ANALYSIS: European PPA offers continue to resist price pressure -- Zeigo

European power purchase agreement offer prices continued to resist inflationary pressure from a bullish wholesale power market in the second quarter, Zeigo's senior price analyst Freddie Lyons told S&P Global Platts Sept. 1.

Q2 trading was particularly strong, with activity focused on Spain, the UK and Germany.

Spain contracted just under 600 MW during the quarter, with PPA prices staying relatively low in European terms despite rising 40% quarter on quarter, thanks to the country's status as a mature, competitive renewables market, Lyons said.

While the Spanish government's auction in January placing 3 GW at an average price of Eur24.75/MWh ($29.3/MWh) generated a lot of market talk, the premiums were yet to be reflected directly in PPAs due to differences in credit risk, contracted volumes, and other financing considerations, Lyons said.

In the UK, meanwhile, more than 440 MW were contracted in Q2. The market had seen a massive increase in the power price in recent months -- Platts assessed year-ahead base power at GBP92.60/MWh ($127.7/MWh) on Aug. 31, up 26% in the two months from July 1.

"This may have led to a rise in the number of short-term PPAs as renewable energy generators look to cash in on contracts with greater value," Lyons said.

The German PPA market has historically lagged other major EU countries but is forecast to post the second-highest PPA volumes in Europe after Spain in 2021.

That is partly to lock in savings for the 16 GW of onshore wind capacity set to lose support from feed-in tariffs after 2025.

"At around Eur50.16/MWh for wind/solar, German prices continue to be one of the highest on the Zeigo platform. In Q2, Germany saw 200 MW in new PPA contracts for renewables," Lyons said.

Polish solar drive

Elsewhere, Poland's National Plan for Energy and Climate aims to deploy 7.8 GW of solar by 2030.

That is being helped along by government moves to remove tax disincentives for renewable investment. Auctions will also begin under a new subsidy system designed to assure price stability for new projects, Lyons said.

In May 2020, Romania had ended its ban on physical PPAs to try and boost renewable investments.

The plan is to launch a contract for differences program in the next one to two years to guarantee competitive prices and investment. Romania's current energy market mix is 16% wind, 7% solar and 34% hydropower, with the rest coming from traditional generation.

Price vs. costs

Lyons noted buy-side surprise that PPA prices had not risen in line with forward curve power prices.

"We have been asked why go to tender now when prices are so high and have had to explain that PPAs have not risen to anything like the same extent," he said.

European PPA prices had remained consistent over the quarter, despite merchant prices rising more than 40% across several European countries.

"As PPA contracts are long-term, the pricing is influenced more by construction costs [solar module/turbine], logistics costs and changes in national and European level policy. Increasing PV module costs across Western Europe have caused a small increase of around Eur3-5/MWh, with average PPA offer prices reaching Eur50.30/MWh," he said.

11.5 year average term

Contract lengths seen on the Zeigo platform were averaging 11.5 years, with German term lengths shorter at nine-and-half years and a minimum contract length of five years for a new build asset.

With many German onshore wind assets reaching the end of their project life cycle, the average wind term is just three years there, with generators offering shorter terms to tie off their energy supply until project decommissioning.

While there had been no significant change in term length over the past few months, Lyons talked of a general desire for shorter terms.

SSE and TotalEnergies had recently begun to offer five-year contracts for the Seagreen offshore wind farm in Scottish waters. However, having won a CFD, even if not for the full production amount, bankability for the project was assured making this more an exception than the rule.

Lyons said Zeigo aimed to launch its first aggregation PPA in September with a supermarket looking to tackle its Scope 3 emissions by securing a PPA for companies within its supply-chain.

"The aim is to democratize renewable energy so that volume does not present a significant barrier to entry," he said.