Long-term power purchase agreements (PPAs) are transforming the way companies buy and sell renewable energy-based electricity in Europe with profound implications for the sector, according to a report by Scope Ratings.
Scope Ratings says that the growing demand for PPA represents a profound shift in risk taking in the sector: from operators of unregulated renewable energy plants (electricity companies, independent energy producers and financial investors), on the one hand, to so-called takers, on the other. In addition to energy suppliers, generation asset owners are increasingly finding direct buyers in energy-intensive companies.
“For the seller of electricity under a PPA, the PPA can be considered a risk transformation tool,” says Sebastian Zank, an analyst at Scope. “For buyers, the long-term visibility in energy acquisition, the potential for profit associated with PPAs and the reputational benefits outweigh the additional risk they take,” says Zank.
“We believe that the overall impact of PPAs on sellers and buyers is a credit endorsement,” he says. However, the overall impact depends on the specifications of the PPAs used and the impact on a seller’s revenue recognition and margins or on a buyer’s raw material acquisition strategy.
However, PPAs introduce significant counterparty and forecast risk because contracts are complex, non-standardized transactions between a buyer and a seller, as opposed to hedging transactions for conventional sources of electricity that typically take place in energy exchanges or through short-term contracts.
The main catalysts for the adoption of PPPs in Europe are the phasing out of subsidies for newly installed wind and solar assets in Europe and the achievement of “grid parity” in many countries, so that solar and wind power electricity generation has become competitive in price with coal, gas and nuclear power.
Owners of unregulated renewable energy projects/assets, such as Encavis, Energparc, Energiekontor, Neoen, Akuo, renewable energy divisions of large European companies or financial investors, such as Octopus Investments, Aquila Capital, Greencoat Capital, Luxcara, have a natural interest in covering their electricity sales over a longer time horizon. Such long-term hedges in the form of PPAs are already well established with buyers such as energy operators or utilities, e.g. Engie, Vattenfall, Axpo, Alpiq, Uniper, among others.
The additional demand for PPA is increasingly coming from industrial and corporate consumers, in particular from energy-intensive companies. Aluminium supplier Alcoa, steelmaker ArcelorMittal and state railway companies Deutsche Bahn and SNCF are among those with PPAs in Europe who wish to obtain environmentally friendly energy supplies that they can use to polish their “green credentials”, hence the recent PPAs with renewable energy suppliers.
The global market for corporate PPAs with direct electricity consumers is set for a new global peak this year, with 13 GW contracted in the first nine months of the year and at medium- to long-term PPA level signed for all of 2018, itself a record year, with much of the growth in the Americas.
Europe is catching up: “We expect continued strong growth in Europe judging by the recent corporate PPAs achieved in the third quarter of 2019,” says Zank.
PPAs in EMEA, mainly in Europe, are likely to cover a renewable energy capacity of around 3 GW of electricity this year, 30% more than in 2018. And this volume adds to the PPA signed between energy sellers and suppliers, which is estimated at between 7 and 10 GW per year, according to Pexapark.
Another change related to the increase in the use of PPA is the increased competition faced by the main European electricity companies from smaller competitors. Consumers can directly purchase volumes of energy directly from the generator without an intermediary and newcomers, such as the energy supply arm of British Octopus Energy, or smaller energy suppliers, such as Audax Renovables or Factorenergia, can obtain electricity using PPAs on renewable energy projects without the need to have generation assets of their own.
“In doing so, they can take over the commercial and even retail operations of the incumbents,” says Zank.