Overall wind and solar PPA prices remain 56% higher year over year, as supply struggles to keep pace with demand
European Commission’s energy market reforms poised to deliver more opportunities for Small-and-Medium Enterprises to enter into PPAs
MADRID – 18 April, 2023 – LevelTen Energy, operator of the world’s largest power purchase agreement (PPA) marketplace, published its Q1 PPA Price Index report today, which reveals that solar PPA prices in Europe have dropped for the first time in two years. LevelTen’s report tracks clean energy price movements across 20 countries in Europe, using price indices that are based on PPA offers uploaded to the LevelTen Energy Marketplace by wind and solar project developers.
According to the report, LevelTen’s 25th Percentile (P25) index of solar prices dropped slightly quarter over quarter, decreasing 4,7% to €73,20 per megawatt hour (MWh). The drop is a noticeable change from the skyrocketing prices the solar industry has been experiencing for the past two years; Q1 2023 solar prices sit at 47% higher than Q1 2022, and 76% higher than Q1 2021.
Wind prices, on the other hand, have continued to rise, as project developers face permitting barriers and rising costs that have pushed up prices by 35% over the last six months. LevelTen’s overall index of wind and solar power purchase agreements across European markets rose 56% year over year, sitting at €88,88 per MWh.
Solar prices decrease in all markets except Spain
On a regional basis, all markets except Spain experienced solar price drops. “There are several reasons for this drop. A primary driver is the fact that supply chain difficulties brought by the pandemic are abating as manufacturers ramp up production and logistical challenges resolve. Also, the gradual decline in inflation, although compensated by higher interest rates, is providing developers with improved visibility into their capex costs, which means fewer uncertainties to factor into PPA prices,” said Placido Ostos, Senior Energy Analyst, Europe, LevelTen Energy. “In addition, the drop in natural gas and wholesale electricity prices is adding pressure to developers to decrease their PPA prices in order to remain a competitive option for buyers.”
In Spain, Europe’s most active solar PPA market, prices continue to climb — rising 9,8% during Q1 and 32,2% on a year-over-year basis. “Competition for PPAs in Spain remains extremely high, applying upward pressure to prices, even as macroeconomic pressures begin to subside,” said Ostos. That said, more supply is coming soon. In January, the Ministry of Ecological Transition in Spain approved 132 solar PV projects across the country, as well as 20 wind projects and 2 hybrid projects, with a total capacity of 27,9 gigawatts. “Although surely not all those gigawatts will make it to the finish line, what is sure is that more solar supply will be entering the market and that will put downward pressure on PPA prices in Q2,” said Ostos.
Spain’s low-priced solar PPAs have made it an attractive market for corporate clean energy buyers, but Greece is hot on its heels. Greece now ties Spain for the highest percentage of offers on the LevelTen Energy Marketplace, at 17.9%, and it’s second only to Spain in terms of solar prices. “Greece’s PPA market is an exciting option for buyers looking to procure clean energy, particularly in light of a recent regulation that gives prioritization to projects with a PPA in the country’s interconnection queue,” said Frederico Carita, Global Director, Developer Engagement, LevelTen Energy. More information on Greece and other emerging markets in Europe, including Hungary and Romania, is available in LevelTen’s full report, which is now available for purchase.
Wind development picks up in Q1, in higher-priced markets
In Q4 2022, LevelTen was unable to produce a wind index because there were not enough wind offers available to anonymize the data; a clear sign of the challenges wind developers faced in bringing new projects to the market, and the paralysis brought by the regulatory turmoil in the last quarter of 2022. However, there was a resurgence of wind offers on the LevelTen Energy Marketplace in Q1, including offers from projects in France, the UK and Romania. These markets have higher wind prices than Sweden and Spain, which were also included in the wind index this quarter. In the six months between Q3 2022 and Q1 2023, P25 wind PPA price offers in Europe rose by 35% to €106,06 per megawatt hour— though this number is impacted by the re-emergence of the higher priced markets on our index.
“Land scarcity, permitting challenges, and local community opposition continue to challenge the development of onshore wind facilities across Europe,” said Ostos. “Recent data has revealed a substantial drop in wind investments, with 2022 investments marking the continent’s lowest since 2009 — an alarming figure. Trade groups have largely pointed to market interventions and other barriers as deterrents to investor confidence in the sector. With that said, we witnessed a resurgence in wind offers on the LevelTen Energy Marketplace during Q1 2023 compared to the previous quarter, an encouraging sign."
European Commission’s proposed energy market reforms show support for corporate PPAs
The European Commission’s final energy market reform proposal, which was published 14 March, makes it clear that the Commission encourages corporate PPAs as a way for project developers to secure long-term contracts and reduce power price volatility. The proposal supports existing national auctions, which now must take the form of a two-way contract for difference (CfD), while also pressing member states to design them in a way that still leaves room for corporate PPAs. Specifically, the proposal states that “renewable and low carbon energy project developers participating in a public support tender should be allowed to reserve a share of the generation for sale through a PPA. In addition, Member States should endeavour to apply in some of these tenders' evaluation criteria to incentivise the access to the PPA market for customers that face entry barriers. Finally, the obligation on suppliers to hedge appropriately may also boost demand for PPAs (which are a way of locking in future prices).”
In public supported tenders, the Commission is pressing Member States to give preference to projects that have already committed to a PPA for a portion of their project’s output with "one or several potential buyers that face difficulties in accessing the PPA market, such as small and medium-sized enterprises (‘SMEs’)." One of the purposes of the reform is to broaden the PPA market, and SMEs have faced challenges competing with larger, investment-grade companies for PPA opportunities. “If tenders follow the Commission’s guidelines, then project developers will be incentivized to enter into a PPA with small and medium enterprises so that they can become more competitive in public tenders,” said Ostos. “This will open up the market to many companies who have historically struggled to participate in PPAs because they weren’t credit worthy, or didn’t need a lot of energy.”
New Financial Instruments May Help Overcome Credit Concerns for SMEs
One reason many SMEs have not been able to participate in the market is because many do not have an investment-grade credit rating. When financial institutions are evaluating whether or not to invest in a project, they carefully review the project’s PPA to ensure that the offtaker has the ability to meet their financial obligations for the entire length of the contract, which typically spans 10-12 years. Companies that are not investment-grade, or don’t have enough financial history to have a rating, need to post significant collateral to be considered a safe bet, or to be considered at all. LevelTen surveyed 21 European developers in its Q1 report, and 57% said they would work with a sub-investment grade buyer, but caveated that the buyer would need to post sufficient security.
The Commission mandates Member States to take action to address this issue, stating: “Member States should ensure that instruments to reduce the financial risks associated to off-taker payment default in the framework of PPAs, including guarantee schemes at market prices, are accessible to companies that face entry barriers to the PPA market and are not in financial difficulty.” The primary financial risk for offtakers is if variable (and often volatile) market prices for electricity drop below the fixed PPA price the offtaker has agreed to pay the project. “It’s possible that with financial instruments in place to support corporate offtakers, credit ratings will become less of a concern for financial institutions when they are evaluating PPA offtakers’ ability to meet their obligations,” said Ostos. "Country-specific regulations will provide further clarity on what those instruments might entail, but the proposal is promising for smaller companies seeking to secure a PPA.”
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About LevelTen Energy
LevelTen Energy delivers the marketplaces, software, automated analytics, and expertise required to accelerate clean energy transactions. The LevelTen Platform is the world’s largest online hub for renewable energy buyers, sellers, advisors, asset owners and financiers. The Platform includes the LevelTen Energy Marketplace, which delivers access to more than 4,500 power purchase agreement price offers spanning 28 countries in North America and Europe. It also includes the LevelTen Asset Marketplace, which brings together over 800 renewable energy project developers and owners, and delivers the online tools and expertise they need to buy, sell and finance assets in North America and Europe. Together, LevelTen and its partners share #OneGoal to accelerate the energy transition. Visit LevelTenEnergy.com to learn more.