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UK PPA auction bids fall to record lows in uncertain times

Highlights

30 bids in latest Zeigo UK PPA auction

UK offers fall to GBP43-45/MWh

Europe-wide offers decline in March

London — A UK power purchase agreement tender this month drew 30 bids from renewable energy project developers at record-low offer prices, the CEO of PPA platform Zeigo told S&P Global Platts Tuesday.

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The average tenure of agreements offered was 10 years.

The client, a large UK consumer of power, had total energy needs of 450 GWh/year, but the auction was for 45 GWh/yr "to test the market and see how it goes. The big prize is, if the tender works, the client wants to do the same for its core energy needs," Juan Pablo Cerda said.

All the big developers in the tender were offering prices never before seen in the UK market.

"The average was around GBP43-45/MWh ($53.6-$56.1/MWh), with some of the GBP43/MWh offers all-inclusive," Cerda said. That was down from GBP49/MWh averaged across the quarter. (See PPA tracker infographic below)

A variety of structures were offered in the auction, with operational and non-operational projects as well as one virtual structure put forward.

The virtual offer bundled capacity at an operational wind farm with a new solar farm. More generally, the offers were balanced between onshore wind and solar, with just one from offshore wind.

"There was a strong will to negotiate, with developers offering flexible terms," Cerda said. In the virtual structure, for instance, there was no need for a sleeving contract.

Indeed, "the vast majority of developers were offering baseload power anyway as part of the package, which we found very interesting," he said.

The PPA market is served by various large providers of 'firming' power, whereby a trading counterparty essentially becomes the offtaker of the intermittent renewable energy and, for a fee, supplies firm baseload power to the official PPA offtaker via a flex contract.

"Now there is less and less need for those services because a lot of developers have that capacity," Cerda said.

"It has been a buyers' market for a while," he said. "Three months ago you would never get a 10-year baseload sleeved PPA at these prices."

Tenders that initially attracted around 10 offers from the market were now attracting many more as developers signed up to the platform, he said.

Looking ahead, Zeigo aimed to aggregate volume "and democratize the way smaller corporates access renewable energy", Cerda said.

Pooling three, four or five companies to offtake volume from one project, however, required a certain level of standardization in the process, he said.

Q1 PPA tracker

Data from Zeigo showed a clear decrease in price across a number of countries for projects registered on the platform in March, highlighting existing uncertainty in the short to medium term.

The prices shown, expressed in GBP per megawatt, are averages of the returns being sought by developers in order to proceed to project financing.

"Excluding the Nordics, we are not seeing the volume of PPAs in Europe as in the US quite yet," said Zeigo's Matthieu Paturet.

"Volumes are growing, however, and volatility in the forward curve is forcing companies to look at ways to manage risk and take advantage of these low prices being offered," Paturet said.

Italy

With historically lower uptake than its neighbors, Italy is forecast to register growth in PPAs as new regulations take effect.

Following in the footsteps of other European countries, new regulation is expected to provide tax relief for buyers of clean energy and provide guarantees to parties agreeing to long-term PPAs.

The Gestore dei Servizi Energetici (GSE), responsible for support schemes for renewable projects, has put in place a guaranteed minimum price regime for renewable energy generators which has been the preferred option over PPAs.

This has encouraged the development of green energy projects but, due to a drop in prices and a rise in administrative costs for this service, alternatives are needed by generators to increase revenue.

Projects on the Zeigo platform are mostly onshore wind and solar projects, seeking PPAs ranging from five to 15 years in duration. There have been some significant deals signed this year.

Steel producer Acciaierie Venete has entered in a five-year PPA with an unsubsidized PV plant, with Swiss trading firm DXT acting as the off-taker. Sonnedix has also grown its solar power PPA portfolio in Italy through a ten-year unsubsidized PPA.

Nordics

Denmark, Finland, Norway and Sweden have significant interest in PPAs and prices for corporate PPAs are lower than elsewhere on the continent.

Low commodity prices and economic slowdown are having a downward impact on prices in the short to medium term. Well suited for decarbonization, governments have set ambitious targets which highlight certain challenges facing these countries such as grid stability and capacity.

Investment in projects is healthy with many under construction or with planning consent.

Over recent years, the main players in PPAs in Nordic countries have been big energy-intensive consumers entering in large deals. Smaller players seeking shorter term deals are shifting the existing standard for PPAs.

Sweden is one of the cheapest European countries for corporate PPAs and neighboring markets such as Finland show similar trends. Wind (offshore and onshore) and some solar represent the majority of PPA projects on the platform.

Poland

With the main contract for difference (CFD) support scheme in place in Poland likely to be discontinued in a few years, conditions are becoming more favorable for PPAs and some deals have already been signed.

Interest in PPAs has grown in Poland, seen as a way to mitigate price risk as well as reduce carbon emissions.

Statkraft and steelmaker CMC have signed a 10-year PPA, although Statkraft does not own any renewable assets in Poland. Onshore wind is the main technology type for projects registered on the platform.

Spain

Conditions for PPAs have been good in Spain, with corporates such as Heineken and Orange signing deals. Although wind energy has been prevalent, solar is growing in stature, representing two thirds of projects on the platform for Spain.

Although still higher than other main continental markets, wholesale energy prices in Spain have been decreasing since 2019 with increased volatility as more renewable energy enters the system.

The government is introducing a policy to require energy-intensive consumers to procure at least 10% of their consumption with renewable energy PPAs with a minimum contract length of five years. Along with a national ambition of 42% of energy from renewable sources in 2030, demand from PPA off-takers is on the rise.

Projects on the platform are mostly mid-size solar and onshore wind generators looking for long term deals up to 15 years.

Early 2020 has seen important PPA deals come through, with Heineken entering in a long-term PPA with Iberdrola to finance the construction of a new PV plant. Another Iberdrola PPA was signed with telecoms company Orange for 200 GWh per year from solar power.

UK

The UK remains an attractive market for PPAs, seen as a useful price hedging mechanism in times of wholesale price volatility. Prices in the UK are high but recent market conditions have led to a steep decline in recent weeks.

Subsidy-free deals are more common with the government's phasing-out of support schemes and more flexible contract structures are created to mitigate risk. However, uncertainty over Brexit and COVID-19 have caused a slowdown in rates of deals being signed.

Onshore wind and solar assets dominate the PPA space in the UK with a 50/50 divide in terms of number of projects registered on Zeigo's platform. Prices are more structured with less variance and certain developers are looking for long-term deals up to 25 years.