Long-term PPA deals being squeezed by price volatility: Pexapark

European wholesale energy market turmoil will test the availability and pricing of long-term renewable energy Power Purchase Agreements, PPA advisory Pexapark said Feb. 10 in a 2022 outlook.

The Q4 2021 price surge saw utility offtakers' hedging strategies severely impacted as the correlation between hedges and PPAs broke down. Massive price moves resulted in significant mark-to-market losses and cash drains on margin payments.

"Sustained and continuous high volatility of capture rates highlights the need for more active management of asset revenues," said Pexapark Chief Operating Officer Luca Pedretti.

Spanish onshore wind capture prices averaged Eur111.10/MWh in 2021 according to S&P Global Platts, with daily prices ranging from Eur1.50/MWh on Jan. 31 to a high of Eur383.01/MWh on Dec. 23.

Pedretti noted that an increase in discounts of Pay-as-Produced PPAs had triggered rising demand for shorter term and baseload PPAs.

"Such volume structure not only brings a steep shift from the typical risk profile used for traditional renewables investment, but also in the day-to-day operating model of the asset," he said.

10-year deal malaise

Directly related to this trend, Pexapark predicted a malaise in the long-term PPA market for 10-year-plus deals this year due to the maturity of some markets and the impact of price turmoil.

The longer-term PPA market could be supported, however, if utilities de-risked their "stack-and-roll" hedging programs with a few long-dated corporate offset deals.

"In that case, a multiple of the offset volumes could be unleashed in long-term PPA volumes with investors to enable additional renewable build out," it said.

Funds flex trading skills

The company also predicted the emergence of large renewable investment funds pursuing utility-like business models.

Short-term PPAs and baseload structures were 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," Pexapark said.

It also predicted the continuing ascent of the mega corporate buyer, looking to contract offshore wind capacity.

"Mega buyers, such as global data centre behemoths, large chemical companies and consumers planning P2X facilities, have gargantuan energy needs" that only offshore wind could realistically meet.

Due to competition, equity may be needed to secure these deals.

"Our inspiration -- as well as aspiration -- comes from a truly one-of-its-kind deal that took place in 2021, when BASF acquired a 49.5% stake in Vattenfall's 1.5GW Hollandse Kust Zuid offshore wind farm in the Netherlands," Pexapark said.

EUROPEAN PPAs: EVOLUTION OF TOP 5 COUNTRIES BY CONTRACTED CAPACITY

Source: Pexapark

58% CAGR

Pexapark's PPA deal count has gone from 36 in 2018 to 141 last year, a compound annual growth rate of 58%.

The company tracked 11.2 GW of contracted capacity last year, with Spain dominating deal flow for a cumulative 3.9 GW, followed by Sweden (1.98 GW), the Netherlands (1.2 GW) and Germany (765 MW).

Amazon, Alcoa, BASF and Agder Energi were the top buyers of capacity in 2021, while Luxcara, Greenalia, Vattenfall and Opdenergy were the top sellers.

Of deals tracked last year, 5.11 GW related to onshore wind, 3.69 GW to solar and 2.19 GW to offshore wind.