INTERVIEW: Luca Pedretti, COO of PPA advisory business Pexapark

The collapse in power prices across Europe has stalled a number of power purchase agreement (PPA) negotiations in the UK, Italy, Spain, the Nordics and Germany, Luca Pedretti, chief operating officer and co-founder of PPA advisory and software business Pexapark, told S&P Global Platts in an interview Wednesday.

While technology costs have come down, prices have fallen further and faster, stalling negotiations. Meanwhile renewable energy project investments in southern Europe are facing up to three-month suspensions due to the coronavirus pandemic.

Click here to read about Platts/Zeigo's European Power Purchase Agreement price report

The pandemic "has exaggerated what was already happening," said Pedretti. "A period of sustained decline in prices on the forward curve was putting pressure on non-subsidized renewables. Then coronavirus acted as the kicker, accelerating the decline."

Wholesale power prices are now on the cusp of certain hurdle rates in contract negotiations, Pedretti said. At the same time, bid-offer spreads on the price curve have widened due to falling liquidity.

"In Spain, responsible for around 50% of PPA volumes last year, Eur35-Eur37/MWh was working well as a price range for these contracts. We're now at Eur31-Eur34/MWh," Pedretti said.

Steeper declines had occurred in higher priced markets such as the UK, Italy and Germany, Pexapark data showed.

"Germany was well above Eur40/MWh in February and is now down to Eur34-Eur35/MWh," he said.

Heightened risk in the market was reflected in wider bid-offer spreads on the price curve, Pedretti said, drawing a parallel to 2018's default in the Nordic power market, caused by Norwegian trader Einar Aas' disastrous punt on Nordic-German spreads.

"Fear dries up liquidity and drives up trading costs," Pedretti said. "PPAs are built upon forward contracts. If liquid, a Eur50/MWh contract may have a 0.05 to 10 euro cent spread. At times like this, the spread can be Eur3."

Lockdown delays

Meanwhile, for many finalized investments, construction has now been suspended due to travel and quarantine restrictions.

Delays of three to six months, however, "might not be the biggest challenge for developers that are used to thinking in years and reacting to uncertainties in the project permitting process," Pedretti said.

"The real problem is price, and it will be two to three weeks before we know whether the situation has stabilized," he said.

If prices do stabilize in that period, Pedretti was confident a recovery was achievable. Pexapark was still receiving quotes from offtakers, but the situation was volatile and differed from market to market, he said.

Longer term, Pedretti hoped the crisis would accelerate the "professionalization" of the PPA market.

Before the power price decline, renewables were competitive with wholesale markets and the odd 50 euro cent in negotiations was not a deal breaker.

"Now that last 50 euro cent is really interesting, there is much more focus on finding the right price and the right product," he said.

And in terms of post-crisis stimulus, governments could do worse than focus on streamlining authorizations, which were particularly slow in Italy, Pedretti said.

Pexapark's PPA indexes provide price information on the average fair value price of renewable transactions across a number of European countries, including France, the UK, Germany, Italy, the Nordics, Poland, Portugal and Spain.

The indexes are averages of daily-updated fair value prices for all renewable energy technologies, weighted by capacity. They aim to highlight price trends relevant for the economic viability of renewable energy projects.

The country indexes are aggregated into the Pexa Euro Composite Index, which provides an overall European renewable energy price.

On February 18, the composite index was Eur38.70/MWh. By March 20, it had fallen 13.85% to Eur33.34/MWh.