Slow PPA market development in some EU countries may threaten renewable energy growth

Traders active in the Baltic electricity market report insufficient liquidity in the PPA (Power Purchase Agreement, or long-term electricity supply contract) market. Market liquidity has declined due to falling wholesale electricity prices and decreasing incentives for offtakers to commit to purchasing electricity over a longer time horizon at a pre-agreed price acceptable to the producer as well. 

The development of the PPA market is stalling in some EU Member States. Although the market is growing significantly across the EU as a whole, there are clear and stark differences between individual countries. Last year, as we previously reported, the European PPA market grew by 40 % to a total of 16.2 GW. The average electricity sale price under PPAs reached 58 EUR/MWh for the year, while estimates at the start of the year had put it at 80 EUR/MWh.

The price requirements of investors and plant operators vary depending on the location and type of generation asset. The highest number of long-term agreements was concluded in Germany and Spain. There were 41 contracts in each of these countries. However, compared with Czechia, northern Germany has better wind conditions, while Spain has substantially better solar irradiation conditions. Accordingly, investors in Germany or Spain can accept a lower electricity price, as they generate a larger volume of energy.

Offering long-term contracts is highly demanding

PPA types also vary: they can be so-called pay-as-produced contracts (payment based on generation, with no defined delivery profile) or pay-as-contracted contracts (payment according to an agreed profile). The price of the latter type will be higher, as the producer commits to supplying a predetermined profile. However, it entails greater risks, including outages at the generation asset or, in the case of renewable sources, less favourable weather conditions, whether wind or solar.

Commercial terms are another problematic aspect. By their nature, the contracts are long-term. Investors therefore seek a counterparty that is expected to be able to take the contracted volume of energy and pay the agreed price for that volume over, for example, the next 10 years.

Offtakers are primarily from industry, although not exclusively, as banks and others are also interested in PPAs. However, industry is currently under pressure in the EU. On the producer side, a reliable partner is needed that will not try to terminate the contract when market conditions become more favourable.

The whole arrangement must then be managed by an electricity trader, which both creates a consumption profile for the offtaker by purchasing the difference between the offtaker's consumption and renewable generation, and incorporates additional costs into the price for the offtaker while balancing the requirements of the offtaker and the producer.

Other costs incurred by the trader include imbalance costs, outages of the contracted generation asset and others. It should be recalled that renewable generation depends on current weather conditions. Where generation forecasts differ from reality, a difference arises that is referred to as an imbalance. Looking at imbalance prices in Czechia this year, they have not infrequently exceeded 100 thousand CZK/MWh. For comparison, the commodity price for households currently stands at around 3.2 thousand CZK/MWh excluding VAT. Offering PPAs is therefore not without risk for any party.

A threat to climate ambitions?

“If there are no PPAs and no government support is introduced, will private capital carry out its investments [in renewables]?” asked Veiko Raim, chief financial officer of Estonian company Enefit Green, rhetorically.

A representative of Swiss company Alpiq, which also trades energy in Czechia, added that the climate ambitions of the Baltic states are not in line with current market conditions.

This may also be the case in Czechia, at least regarding ambitions for the development of photovoltaic power plants. PPAs are few and far between in Czechia, and photovoltaic plants have so far been supported only through investment subsidies. However, investment subsidies may not be sufficient to ensure project economics, also taking into account their financing and return-on-equity requirements.