional renewables investment. Changes in the daily catch price and lower than expected production volumes caused cash outflows and losses in markets such as Sweden. The ongoing high volatility of capture rates makes base load PPAs more uncertain, leading to the need for new energy risk management approaches.

market squeeze

We believe that the total PPA market in the long term will languish in absolute numbers. and the availability and pricing of long-term PPAs in many markets will be tested due to the maturity of some markets and the impact of the recent turmoil. Although companies have an advantage right now, many PPAs are structured for “sunny weather,” creating more risk for sellers.

However, one possible scenario could extend the life of the PPA market by 10 years. Since utilities are born intermediaries, the two types of consumption could complement each other, as they already have. Suppose a utility company can reduce the risk of its accumulation and accrual coverage program with some long-term corporate compensation agreements. In that case, a multiple of the offset volumes could be realized in long-term PPA volumes with investors to allow additional renewables construction.

State-of-the-art utilities

We also expect a number of new renewable investment funds to pursue “next generation utility” style models. Short-term PPAs and baseload structures are pushing investors to upgrade their operating models, with origination teams, portfolio management capabilities, and risk management infrastructure. Take a step back and you can see that these investors are becoming the next generation utilities. Large funds, in particular, are starting to turn implicit diversification into measurable benefits by managing their assets on a portfolio basis.

We foresee the launch of new and large funds in renewable investment capitals such as Hamburg, London and Copenhagen. Such players will bring to the table the risk management skills of a trading house, with the aim of capturing higher investment and trading returns at the portfolio level. We believe that in terms of volume, such investment could start to overshadow the classic PPA market in the long run.

Corporate Buyer Class

Where the rules allow, offshore wind capacity purchase contracts could be entered into with companies outside the mega-buyer class. Megabuyers like global data center giants like Amazon, big chemical companies, and consumers planning Power-to-X installations have gigantic and growing energy needs.

Their high-volume needs drive the only renewable energy asset class capable of generating such volumes, and that is offshore wind. Due to competition, capital may also be required to secure such large volumes. Our basis for this prediction comes from a truly unique deal that took place in 2021, when BASF acquired a 49.5% stake in the 1.5 GW Hollandse Kust Zuid offshore wind farm from Vattenfall in the Netherlands.

The rise of PPAs is part of a much broader and far reaching energy transition. While a few years ago PPAs were simply a replacement for feed-in tariffs, the market has evolved rapidly and we are now seeing the contours of a new renewables investment and operating model emerging from the frantic trading activity.

The market is maturing, and renewable energy investors and operators will be larger, more diversified in technologies and markets, and masters at managing energy risks.

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