Green power PPAs at premium in three-tier power markets: LEF panels

Renewable power purchase agreements (PPAs) are emerging as a premium segment in European power markets as forward electricity prices fall toward pre-crisis levels, speakers at the Platts London Energy Forum said Feb. 27.

A recurring theme during the forum was developer anxiety at the increasing number of negative hourly power prices in Europe amid accelerating solar deployment and weak demand.

"First is what you're seeing in the traded market, baseload and peak, on the screen. Second there is the CfD -- a risk-free incentive to get projects built. The timing can be a challenge in terms of taking an FID...Then if you are a corporate with ESG [environmental, social and governance] ambitions and commitments to shareholders, you're going to have to compete beyond that CfD to attract electrons," said Jason Tate, Head of European Power Trading and Origination at BP.

Pexapark CEO Michael Waldner added that this transparency was key amid volatile market prices.

"The situation changes continuously, but you want to conclude a PPA at a fair price," said the co-founder of the PPA platform now publishing over 1,000 daily PPA prices across markets, technologies and tenors.

Waldner noted PPAs facilitate the initial project finance and do not explicitly take account of merchant tail revenue. Many assets can look forward to a life-span of around 35 years, while the standard PPA length is currently 10 years, he said.

Analysts at S&P Global Commodity Insights peg break-even PPA price ranges across many European market above current market signals.

Falling wholesale prices are partly due to the acceleration of wind and solar deployment as well as future expectations with some 16 GW of projects underpinned by PPAs in 2023, according to Pexapark.

For 2024, the consultancy forecasts over 20 GW to be signed expecting subtle changes across markets and the type of PPAs.

The Platts-Pexapark PPA index for a standard 10-year solar PPA in Spain was pegged at Eur28.35/MWh on Feb. 26 and Eur42.91/MWh for Germany, down over 20% so far this year.

Platts is part of S&P Global, which is a minority stakeholder in Pexapark.

New demand from electrification

Despite some "PPA pricing dislocate with wholesale market signals" noted by some panelists, developers see strong growth and fading supply chain risks, especially for solar at the moment.

For Matt van Staden, senior PPA originator at Ampyr Solar Europe there were different supply chain impacts in each market, but overall less risk except growing grid access waiting times for new projects.

"Wholesale market prices do not reflect the higher interest rate environment for capital intensive renewables," van Staden said. "You need a PPA premium or GO premium or something else for projects to take off."

Ampyr Solar has a 7-GW project pipeline across the Netherlands, the UK and Germany.

Another issue much talked about was rising negative hourly prices especially during solar peaks with some 1,500 negative hourly prices registered last year across Central Western Europe.

Kerry Thacker-Smith, lead analyst for European power at S&P Global, said wholesale prices alone were insufficient to support renewable build out: "We need that additional support from CfDs -- capture rates for solar last year were around 80% of the baseload price."

For Duncan Dale, VP at Statkraft UK, the "PPA market has swung from a seller's to a buyer's market," but remains attractive due to the large demand for renewable energy, partly due to rising demand from new energy transition applications including electrolyzers to produce hydrogen.

European power demand, which has fallen sharply during the energy crisis, remains around 10% below pre-crisis levels with falling wholesale market prices slow to filter through to consumers and industry.

Analysts at S&P Global forecast power demand across core European markets to only to rise above 2019 in 2026 with new demand from electrification slow to emerge and only the wider IT sector with booming data centers an exception.

Dave Jones, Global Insights Lead at climate think-tank Ember, noted that European consumers bought a handful of millions of electric vehicles and heat pumps over the past two years, but only a mass rollout of such applications would significantly change the demand landscape.

Meanwhile, weak demand and rising renewables have reduced Europe's demand for thermal power generation.

Coal burn in Western Europe is set to plunge sharply amid closures and market signals now also in favor of gas despite falling carbon prices.

However, due to reduced running hours even gas plants require support mechanisms like capacity markets to secure future back-up generation capacity, Elisa Scarpa, Deputy Director, Market Strategy and Structuring at Italian utility Edison, said.

Batteries to help grid

A key bottleneck, but also a facilitator for interconnected markets across Europe, was the power grid, the panel noted.

A delegate reiterated there was "no transition without transmission," with some delegates noting swift progress in the deployment of batteries in Europe and 2024 shaping up to become "the year of the battery."

Flexibility was an essential aspect to accommodate larger shares of renewables in Europe, Statkraft UK's Dale said.

Tom Tindall, Senior Vice President, Markets, Regulation and Commercial at Brookfield Renewable, expects battery costs to decline with the EV sector helping with scale to bring down battery prices.

"We are on the verge of seeing more investment opportunities in batteries," he said having followed the segment for some years.

Analysts at S&P Global forecast some 36 GW of battery capacity to be online across Europe in 2025.

Falling lithium prices allow for longer battery duration. Platts last assessed lithium carbonate CIF Europe at $13,900/mt on Feb. 21, just above lows last seen in mid-2021.

Elsewhere in the storage space, Tim Calver from electrolyzer maker ITM also saw a significant role for hydrogen in the future especially with falling power prices a key driver.

However, electrolyzer costs were unlikely to follow the sharp cost reduction trajectory seen in wind and solar, he said noting that capex costs for electrolyzers only account for a small portion of the levelized cost of hydrogen (LCoH).

Power price inputs account for around 60%, while electrolyzers capex was a third of the remaining 40%, ITM's Calver said.

S&P Global analysts see 2030 EU green hydrogen production of around 3.2 million mt under its European Planning Case.

Europe is among the more expensive global regions for electrolytic hydrogen production, according to the Platts Hydrogen Price Wall.