How Important are Power Purchase Agreements (PPAs) for the Renewable Energy Transition?
Project Finance & Infrastructure Investment in Energy Sector 2020
22-24 April 2020, Amsterdam, The Netherlands
The phasing out of subsidies for renewable power generation and transition to competitive auctions have changed the market dynamics in renewable energy deployment in Europe. Long-term power purchase agreements (PPAs) are now the primary price hedging tool for project developers as well as corporates, traders and utilities, enabling guaranteed returns for project developers and affordable green energy for the consumers. According to a report by DLA Piper, the number of renewable power purchase agreements (PPAs) in Europe increased tenfold in six years, from 4 in 2013 up to 45 in 2019. Green PPAs are gaining relevance also due to increased pressure on big corporations from stakeholders and consumers over their green credentials. More than half of Europe’s energy consumption is from industrial and commercial consumers. This way, Green PPAs could deliver significant reductions in CO2 emissions.
Earlier this year, AB InBev (maker of Budweiser) signed Europe’s largest corporate solar PPA with BayWa r.e.to supply 130-megawatts of electricity to 14 breweries in Europe. A few months ago, in December of 2019, Ørsted signed the largest-ever corporate offshore wind deal with German chemical company Covestro for 100 megawatts of electricity over 10 years. Last year, Google announced its plans to purchase 1.6 gigawatts of renewable electricity worldwide, including nearly 800 MW in Europe, through 18 new energy deals. According to reports, the deals will result in $2 billion worth of renewable energy infrastructure including solar farms and wind turbines.
At a time when the European Union is phasing out subsidies in the form of feed-in tariffs for renewable power generation, Green PPAs can ensure guaranteed returns for investments in renewable energy projects. According to Louis Strydom - Director Market & Project Development: Middle East, Wartsila, “Where PPAs are clear and upheld they create stability and attraction for investors. In such circumstances, they create a fertile investment environment where investors risks are limited. Even in merchant markets, PPAs can still play a role to clarify returns and assist investors in delineating their risks. “
Roeland Menger - Investment Manager, EDF also shares a similar opinion. He says, “PPAs form the basis for security on the revenue side for project developers. Long-dated PPAs with either (state-owned) utilities or directly with commercial companies will create certainty and stability for both parties, hence increases the financeability of renewable energy projects. “
With subsidies being phased out, many small and medium-size solar and wind farm operators do not have the means to participate in wholesale electricity markets and lack the financial resources to manoeuvre the fluctuations in wholesale electricity prices. Long-term PPAs would enable such operators to stay operational by ensuring a reliable income to cover operation and maintenance. Tobias Heyen, Senior Originator at Engie, “The PPA helps to connect the operator with the end customer. We can now see a change on the operator´s side, not just well-situated utilities are building big scale renewable power plants, but mid-sized investors are also getting engaged. The difference is that those are mostly focused on investment, construction and technical services. The marketing ability is not covered, at least not to the physical extent. The PPA and the utility´s role will be significantly important to close that gap. Furthermore, the merchant PPA can enable projects to get built even though the project does not deliver directly to an industrial off-taker. At ENGIE, we aim to accelerate energy transition through renewables and PPAs, for our clients of all sizes. Our role of green midstreamer enables us to manage risk allocation between upstreamers and downstreamers, on-board part of the risks and/or mitigate them through first-class hedging strategies.”At the Project Finance & Infrastructure Investment in Energy Sector 2020, Tobias Heyen will share his insights on Power Purchase Agreements (PPA) being the way to green energy in Europe.
PPAs are enabling the development of more Energy from Waste projects by making them bankable and protecting them from the volatility of output, and at the same time providing consumers with affordable clean energy. According to Tomasz Franka, Project Finance Director, SUEZ, “The climate and the existing infrastructure in central and eastern Europe give a great opportunity to efficiently make the best of the renewable energy in waste for the heat and power cogeneration purposes. PPAs are usually one of the pillars of a well-balanced, structured and sustainable EfW project. The role of PPA is to give a necessary, long term comfort to the investor and power producer (e.g. an EfW plant) that his investment and the associated risks in clean/renewable energy source development will be fairly compensated and rewarded. Renewable energy sources, like waste thermal treatment plants, are intrinsically more prone to the volatility of output than the ones based on traditional fuel. Hence, in an ideal world, PPA should protect the power producer from (any) penalties for underperformance on delivery of commitment for reasons beyond his control or not attributable to his default. On the other hand, PPA prices of a clean/renewable energy should be affordable for the end-users but the financial consequences of green energy sources underperformance should be balanced against the environmental costs of using alternative energy sources. An EfW project which is sized to be fit for purpose is one of the main examples where PPA can go hand in hand with renewable energy objective and affordability of all types of services rendered – waste treatment & energy production – a best case in point being the ongoing PPPs in Poznań (Poland) or Belgrade (Serbia). “
Long-term PPAs are enabling corporates to play a bigger role in the energy market with purchasers having a say in the source and price of the energy they use, at the same time providing security for project developers and investors. The ensuing market dynamics will dictate how PPAs evolve in the coming years; Project Finance & Infrastructure Investment in Energy Sector 2020 will discuss the latest trends and drivers in PPAs in Europe. The forum brings together project finance experts and infrastructure investment decision-makers for discussions, case studies and presentations on the global energy project landscape and analyzing project financing opportunities and challenges.
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