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INTERVIEW: US platform LevelTen sets sights on Europe's buoyant PPA market from new Madrid office

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INTERVIEW: US platform LevelTen sets sights on Europe's buoyant PPA market from new Madrid office

Highlights

'Price does not always equal value' for corporates

Credit, COVID, returning subsidy issues ahead

German demand growing despite price ranking

London — Backed by strategic investors Total and Equinor, US power purchase agreement platform LevelTen is targeting the European market with a new office in Spain, where big deals are being announced on a near-daily basis, the company told S&P Global Platts in an interview Oct. 6.

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On Sept. 25 French integrated energy company Total signed an agreement with developer Ignis to develop 3.3 GW of solar power projects in the country, involving 6 TWh/year of offtake said to represent the largest corporate power purchase agreement ever signed. The deal brings Total's solar portfolio in Spain to over 5 GW, allowing the group to cover all its consumption needs across Europe by 2025.

The announcement came hard on the heels of PPAs involving Lightsource bp and Forestalia, and Engie and Air Liquide, with Engie GEM's Alexandre Cosquer telling S&P Global Platts the French utility had tripled its megawatts of upstream and downstream PPAs under management in Iberia every year since 2018.

"We're excited by the deals we are seeing in Spain," LevelTen's vice president for Europe, Flemming Sorensen, said from LevelTen's new Madrid HQ.

"Awareness and target setting in the corporate world has continued despite the downturn in wholesale electricity prices. Some might end up seeing their credit looking slightly worse than prior to COVID-19, but we don't see that as a game changer," he said.

LevelTen has more than 350 developers on its platform, including 100 new developers with projects in Europe.

The business has been set up to serve corporate buyers and sellers, utilities and third-party advisors as a channel search platform.

Analytics have been developed to reflect European specificities such as hydro in the Nordics, the impact of carbon pricing, and the presence of balance-responsible parties. The platform accepts offers for standard virtual and physical PPA structures and is able to solicit supply offers to tailored contract structures.

Fundamental questions when enrolling a new buyer involve accounting treatment (IFRS or GAAP), and risk tolerance.

"Some want the best value possible – whether it be in Spanish solar or Nordic wind, while others follow a hedge-effectiveness approach, where a buyer has exposure to retail electricity prices in Spain or the Nordics or Germany and wants a PPA that serves as an energy hedge in that market," said Chief Operating Officer Jason Tundermann.

Price vs value

While pricing is important it does not always equal value, Tundermann said. "You need to look at price, contract structure, production profile and forward hourly electricity forecasts. All that comes together to evaluate whether a Eur35/MWh PPA offer in Spain versus a Eur27/MWh wind offer in the Nordics is a better deal. That is why we exist," he said.

Sorensen noted that in the Nordics, corporate PPA prices were slightly above where the market was trading, whereas in Spain it was the other way round.

"That is OK for us because we cater to both types of buyers – but it is a dynamic we're aware of, and one reason we are here is because of corporate demand, and there we see quite strong interest gauged by requests for advisory services," he said.

PPAs signed today were for projects that would not come online until 2023 or later, with most buyers anticipating a recovery to pre-COVID price trajectories within that timeframe, Tundermann said.

Nevertheless, in the current situation there are concerns around credit as well as that companies are so occupied dealing with immediate issues that they don't have bandwidth to focus on PPAs. "We see corporates putting out unexpected fires at the moment," he said.

PPA OFFER PRICES, Q2 2020 (Eur/MWh)

Wind 25th Percentile PPA Offer Prices
Finland
30.00
Sweden
28.09
United Kingdom
47.95
Ireland
57.38
France
77.50
Spain
40.04
Solar 25th Percentile PPA Offer Prices
Sweden
35.02
United Kingdom
45.38
Ireland
63.50
France
44.56
Spain
36.90
Denmark
29.99
Poland
46.36
Germany
49.60
Netherlands
51.67
Italy
44.00
Source: LevelTen

Subsidy levels

There is also the possibility of returning support for renewables under new regulations in Spain. "There are lots projects available in Spain, but we see some slight regulatory uncertainty," Sorensen said.

"Corporates are looking at Spain because the value is quite high, but there is a chance that subsidies could come back into play. Depending on how that plays out, that could affect corporate procurement," he said.

Subsidy levels are a primary driver of price in PPAs, Tundermann said. "In France we're not seeing really competitive offers because sellers can sell into the subsidy regime at a very high price – there is no reason to sell to a corporate at the market rate," he said.

Once a subsidy regime sees bids far below forecast market prices then the way opens for corporate PPAs.

Resource is another big driver of cost-effectiveness, with Spain and Italy jumping off the solar charts while the Nordic region is doing the same for wind. Then there are considerations of land availability, the ability to deliver at scale, and ease of permitting.

"Agricultural preservation ordinance and rocky soils in Italy do not allow for a lot of large projects, for instance," Tundermann said. In Ireland, too, large projects are rare. In these markets, PPA platforms have the challenge of cobbling together a number of smaller projects to meet a large demand, he said.

Heading east

LevelTen is seeing activity pushing east with a lot of interest in Poland, but it remains to be seen whether any easing in wind turbine distance rules translates to PPA volumes.

And while German offers do not mark to market as closely as other countries, there is "a ton of industrial demand, so for those companies that need a local story or feel strongly about hedging specific retail market exposure, we're seeing a lot of demand in Germany despite the value rankings," Tundermann said.

In summary, the company sees a huge shortfall in renewables available to corporates versus ever more ambitious 2030 climate targets. "A lot of money is going to go into reducing that shortfall with increased government interest ensuring the market is well supported in the next 10 years," Sorensen said.