Renewable power prices surge in Q4'21 as Europe's energy crisis starts to bite

Months into an unprecedented energy crisis in Europe, surging gas and electricity prices are feeding into the market for renewable power purchase agreements, according to power purchase agreement market platform LevelTen Energy.

Renewable power purchase agreements, or PPAs, where corporate and utility energy buyers contract output from wind and solar farms, do not usually track market volatility, as plants are often not yet built when contracts are signed.

But in the fourth quarter of 2021, LevelTen recorded a 7.8% hike in wind and solar PPA prices in Europe compared to the third quarter, with its Blended European Index, which aggregates the lowest 25% of PPA offers, now standing at €52.46/MWh. The index is up 17.5% compared to the year-ago period, LevelTen said in a Jan. 13 report.

Wind prices surged more than solar, rising 8.2% in the fourth quarter compared to the previous three months, though solar prices increased more than wind on a year-over-year basis.

Much of the increase in wholesale power prices comes from natural gas. Rebounding gas demand, supply shortness across Europe and reduced supply from Russia saw many European markets hit record prices. In France, outages at several nuclear power stations compounded the pressure.

From LevelTen's perspective, this means renewable PPAs will become even more of a seller's market in 2022.

High wholesale power prices are making it more attractive for developers to market their power directly on the market, despite the risks of fluctuations, according to Frederico Carita, manager of developer service for Europe at LevelTen.

"[The fourth quarter] made it clear that the crisis — and its elevated wholesale electricity prices — don't seem to be going anywhere any time soon, and neither is their impact on the PPA market," Carita said in the report.

Meanwhile, corporate power buyers remain keen on PPAs, as many feel the pain of market volatility on their own energy bills. Decarbonization targets and environmental motivations also continue to drive demand.

Long a market dominated by tech giants with power-hungry data centers such as Meta Platforms Inc. and Google LLC, a new class of industrial mega-buyers is also emerging, such as chemicals-makers BASF AG and Covestro AG, which are squaring up to challenging decarbonization pathways.

Increasingly, there is an imbalance between supply and demand in Europe. "Corporate desire for renewables continues to grow, while fewer highly attractive renewable projects are making their way through the gauntlet of complex permitting processes, interconnection backlogs and supply chain difficulties. Given the relative scarcity of renewable offers combined with rising development risk, developers are, not unreasonably, increasing their prices," Carita said.

While prices are on the rise, there are still marked differences across Europe. This is due to variations in wind and irradiation resources and market designs, for instance. Spain continues to offer solar power at the lowest cost in Europe, and wind projects in the country are also among the cheapest in Europe. Only Finland offered cheaper wind power during the quarter, LevelTen said, adding that prices there have been stable over the past year.

The Nordics have seen comparatively low power prices for years, as the region's large hydropower fleet is supplemented with more onshore wind capacity. This has shielded the region from the recent gas-driven price surge. "Nordic wholesale prices as a whole remain low when compared to the rest of Europe, meaning developers there are less enticed by the prospect of going merchant," Carita said.