ECEM: Falling UK power prices spur competition across PPA market

Competition to secure power purchase agreements (PPAs) has been rising as a result of greater need from green generators to secure a higher financial return from renewables obligation certificates (ROCs), a report published last month shows.

But far from create a buyers’ market and drive down returns for generators, the increased competition has in turn ushered in more off-takers which has helped ward off any prospect of a weakening market.

ROCs are issued to the UK’s green energy producers as a financial support scheme. These can then be sold to suppliers which are required to fulfil a mandatory annual quota. The government will phase out the RO system in April 2017 to new capacity, to be replaced by contracts for difference (CfDs) system.

A report from energy consultancy firm Cornwall Energy published in January emphasised the impact of cheaper wholesale electricity on the value of green energy.

Weakening electricity prices in the last quarter of 2014 caused renewables producers to attempt to recover some revenues from other sources that result from their generation, such as ROCs, which can be supplied along with the electricity under a PPA. The impact passes into earnings for green generators because the wholesale power price represents a significant part of the total value of green electricity in PPAs, up to 80%. Depending on the contract terms, electricity prices could be variable and are usually dependent on market prices.

An environmental broker from New Stream Renewables agreed with the findings of the report saying that higher activity from buyers looking to maximise revenues through ROCs was “certainly bringing more competition and as such more liquidity”.

The outlook remains largely unchanged as sentiment for power prices is bearish. Prices are expected to come under downward pressure from solar deployment ahead of the RO cut-off at the end of March as well as pressure from healthy gas storage. Support under the RO for new solar installations over 5MW will be swept away from April.

More generators competing for deals, could have meant pressure on prices amid a PPA buyers’ market. However not all green producers succumbed.

“The more aggressive stance from generators on value retention for green power has been aided by greater levels of liquidity and competition in the market, especially on tenders for long-term PPAs,” the report said.

This is because, with more competition from generators looking to secure better deals, higher activity in the market triggered a rise in buying interest.

In fact according to the Cornwall Energy report, “the numbers of off-takers actively involved in bidding on long-term PPAs reached double-figures and as a result incentivised reduced discounts”.

With cheaper electricity, suppliers could be seen as more likely to sign a generous agreement for ROCs in a PPA. “We signed a PPA last week which was at 98% of the buyout recycle value for its ROCs,” said one broker source.

The bearish trend observed in UK wholesale power prices over the last quarter was mainly driven by similar moves on the gas market which was hit by falling oil prices. High gas storage also contributed.

The UK power sector stoically follows the NBP gas equivalent because of the large percentage of gas-fired power plants that feed into the British grid when consumption rises and coal and nuclear generation fail to meet demand. Sophie Udubasceanu