The EC’s Leaked Draft Market Reform Looks Like Good News for PPAs

As EU politicians work towards a bloc-wide market reform proposal to bring European electricity prices down to sustainable levels, a wide array of recommendations have been put forth from policymakers, including a Spanish proposal advocating for the government to be the sole purchaser of clean energy through long term contracts. While the idea of the government having a strong grip on the market is politically attractive, history has shown that competitive markets have lower prices and operate more efficiently. Though well-intentioned, the proposal would slow down development and shut out corporations that are eager to support renewables.

In contrast to the Spanish proposal, the last several months have also seen calls from energy majors and European governments for mindful reforms that avoid disrupting what works well about the existing market — including power purchase agreements (PPAs). All those participating in the European energy landscape have been collectively holding their breath in anticipation of the draft proposal, which is currently due on 16 March.

Perhaps unsurprisingly, the proposal draft has leaked — and its contents are encouraging. It’s clear that the EC has heard the voices of industry groups and understands the importance of protecting what works in the current market design, while also evolving it in a direction that will protect European ratepayers. The draft proposal makes clear that the EC sees PPAs and fixed-price electricity contracts as a primary means of bringing price stability to Europe’s energy markets.

Getting Into the Details

On a high level, the draft supports PPAs as a major tool in Europe’s broader energy transition, complementary to other market routes. Important points specific to PPAs in the draft include:

• A suggestion that countries ensure financial instruments that reduce the financial risks to PPA offtakers, and that countries can take into account union-level instruments (those financially supported by the EU itself).
• Other changes regarding PPAs involve limitations to international PPAs, which will be required to specify the bidding zone of their delivery. Cross-zonal transmission rights will likely be required, and it's possible that these restrictions, though logical, may negatively impact total market size.

Government contract for differences (CfDs) have been a core concern in market reform discussions. Importantly, it seems that the draft proposal does not include a suggestion to make government CfDs obligatory for developers — which many in the industry had feared as a possibility. CfDs are generally included alongside PPAs as fixed-priced products that the EC expects will bring greater pricing stability across Europe. The draft’s CfD-specific elements of note include:

• Two-way CfD price support schemes for new investments of all technologies. This setup makes CfDs’s settlement structure far more similar to that of a typical PPA, turning them into more similar products.
• More flexibility for renewable projects to sell through both PPAs and CfDs. This includes a suggestion to give preference to projects bidding into CfDs that already have a PPA signed — especially if that PPA’s offtaker is a small- to medium-sized enterprise (SME).
• Details missing here are around limitations on volume and price for national auctions.

Developers being permitted to bid into CfDs with projects that are already partially contracted to a PPA is an exciting step, as it provides additional flexibility and routes to market for developers, and it will likely make PPA contracting with smaller entities easier and less risky for sellers. Europe’s energy transition needs participation from as many parties as possible, regardless of their size, and it’s good to see the EC’s proposal working to make the PPA market more inclusive. 

Takeaways for the PPA Market

What should PPA market participants take away from this draft? While there is still much work to be done before a final proposal is reached, the draft should provide a large sense of relief for PPA buyers and developers. It is clear that the EC is looking to preserve a fundamental level of freedom in the energy market, both in how developers can sell their electricity, and with regards to who can buy that electricity and on what terms. Let’s all collectively keep our fingers crossed that the elements laid out thus far are preserved and make it through to the final version of these reforms efforts.

What’s more, the EC seems to understand the important role PPAs have to play in bringing stability to Europe’s wholesale electricity prices. A recent analysis from my colleague Kristian Lande quantitatively substantiates this idea, and I’d recommend all those involved in the PPA market give it a read. It’s clear that PPAs benefit not only grid decarbonisation efforts in Europe, but also protect its ratepayers. The Commission’s focus on PPAs as a central solution to the energy crisis is a win-win for energy buyers of all types and sizes.

Questions Remain

There are, undoubtedly, a number of unanswered questions in this proposal. Specifically, there has been little discussion about how exactly the costs of these investments will be passed down to consumers — the core reason behind why these talks were undertaken to begin with. It would be great to see, for example, details around whether or not “last resort tariffs” (typically a fully regulated risk-free tariff) will have exposure to long-term prices. If they were, to any degree, linked to a PPA or other product in this way, it would over time begin to pass more “average” costs down to retail customers (rather than more volatile market prices). Such a measure could also drive competition among other retailers, which could apply further downward pressure to prices. 

The EC also has opportunities to make PPAs even more attractive by changing the accounting norms around them. Since they are defined as financial derivatives, PPAs can create accounting headaches for companies. By changing this definition to more closely mirror a typical procurement contract, the Commission could make entering into PPAs that much easier. It has yet to be seen if they will do this, but it would be a welcome move.

A Good Job — So Far

The ink is far from dry on this proposal. But, if the general ideas contained within this draft are retained through to the final implemented reforms, Europe’s PPA market will have done well, and will be able to continue driving Europe’s energy transition and crucial climate goals.