Developers of renewable power projects in Europe have recently been getting used to a new reality: as taxpayer-funded subsidies disappear and competitive auctions keep pushing down costs for new-build power plants, managing the merchant risk is fast becoming a necessity.

But as utilities and other infrastructure developers try to limit their exposure to wholesale electricity prices, one of their preferred options for de-risking unsubsidized solar parks and wind farms — signing long-term power purchase agreements, or PPAs, with corporate offtakers — could turn more and more competitive as suitable counter-parties become increasingly rare.

"The corporate PPA market isn't going to be infinite and you're going to have to find innovative solutions [to win contracts]," Danielle Lane, the head of portfolio and transactions at Swedish utility Vattenfall AB, said during a panel discussion at Aurora Energy Research's annual spring forum in Oxford on March 19.

Vattenfall cut a deal last year to sell a fifth of the power from its planned Kriegers Flak offshore wind park in Denmark to a healthcare and a biotechnology company, one of the first corporate PPAs for an offshore wind farm. The company has also won a zero-subsidy tender to develop the 700-MW Hollandse Kust Zuid 1&2 offshore wind projects in the Netherlands and plans to become one of the largest provider of corporate PPAs in Europe.

Billions at risk

Although the market for corporate PPAs in Europe is still in its infancy compared to the U.S., activity has picked up rapidly in recent years. European wind farm operators have sold 4.7 GW of capacity to corporate customers since 2013, with deals reaching a record high last year, and at least 4.2 GW of subsidy-free solar projects have so far signed PPAs with both utilities and corporates in Europe, according to market researcher Bloomberg NEF. A majority of the solar PPAs have been concentrated in Spain and Portugal, but deals have also included Anheuser-Busch InBev SA buying solar power from projects in the U.K., for example.

Meanwhile, solar and wind capacity in the EU is forecast to continue to grow at pace in the coming decades as countries strive to reach bloc-wide green power targets. Aurora Energy Research estimates renewables capacity will grow by 410 GW between now and 2040, requiring up to €400 billion in new investment.

Budweiser maker Anheuser-Busch InBev contracted to purchase solar power from a portfolio of unsubsidized projects in the U.K. last year. Source: Associated Press

But since much of this capacity will be realized without direct subsidies, it also comes with significant price risk for developers, it said in a report released March 19. Although major corporate electricity users looking for the green benefit and stable power prices of a PPA are expected to play a crucial role in carrying some of this market risk, suitable off-takers could quickly become rare and as much as half of the $400 billion investment opportunity could be put in jeopardy.

Aurora estimates that companies covering only 14% of industrial power demand in the EU are able to absorb the long-term power price risk involved and also fulfill the high credit ratings lenders require to finance PPA-backed renewables projects. That equates to 255 TWh in demand EU-wide, or the equivalent of 60 GW of offshore wind farms.

Developers who manage to form the right off-taker partnerships now will therefore have a competitive edge in the future, said Benjamin Merle, a principal at Aurora. "We expect PPAs to become economic in most countries in the next three to five years. Now is the time to prepare your strategy," he told an audience at the event in Oxford.

A large and bankable balance sheet is one of the key elements that financing banks look for in a corporate PPA counter party, with most typically requiring investment-grade ratings, according to market participants.

Most utilities will have a better credit rating than the average corporation and signing contracts with companies with weak credit will increase both risks and financing costs, Katrin Fuhrmann, a senior originator at French utility ENGIE SA's trading and risk management division, told an audience at the E-world conference in Essen, Germany, in February. "Credit-worthy customers will be a scarce resource," Fuhrmann said.

Alternative options

Others hope that banks will start to lower their strict criteria as they gain experience with corporate PPAs and develop suitable financing structures. José Donoso, director general of Spanish solar association UNEF, said in an interview that lenders have started financing pure merchant solar projects in Spain, although they require twice the share of equity financing in such deals compared to subsidized projects.

"We don't mind subsidy-free but we need some sort of stability," said Carol Gould, the head of power and renewables for Europe at Japan's MUFG Bank Ltd., which has structured financing for offshore wind projects, for example in the U.K. "You need to have at least part of your revenue to be relatively certain to be sure that you will have the debt repaid."

Market participants also maintain that there are other ways of de-risking unsubsidized renewables. Danish wind power giant Ørsted A/S, which is developing merchant projects in Germany and the Netherlands, recently said its bid in the latest subsidy-free Dutch offshore auction would include a commitment to produce hydrogen using the wind farm's power production to help stabilize revenues from the project.

Vertically integrated utilities are also expected to finance merchant projects on the back of their regulated revenues or through portfolio diversification, and financial hedges could also find more application in de-risking projects, according to multiple speakers at the Aurora forum.

Lane said one reason Vattenfall was comfortable with its zero-subsidy bid for the Hollandse Kust Zuid 1&2 project in the Netherlands was the company's retail business. "We have a large customer base in the Netherlands, which gave us the confidence to trade off the back of our merchant offshore wind farms in the same way we trade off the back of our other assets," she said.