The energy market turmoil of the fourth quarter of 2021 is leading to fundamental changes in the renewable energy power purchase agreement market. That is according to the ‘European PPA Market Outlook 2022’ report published today by Pexapark, a specialist in software and advisory services for renewable energy sales.
In a year where volatility – driven by surging gas prices – spiked five times higher than usual, PPA activity in renewable energy grew 58 %, with December 2021 witnessing the largest PPA activity ever, in terms of volume.
The annual report predicts that lasting impacts, particularly in maturing markets, will test the availability and pricing for long-term PPAs of 10 years or more. This market uncertainty will bring in a period of short-term PPAs and new baseload structures. It will also drive the rise of the so-called next generation utilities, pushing investors to upgrade their operating models to comprise origination teams, portfolio management capabilities and risk management infrastructure.
Annualised volatilities of front year contracts, a key driver in PPA pricing, reached volatility levels of up to 250% last year - five times the level of usual spikes. And as prices began to rise in September, PPA activity nosedived in October, with the closing of merely 125 MW of PPAs across three deals. This indicated that the merchant market actually prefers more moderate changes in price for long-term PPAs.
Despite the circumstances, activity rallied through December, with an impressive 3.2 GW of PPAs signed over 21 PPAs. Last year also saw corporates secure a greater number of PPAs than utilities, with the high-price volatility creating a more disadvantageous pricing situation for utilities. In total, 2021 saw 6.5 GW of disclosed contracted capacity for corporate PPAs, and 4.6 GW for utility PPAs. Amazon was the biggest PPA offtaker, responsible for 16% of the year’s contracted capacity and 30 % of European corporate PPAs overall.
This is a trend that is likely to continue through 2022, according to Pexapark’s Market Outlook, with the rise of the ‘mega buyer’ offtake segment. Corporates such as global data centre behemoths, chemical companies, and consumers planning power conversion facilities, such as green hydrogen, have enormous energy needs. Such needs are likely to be sourced from offshore wind farms, alongside equity investment, as pioneered by the one-of-a-kind deal between chemicals company BASF and Vattenfall.
Luca Pedretti, chief operating officer of Pexapark, said: “The findings of our 2022 Market Outlook strongly indicate that operating models for renewable energy sales and risk management are going to be needed to keep pace with the impact that volatility is having on the market.”
“We have seen that an increase in discounts of Pay-as-Produced (PAP) PPAs has triggered rising demand for shorter term and Baseload PPAs. Such volume structure not only brings a steep shift from the typical risk profile used for traditional renewables investment, but also in the day-to-day operating model of the asset. In many markets, changes in daily capture price and lower than expected production volumes led to cash outflows and losses in markets. Sustained and continuous high volatility of capture rates highlights the need for more active management of asset revenues.”
“In response, renewable energy funds and investors are building what we see as the next generation utilities. Such players will aim at building similar skills in risk management as typical trading houses to capture the gains of actively managing their exposure to price risk. We predict that investment managed actively with shorter-term PPAs could overshadow the existing long-term PPA market in terms of volume.”
The full report is available on the Pexapark website at: https://pexapark.com/european-ppa-market/