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INTERVIEW: Iberian hydro acquisition strengthens Engie's PPA appetite

Highlights

Right mix essential to managing risk

Rising corporate demand for deals

Wholesale liquidity grows but slowly

London — The acquisition of EDP hydro assets in Portugal will increase Engie's ability to take on power purchase agreement risk in the Iberian market, Alexandre Cosquer, Executive Committee member of Engie's Global Energy Management business unit, told S&P Global Platts in an interview Sept. 17.

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"Our goal is to buy as much as we can, sell as much as we can, answering the needs of both upstream producers and downstream consumers, while managing the risk in between," he said.

Having a diverse mix of generation assets, a strong local trading presence and the right data systems were pre-requisites to building a solid PPA business, he said.

"The amount of data and analytics you need for a 1,000 turbine wind fleet is huge. I'm not saying managing a gas plant or a hydro dam is easy, but wind is of a different order of magnitude in terms of quantity of data," Cosquer said.

As well as having a local trading team (Engie's is in Madrid) and the IT systems to process highly granular live and forecast production data, a PPA manager needed the right mix of generation assets.

In December last year Engie achieved this with the Eur2.2-billion ($2.6-billion) purchase of six Portuguese hydro plants from EDP, adding 1.7 GW of capacity to its 1.2-GW-plus Iberian onshore wind and solar portfolio.

"Wind, solar and hydro is the right mix, hydro acting as a battery to help balance the grid and integrate a bigger share of renewables. We now have three run-of-the-river stations and three pumped storage plants to do that," Cosquer said.

Engie has just signed a 10-year power purchase agreement with Air Liquide to supply the industrial gas production company with 15% of its Spanish consumption needs.

The power is to be sourced from renewable energy projects in Andalusia.

The contract, which will save over 250,000 mt of CO2 emissions over its course, follows a number of Engie PPA deals in Spain with large industrial groups such as Fortia and Lactalis.

The unit gives priority to its own generation assets when signing deals, "but we want to address the needs of other developers and we don't always have the right match in terms of time-to-market," Cosquer said.

Forward liquidity

When Engie began trading in Spain the forward curve was illiquid, the year-ahead contract trading around 25 MW per day, while Calendar +2 was trading around 25 MW per week.

"Liquidity has increased a lot on the front three years, and the market is clearing up to Cal +10 – but is there a lot of liquidity out to Cal +10? No, there is not," Cosquer said.

Around 5 MW had traded on Cal +10 in the last couple of months, with Engie involved.

The products are baseload, which represent "only a proxy hedge for upstream or downstream risk", he said.

"Liquidity is improving but not to the point where you can go to the wholesale market alone. You need to go to someone with a long-term view of consumption, and a long-term view of how hourly prices will transform in the coming years as wind and solar grows," Cosquer said.

Standardization

Cosquer was surprised at how many direct requests his company was getting to negotiate PPAs, putting this down to Engie's strong appetite for managing market and credit risk, and its growing experience in a complex sector.

"Everybody dreams of a standard PPA contract, but the market is changing so fast -- from daily load, to as-produced, to as-consumed -- and there is always a physical asset behind the deal," he said.

While PPA standardization was not yet on the horizon, Cosquer could imagine standardization on the wholesale market, where instead of baseload, peak and offpeak products, there was a generic solar shape product, or an average wind product for the relevant market.

In Germany these types of products were not attracting liquidity yet, but Cosquer predicted that in ten years' time, "peak will not be the right way to look at risk. It will be solar or wind shape."

Since 2018, GEM had tripled the megawatts of upstream and downstream PPAs under management in Iberia every year.

"We are not worried by our ability to match upstream and downstream risk. The limiting factor in future could be how much transformation risk we take on, and how much solar shape we can hedge – but we are not there yet," he said.