Rising project costs for wind, solar lift PPA break-even points: S&P Global

European renewable energy projects face long-term pricing uncertainty despite a recent easing in cost pressure, according to analysts at S&P Global Commodity Insights.

The analysts estimated break-even levels for a 10-year solar and onshore wind PPA starting in 2025 in the low Eur60s/MWh ($60s/MWh) and around Eur80-Eur85/MWh in Germany to recover new build costs, operating costs, and financing costs and include the value of Guarantee of Origins.

That "fair value" perspective on PPA prices differed from "mark to market" approaches, which are more impacted by swings in near-term forward pricing signals from wholesale markets, they said in a July 4 report.

"While PPA prices are influenced indirectly by the development in wholesale power prices and capture rates, the development in newbuild costs also has an impact," said Bruno Brunetti, head of low-carbon electricity analysis at S&P Global.

"PPA prices are set to stay elevated for the next couple of years for plants to break even," Brunetti said, noting inflationary pressures on new projects were still mirroring cost escalations over the past two years.

"With gas prices declining and renewable cannibalization rising, PPA prices may diverge from spot captures prices," he said.

Volume-weighted monthly average capture prices for solar in Germany ranged from Eur61.89/MWh to Eur127.91/MWh so far in 2023, according to Platts Renewable Energy Price Explorer.

Meanwhile, the Platts-Pexapark PPA index for a standard 10-year Spanish solar PPA was pegged at Eur36.59/MWh on July 3.

For German solar, the Platts-Pexapark index was Eur58.63/MWh on July 3, down from levels above Eur80/MWh early March.

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

Long-term capture rates

In addition to the underlying costs for project developers, wholesale power price trends and capture rates shape PPA prices.

With asset lifespans of 25-30 years far beyond the typical 10-year PPA, post-PPA revenues also have a large impact on PPA evaluations.

Capacity factors are the other key driver of price variations across PPAs and markets.

For Germany, a 10% change in capacity factor assumptions can lead to a 15% change in the modeled PPA prices, especially relevant for solar with projects in the south at an advantage to projects further north.

"Revenue cannibalization risks are more pronounced in the longer term, for the merchant tail post-PPA," the analysts said.

"In Spain, our models show that the lower the PPA share of the power plant, the higher the PPA price should be as more capacity is left unhedged and exposed to potentially lower revenues from the spot market," Brunetti said.

Other factors, such as discount rate or the debt ratio of the project, have a more limited impact on the PPA price in the modeling results by S&P Global.

Falling from 2026?

With system flexibility still lagging behind, the trajectory and volatility of wholesale capture prices remains highly uncertain.

"Our modeled PPA prices are generally above the forecast capture prices, with the divergences being particularly large for solar," Brunetti said.

Record solar generation this spring has deflated hourly prices around midday, often falling below zero and impacting income of merchant solar PV plants.

"Unhedged revenues of solar plants face large downside risks, but this might be an opportunity for corporate offtakers that have appetite for a larger exposure to wholesale markets," Brunetti said.

"This disconnect begs the question whether off-takers will be comfortable with signing long-term contracts as near-term power prices continue to decline."

PPA prices are set to decline from 2026 as cost pressures ease going forward.

Solar has the biggest potential for capex cost declines within the next five years adding pressure on solar PPAs starting in 2026 and 2027.

The S&P Global model shows a Eur12/MWh drop for solar PPAs starting in 2026 versus PPAs starting in 2025 and a further Eur8/MWh for contracts starting in 2027.

EU wind and solar GOs for 2025 were last assessed July 4 at Eur5.10/MWh, according to Platts assessments for S&P Global.