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INTERVIEW: European PPA market could see record deals in 2023: Pexapark


Trend to shorter-term, hybrid, tripartite PPAs

Balancing costs, credit risk are 'sticky issues'

New Platts-Pexapark 3Pi as Spain, Germany lead market

  • Author
  • Andreas Franke
  • Editor
  • Jonathan Loades-Carter
  • Commodity
  • Electric Power Energy Transition

Europe's market for renewable power purchase agreements (PPAs) could reach a record 200 deals this year despite regulatory uncertainty, Pexapark's chief operating officer (COO) Luca Pedretti said March 1 in an interview.

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Trends to look out for this year include a move to shorter-term contracts, the growth of hybrid PPAs for co-located assets with batteries and the evolution of tripartite PPAs as project developers, energy traders and corporates join forces, said Pedretti, who co-founded the PPA pricing platform in 2017.

"We wouldn't be surprised if short-term PPAs for new projects eclipse deal numbers for 10-year deals this year," Pedretti told S&P Global Commodity Insights, adding 200 deals was "absolutely feasible."

Pexapark's PPA Tracker registered 161 deals in 2022, up 5% on the year, but disclosed volumes fell 21% to 8 GW.

"This is definitely not a buyers' market, the tables have turned with the crisis. Due to high prices and a lack of projects we have moved to a sellers' market," he said.

Pexapark's Euro Composite Index, a trend indicator for the fair value of a standardized 10-year PPA weighed for technology, averaged Eur153/MWh in August 2022, but fell below Eur64/MWh Feb. 28.

Sticky themes

While a normalization of price signals and efforts to fast-track renewables would indicate a further uptick in deals, new issues had emerged.

Rising balancing costs, the impact of inflation and credit risk issues were all "sticky themes in negotiation rooms," Pedretti said.

Balancing costs ranging up to Eur15/MWh in addition to the agreed PPA price add costs and in some cases have led to a renegotiation of existing deals, he said.

Positive regulatory change flowing from the European Commission's consultation on power market reform would help, he said.

"A government-backed credit insurance mechanism would be the ultimate boost for growth in corporate PPAs in Europe," Pedretti said, comparing such a mechanism to export guarantees for equipment makers.

"What I am most worried about is continuous talk about possible additional changes, harming new investment and PPA activity," he said.

Standardized methodology

"Typically when there is a call for standardized PPAs there is much more need to clarify and educate on underlying risk components -- rather than standardized legal language," he said.

Standard contracts alone would not solve the complexity of financing decentralized and weather-dependent renewables.

"We call it the holy trinity of renewable risks consisting of price risk, volume risk and capture risk. This makes renewables wonderfully complex as values look different depending on technology, location and how much of that technology in that location is already built," Pedretti said.

"For this you need a lot of data," he added.

Pexapark has supported over 22 GW in PPA deals with over 8 GW based on its PexaOS system.

Its platform offers thousands of daily price calculations across markets and asset groups with its locational pricing tool offering investors project-specific values based on location, turbine type and contract length to calculate fair PPA values.

"What is important for the market is that the legal ecosystem is ready. What has been missing is transparent pricing of PPAs and its sub-components, if you are unsure about the price that is never a good environment for closing a PPA deal," he said.

Batteries ease cannibalization

Pexapark predicts batteries to become increasingly part of renewables investment as assets co-located with batteries can lift capture rates.

"We expect a significant share of PPAs to be "hybrid PPAs" referring to co-located assets. The US and increasingly the UK are leading, but this wave is coming across other markets," he said.

Over 40% of new solar investment in the UK now includes storage. In California and Texas this is already above 90%, he noted.

Analysts at S&P Global also see the UK leading Europe's battery market away from ancillary services to mitigating merchant risk.

Cannibalization or falling capture rates are an essential aspect of PPA pricing especially for "pay as produced" (PaP) contracts.

Pexapark data shows capture rates for solar in Spain as low as 41% during the summer, but rising to 79% in winter.

S&P Global analysts forecast annual average capture rates of 71% and 78% respectively for German solar and onshore wind in 2030.

Expansion plans

Spain and Germany are leading the PPA market, accounting for a third of all deals.

"Spain has been great as it has permitted projects and strong corporate or utility interest. Germany and also Italy could be much bigger if there was permitted projects," Pedretti said.

Platts, part of S&P Global, has started to publish daily PPA prices for onshore wind and solar in Germany and Spain reflecting daily values for a standard 10-year contract.

"Pexapark and Platts have joined forces to further improve market transparency and liquidity by creating a new set of price indices for the PPA market," Pedretti said.

For German solar, the index was pegged at Eur78.07/MWh on Feb. 28, while Spanish solar was pegged at Eur42.67/MWh.

"Pexapark wants to cover the full value chain of renewable investments and operation with our software and our models. Wherever there is a PPA market, Pexapark can play a role," Pedretti said.

"So far, we are a European player, but the clients are going global, and Pexapark would like to follow," he added, noting fast growth in the US amid a more fragmented and different market with the US PPA market mainly driven by tax credits.

Pexapark is an investment management platform for renewables based on a subscription model.

S&P Global is a minority stakeholder in Pexapark.

Pexapark's Top10 by PPA deal count

2022 (2021)
Spain 31 (35)
Germany 23 (15)
Great Britain 15 (15)
Poland 13 (11)
Denmark 12 (8)
Finland 12 (14)
Italy 9 (8)
Sweden 7 (16)
France 6 (10)
Norway 5 (NA)

Source: Pexapark