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New off-take deals could slow as renewables market digests power price plunge

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Developers with strong balance sheets could hold their breath on new power purchase agreements as power prices plunge due to coronavirus.
Source: Ørsted

The landscape for renewable power purchase agreements, or PPAs — increasingly crucial mechanisms in a European market becoming less reliant on government subsidies — is set to change in the coming months as the coronavirus crisis takes hold. Uncertainty affecting both supply and demand is slowing the pace of trading, with participants reassessing the backdrop to their deals and taking a closer look at the fine print.

Demand for PPAs still prevails, driven in part by lower power prices but also by continued appetite from the large sustainability-minded corporations that have become active buyers of renewable electricity. While some industries like hospitality and retail will have lower power needs during the crisis, many of the businesses leading the charge on corporate PPAs may be shielded, said Kyle Harrison, senior associate for corporate sustainability at BloombergNEF.

"Tech is resilient, and quite important for the corporate PPA market," Harrison said in an interview. "They are going to continue to build these power-hungry data centers; their power demand is not going to be altered by this."

Harrison also highlighted the long-term nature of the PPA market, with deals many months in the making and the direct impacts from the current downturn therefore not yet visible. Still, "there's no doubt it is going to have a negative impact on the market overall," he said.

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Some sellers looking to enter renewable off-take agreements are cautiously stepping to the sidelines until volatility eases. "Developers may think they are giving away value" by closing deals in times of depressed power prices, said energy lawyer Munir Hassan from CMS in an interview. While many deals will still go ahead, some developers with strong balance sheets can afford to hold their breath for a while, he said.

One business calling time-out for now is Danish wind giant Ørsted A/S. CEO Henrik Poulsen told analysts and investors on a March 25 coronavirus briefing call that while Ørsted is still talking to corporates about potential PPAs, the issue is being put aside for now and the company will take a fresh look when power prices stabilize.

Good deals

But many developers relying on PPAs for cash flow will not be willing or able to wait out the slump, which is good news for buyers. "There will probably be some very good deals out there," said Hassan.

LevelTen Energy Inc., the Seattle-headquartered PPA trading platform, announced its first request for proposals in Europe, on behalf of a large off-taker, on March 26, right in the midst of the coronavirus outbreak — further proof that interest in buying green power prevails despite the recent volatility in the power market, according to Jason Tundermann, vice president of business development at LevelTen.

While some buyers have slowed down their planned procurement as they grapple with factory closures and staff layoffs, Tundermann said in a March 27 interview that he has not seen any buyers revoke their interest entirely. "The marketplace continues to operate just the same," he said.

Similarly, U.K.-based solar developer Lightsource BP Renewable Energy Investments Ltd. continues to see high levels of buyer interest, director of power markets for Europe, Zosia Riesner, told S&P Global Market Intelligence. The developer is still keen to enter into PPAs, with a number of tenders underway, but contracts will need to be drafted in a way that ensures future upsides or downsides coming from the power markets are shared fairly, she said.

As PPAs are usually dealt at a discount to wholesale market prices, developers are now feeling the squeeze, and some projects will offer better margins than others. Assets with optimal sun or wind conditions, preexisting transmission infrastructure and low operational costs could still give developers sufficient returns from PPAs, even while power prices are under pressure, Hassan of CMS said.

READ MORE: Coronavirus brings counterparty risk into sharp focus for renewables projects

Cautious sellers

Geographies more severely affected by the coronavirus will also see more substantial disruptions to their PPA markets. "The severity of COVID-19 based on geography does definitely have an impact," said Harrison of BloombergNEF.

PPA advisory Pexapark is among those observing a stalling in negotiations across Europe, particularly in the south of the continent where power prices are under the most pressure, its COO and co-founder, Luca Pedretti, said in an interview with S&P Global Platts. "A period of sustained decline in prices on the forward curve was putting pressure on non-subsidized renewables," he said. "Then coronavirus acted as the kicker, accelerating the decline."

In Italy, the country in Europe worst-affected by the coronavirus, the PPA market is set to slow disproportionately. While the lack of boots on the ground and supply chain disruptions are one reason, the short-term plunge in power prices is also reducing interest from developers with projects that need off-takers.

However, buying demand is certainly still there, said Luca Prosdocimi, energy management analyst at Italian renewables developer Falck Renewables SpA, in a webinar organized by Cornwall Insight on March 12. "We can see in the market a lot of buyers, but nobody wants to sell now," he added.

"There is a strong reduction of the energy price," Emilio Sani, an energy lawyer for solar association Italia Solare, told S&P Global Market Intelligence. For many of the smaller developers, that is a key deterrent. "Now is not the best time to negotiate a PPA in Italy," Sani said.

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.