Europe solar investors adapt contracts to supply smaller, riskier firms

Growing demand from smaller corporate renewable offtakers is spurring multi-layered power purchase agreements and new risk aggregator models, experts told the PV Operations Europe 2019 conference.

The global corporate renewable PPA market is growing fast as companies capitalize on falling costs to meet rising sustainable development targets.

The U.S. has led PPA growth but demand in Europe is increasing as a growing number of industrial groups and smaller enterprises enter the market. In the coming years, new European Union (EU) directives will accelerate demand by reducing barriers to PPA development.

"The momentum is really starting to happen in the corporate PPA space," Ulrika Wising, Head of Solar and Storage at Macquarie Group investment bank, told the conference in Munich on February 27.

"We are actually seeing a lot of interest from the medium-sized commercial and industrial companies that are starting to have a sustainability agenda," Wising said.

Growing demand from smaller offtakers is driving new PPA structures which include multiple counterparties and multiple contract durations, experts told the conference.

Going forward, greater PPA flexibility and new aggregator roles will widen the market to partial merchant models and higher-risk offtakers, they said.

Sharing risk

The influx of smaller companies into Europe's corporate renewable PPA market follows a U.S. trend.

Last year, 34 new US-based companies signed their first clean energy PPAs, representing 31% of corporate PPA activity, BloombergNEF (BNEF) said in a report published in January.

                                    US corporate renewable deals

                                                           (Click image to enlarge)

Source: Rocky Mountain Institute's Business Renewables Centre

Smaller companies are aggregating their electricity demand to buy into large-scale solar and wind projects, often alongside an "anchor" buyer with a stronger balance sheet to help lower risks.

Many of these smaller firms are seeking shorter PPA contracts and new types of PPA structures will include multiple contract tenors and multiple offtakers for the same asset, experts told the conference.

"What we will start seeing... is layers of PPAs," Guy Auger, CEO of Greensolver, a renewables advisory group, said.

"Having on the same site a five, a 10, a 15-year piece which are different prices and enable you to optimise your pricing and your risk over time," Auger said.

This multi-term approach will require an in-depth understanding of regional power markets and pricing trends.

The spread between PPA and wholesale prices varies between country, depending on market-specific factors such as liquidity and national regulation.

In Spain, ten-year PPAs are currently around 40% lower than spot market prices, Martin Scharrer, Head of Legal at Encavis, a renewables investment group, said.

"Prices are rising on the spot market but you don't see the prices rising on the PPA in parallel," Scharrer noted.

         Day-ahead power prices, volumes in Spain (ES), Portugal (PT)

                                                         (Click image to enlarge)

Source: European Commission's quarterly electricity market report. Data source: S&P Global Platts, OMEL.

In contrast, some UK-based corporates are willing to pay PPA prices similar to spot prices though sleeve or virtual PPA deals, Wising said.

Limited interconnection between Europe's markets mean that spreads between PPA prices and merchant projects will remain different between countries, Wising noted.

"We are going to live with a disconnected electricity market in Europe for a very long time and with that we will have different dynamics in different jurisdictions," she said.

Merchant future

As costs continue to fall, experts predict a growing share of merchant projects based on wholesale market risks.

Utilities and corporate groups with larger balance sheets are expected to dominate this space, but innovative contract structures could attract other types of investors.

Some companies are developing "hybrid" contract structures with partial PPA coverage and these could attract institutional investors, Patrick Hinze, Senior Project Manager at Munich RE insurance group, said.

"At the moment we see that there is a big demand for special risk transfer solutions enabling projects which will definitely be at least partially merchant in the future," he said.

Institutional investors will want to implement contracts for at least part of the output, Hinze said.

"A combination of both needs to be there and if that is the case I see a market for institutional investments in renewables, even in a partially merchant world," he said.

Bundling risk

Until now, PPA contracts have been limited to investment-grade offtake counterparties but this is set to change as PPA structures evolve.

"There is money out there that is also willing to work on a PPA basis with companies that are not investment-grade," Wising said, noting that the deals available to them will be less attractive.

Demand from these companies will see the emergence of new market players which aggregate these deals and manage risk on a portfolio basis, Hinze said.

"Maybe even combined with some portfolio hedging solutions...I think we will see new players there," he said.

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