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INTERVIEW: UK wind, solar assets rush to lock in PPA values: Renewable Exchange

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INTERVIEW: UK wind, solar assets rush to lock in PPA values: Renewable Exchange

Highlights

Transaction volumes boom in rising market

Generators seeking to lock out into 2024

Imbalance risk could influence CFD auction

UK wind and solar assets are seeking to lock in today's prices for as long as they can under power purchase agreements, but suppliers are understandably cautious, Renewable Exchange's Chief Commercial Officer Chris Smith told S&P Global Platts Oct. 8.

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The platform hosts over 40 offtakers, 1,700 generators and 4 GW of capacity, with transaction frequency taking off this year.

"We've helped generators secure nearly 600 PPAs year to date, with over 80 contracts in September alone," Smith said.

Last year generators were going short, selling for six months and leaving it very late to renew agreements, he said.

This was because prices had been bumping along at a low level for some time and in a relatively tight band.

"A wind asset locked in at around GBP45/MWh last year on our platform. They're looking at GBP110/MWh now for a renewal," Smith said.

At these rates generators were understandably seeking to lock out as far as possible, one portfolio contracting in January for 12 months, "then a month ago it locked out from April 2022 to March 2023, and is now looking to lock out from April 2023 to March 2024," Smith said.

This was not uncommon, the whole sector being presented with potential returns well above plan due to the wider escalation in power prices.

Some suppliers had been less keen to fix out long term due to higher balancing risks, "but we're alleviating this problem for generators by letting them access a wider pool of offtakers," Smith said.

Suppliers had been exposed to greater imbalance risk this year due to a low-wind, high-balancing-price dynamic, with even a large utility like SSE warning of the related costs of being short of its own wind output forecast.

"However, there are still many confident suppliers bidding on assets and offering prices long into the future," Smith said.

Sweet spot

The UK PPA market tended to divide between operational assets, often owned by infrastructure funds (Octopus, Greencoat, Bluefield), looking for deals for up to three years out, and new subsidy-free projects looking to come online in the next six to nine months.

"Five years for new assets seems to be the sweet spot at the moment. In January a solar plant would be looking for around GBP57/MWh for that period. Now it is more like GBP134/MWh when you add in embedded benefits, locational values and REGOs," Smith said.

Non-bio REGOs were assessed by S&P Global Platts at GBP3.40/MWh Oct. 5, triple values seen June 10 and up from just 17 pence in early February.

The challenge then is to accelerate construction to capture current prices at a time of high resource/labor demand and fitful supply, he said.

Standard contract

Smith said agreement across a number of bankable suppliers to use Renewable Exchange's standardized digital PPA contract put together by Bristol-based law firm TLT LLP had been a game-changer for the platform.

Trust is now also established around the exchange's forecasting tool, which predicts PPA prices for an asset based on multiple price points including historical tender activity on the platform.

"The forecasting tool works out the kind of price level one can expect in the near future. But while the accuracy is very high for the top bidders, a UK wind tender in late September saw a GBP20/MWh bid spread between four established, credible parties due to the current concerns about wind imbalances," Smith said.

CFD Round 4

Increased wind imbalances could affect outcomes in December's fourth Contracts for Difference auction, he thought.

"Based on the last auction the assumption is that offshore wind bids will be really low going into Round Four. Historically bidders have looked for around a 2% discount over 15 years [against the market reference price]. I don't think imbalance discounts will be as tight this time [because of intense competition] – maybe 10% or three or four pounds."

This could really hit viability because increasing discounts would reduce revenues for many already borderline projects, Smith said.

German opportunity

Beyond the UK, Renewable Exchange has updated its platform to accommodate foreign markets' specific parameters. This allowed it to run a first tender in Germany, Smith said.

"Now the platform can be adapted to specific foreign market elements such as price and geographical data, Renewable Exchange is setting up for expansion into continental Europe, starting with Germany, Spain and Denmark," he said.

"In Germany we ran a tender for a post-EEG asset owned by a major renewable generator. Over 20 offtakers bid, with a wide spread -- one utility bid Eur10/MWh higher than the bulk of bids, others were Eur30/MWh lower," Smith said, noting highly competitive bidding.

A lot of German wind farms coming out of EEG subsidies and into the PPA market "are really old, and any of them can be curtailed [in the UK only balancing mechanism assets are generally curtailed]. Some assets are so old that if they are curtailed, they may never work again. We're building solutions to help manage these variables," he said.

Over 15 GW of first generation onshore wind turbines will reach the end of their 20-year EEG support contracts by 2025, according to German wind association BWE.