Price discrepancy the main barrier to UK PPA deals, developers say

He explained that often, when developers quote customers a price, the customer is comparing that quote with a lower price forecast they’ve bought in from a consultant. This price discrepancy has seen a slowdown in European PPAs.

“The issue I’ve got with that is that the projected price doesn’t capture the risk or the upside; if you look at the spread of possibilities on price in any year, it’s heavily weighted on upside. The central case doesn’t quite hit where we need to be, so you do have this price discrepancy at the moment.”

Peyman was joined on the panel, titled ‘Simplifying Complexity –The Future of PPA Design in the UK & Ireland Market,’ by Stella Mavrommati, senior associate at law firm CMS.

She said, “Nothing really starts unless the pricing works for both parties. It’s important to align on all the risks that might unwind across any of the parameters of a commercial deal. But when this comes later in negotiations, it drives complexity.

“Who takes on risk? What happens if there’s curtailment or negative prices? All of this needs to be addressed early on in negotiations.”

Ross Irvine, senior manager of PPA origination and structuring at EDF UK, agreed. According to him, being involved early as the party facilitating an agreement is “key” because “we can find ways to make things simple, we can be flexible”.

New build projects less attractive for corporate PPAs, additionality less important

“Operational PPAs are becoming more of a thing: they’re simpler, they’re shorter,” Peyman said.

This chimes with comments by Irvine in both a recent interview with PV Tech, and on the panel. He said the delay risks associated with new projects, particularly in the UK with grid connection delays, corporates are looking to operational assets that lend themselves to short agreements. In these cases, “other clauses become less nuanced too”.

Mavrommati added: “What I hear from the market is that some corporates are less concerned about additionality (although that will always be important for some parts of the corporate offtake market). Especially in the UK market, where you have a very advanced Contracts for Difference (CfD) scheme that kind of competes with PPAs and is crucial for development of new assets, operational assets can plug the gap.

“The energy transition is not just about new assets, it’s also about maintaining the assets we already have to secure the green future we are after across Europe.”

Power market volatility and negative pricing: ‘It doesn’t really matter what the price is’

Increasing negative pricing periods and power market volatility need to be addressed, Mavrommati said, but there is a range of approaches to do this.

“These include setting up a cap on negative pricing hours or negotiating a floor, or you can combine the two, but there’s a lot of variation in the market. Everyone agrees it’s not sustainable to make it just a problem for the seller.”

Peyman’s take was that these factors are somewhat inconsequential. “A PPA is a long-term fixed deal. From a seller perspective, we aren’t saying we’ll stop selling to the buyer when the price gets really high, so I don’t understand why we need to talk about negative prices; we are setting a fixed price deal that takes both parties off the wholesale market, so it doesn’t really matter what the price is.”

That being said, he did concede that “if you’re asking the generator to curtail or refusing to pay negative prices, you’re adding risk. So we are having to forecast for negative pricing which adds to the risk and complexity of what should be a simple fixed price deal.”

Energy storage, particularly co-located with generation assets, is emerging as the go-to fix for negative pricing across Europe and the UK. Island Green Power, “like many developers,” has co-located sites, which Peyman said “means savings through sharing land and through sharing a grid connection”.

At the moment, he said, developers will likely have a separate PPA agreement on the solar side and an optimisation agreement on the battery side. “That works quite well because then the battery can respond to all the peaks and troughs in the market, not just balancing the solar,” he said.

Energy storage lowers risk but adds complexity

“Batteries also remove the risk of balancing and shaping needs that come on top of, and at added cost to, a PPA. What we are seeing now is an emergence in financial agreements around volatility. As the market gets more volatile, batteries earn more but there’s potentially more risk on the PPA.

“Doing some kind of financial swap around the battery and combining that with a PPA probably takes some of that risk and uncertainty away,” Peyman added.

Mavrommati said these emerging financial structures are “definitely one of the most interesting growth areas in the wider market at the moment.

“We are still in a very exploratory phase, but we are seeing corporates thinking about whether they can engage. It’s an interesting market, but the big question is how we make it simple enough for offtakers to effectively engage.

“With a PPA on one side and a parallel arrangement that gives you access to arbitrage value, but it needs to stay simple in how you frame the terms and in the commercials.”

In closing, Irvine said that battery swaps and revenue swaps are “a great idea” and “certainly one of the most interesting things within the market”.

However, “if complexity is one of the things you’re looking to avoid, that conversation is something you want to avoid.”

PV Tech publisher Solar Media is hosting the Renewables Procurement & Revenue Summit, this week in London. The event will cover PPA design, tackling high energy prices and more; for more information, including the full agenda and ticket options, visit the event website.