Rising renewables demand positions European developers to boost prices

A scarcity of new wind and solar projects and the insatiable demand for green electricity are shifting the balance of power in the European renewables market further in favor of developers.

The price of renewables power purchase agreements, or PPAs, in Europe rose by 17.5% year over year in the fourth quarter of 2021, market platform LevelTen Energy Inc. said in a January report. Permitting and grid connection bottlenecks have slowed project developments, but PPA deals continued to flow, with corporate buyers scrambling to lock in green power at cheaper-than-market rates.

Renewables power buyers signed a record 141 PPAs in Europe in 2021, according to analytics platform Pexapark, supporting over 11.2 GW of new capacity. Globally, a record 31.1 GW of corporate PPAs were secured, according to BloombergNEF.

"This used to be a buyer's market," Frederico Carita, manager of developer services for Europe at LevelTen, said in an interview. "Now the tables have turned."

Paying a premium

Executives at large developers such as Ørsted A/S, Iberdrola SA and Neoen SA reported rising PPA prices during the recent earnings season.

Corporación Acciona Energías Renovables SA said 10-year PPAs in Spain and other EU countries have shot up in price by more than 20% for contracts starting in 2024 onward and are expected to rise further still. Meanwhile, EDP Renováveis SA, the listed renewables business of EDP - Energias de Portugal SA, renegotiated certain PPAs last year, adding up to €5/MWh or $5/MWh to the cost, depending on the location of the deals.

"We wanted to make sure we just didn't lock in the PPAs for the sake of the PPAs, but that we actually got the returns we wanted," CEO Miguel Stilwell de Andrade said on EDPR's Feb. 16 earnings call, explaining the rationale for renegotiating contracts.

A 10-year PPA in Italy would have cost a buyer about €45/MWh a year ago but now costs about €65/MWh, according to Eyal Podhorzer, CEO of Israel-listed power producer Econergy Renewable Energy Ltd. He added that when electricity prices started rising, some off-takers did not adjust their bids fast enough.

"In the last six months, PPA off-takers started to realize they were out of the market and started to raise [their offers]," Podhorzer said in an interview. "It makes sense now [for off-takers] to pay a premium."

'Overwhelmed with requests'

Despite rising prices, demand from buyers has not diminished, with corporate and industrial off-takers rushing to try and lock in renewables power contracts at rates that Stilwell de Andrade described as "a lot cheaper" than the surging wholesale cost of electricity.

Power prices in Germany reached €251/MWh on Feb. 28, compared to €41/MWh a year ago, according to S&P Global Commodity Insights data.

"The price rises have been a wake-up call for many corporates," said Benedikt Ortmann, global director of solar projects at German developer BayWa r.e. AG. "We see ourselves being overwhelmed with requests for PPAs. We simply don't have enough projects for that."

Projects are in such high demand, in fact, that Acciona Energías CEO Rafael Mateo said buyers are increasingly open to signing PPAs with operating plants rather than new-build capacity, sacrificing their typical requirements to enable the development of new projects through their PPAs.

"This is ... a good opportunity for us to contract the Spanish volumes at very attractive medium-term prices," Mateo told analysts Feb. 24.

Shift in PPA market

Some power suppliers, such as Endesa SA, Enel SpA's Spanish subsidiary, are attempting to extend the duration of their PPAs to reduce the burden of high and volatile wholesale prices on their customers.

Industrial companies with the largest power demand, such as steelmakers or chemicals manufacturers, might be more willing now to lock in PPAs for longer, given they risk operating less efficiently and losing business if they are forced to pay over-the-odds for electricity.

"It's quite an urgent situation for some," Ortmann said in an interview. "It's getting really serious."

This points to a fundamental shift in the renewables power market. PPAs are "no longer a PR statement" but also serve as a financial hedge, Gregor McDonald, head of trading and PPAs at Danish group European Energy A/S, said March 8 at the Solar Finance and Investment Europe conference in London.

With wholesale power prices forecast to remain above average for some time, the PPA market will continue to favor sellers in 2022, according to LevelTen.

However, the balance of power could shift the other way if national governments follow through on EU measures to ease permitting bottlenecks and reinvigorate capacity additions, announced March 8 as part of proposals to reduce reliance on Russian gas.

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