Power price volatility driving demand for shorter, more sophisticated PPAs

“What we’re starting to see more creeping in is either shorter term PPAs with fixed price, people asking you to price [a] month ahead, or baseload pricing, looking at shaping cost ahead and who takes that risk,” he said, adding there has also been work in “pricing in floors and discounts to market.”

While a a PPA may have typically run for between 15 and 20 years, a steady flow of shorter contracts has emerged in recent years. PV developer Solaria signed a 10-year deal with Shell Energy Europe last month for six solar plants in Spain with combined capacity of 300MW shortly after Danish renewables group Better Energy secured a seven-year PPA with pharmaceutical company Lundbeck.

As deployment rapidly scales up across Europe, PPAs are set to become a dominating force in the continent’s project financing. Software company Pexapark estimates that as much as 10GW of capacity could be contracted under long-term agreements by the end of this year. Although the majority of contracts are held by developers in Spain, where the solar sector is more mature, Luca Pedretti, Pexapark’s COO and co-founder, believes Germany could become a strong competitor due to country’s proliferation of industrial and corporate firms with stronger liquidity.

However Fernando de Juan Astray, head of origination, structured and long term products for Axpo Iberia, echoed the sentiments around PPA length and sophistication, believing contacts are becoming more standardised as offtakers and developers seek to mitigate their own price risk.

“There’s an oversupply right now, especially in hot countries,” he said, adding that these supplies are “really setting price levels and if you want to offload risks and hedge, then you have to pay some risk premiums”.

“That’s why in our view the market has tended towards more standardised structures, more baseload-y structures where risks are more manageable from the offtaker’s point of view.”

As solar energy prices gain parity on the grid, he said, “there has to be a proper risk assessment and therefore make decisions on that risk. That’s where we have seen, structures would tend to be shorter term, perhaps five years instead of 10, 12, 15 which they were before, there are fewer pay-as-produce structures, perhaps going to a base-load structure.” Astray added that more financially complex structures such as monthly reviewing and shorter term contracts “would raise your PPA prices”.

Olivier Bardet, head of global pricing and structuring of Enel Green Power, added that European PPAs are “becoming more financial and this development is good while the market is producing hedging solutions to everyone.”

However, Bardet later noted that new deployments and projects are still the driving force behind long-term power agreements. Although new deployment is needed as the global energy transition progresses, he warned that the solar industry will need to think critically about remarketing existing power plants in the future.

“It’s a market that’s driven a lot by additionality,” he said. “Existing plants have smaller cover than new plants and in some ways this energy, in some ways damages existing plants’ marketing, and in future will have to think about how to change that and make existing plants attractive.”