Corporate power purchase agreement slowdown to prove temporary

LONDON (ICIS)–Increasing demand saturation from large renewable power buyers based in Nordic countries is the key factor behind a slowdown in European corporate power purchase agreement (PPA) capacity signed for this year.

ICIS’s  new corporate PPA statistics page , launched last week, shows that just over 400MW of deals have been signed over 2019 to date, a slower rate of growth than both 2016 and 2018.

Analysts have rightly assigned the corporate PPA market with bullish growth prospects, but the slowdown may continue until a large number of subsidy-free and post-subsidy projects emerge more widely in Europe in several years.

Corporate PPAs

Corporate PPAs are long-term contracts signed between a renewable generator and a company for the supply of electricity.

The deals, which are often below the wholesale power price, allow companies to meet sustainability targets and hedge against future price risk. At the same time, they provide the renewable generator with a route to market and a long-term income, and can bypass to some degree the effect of price cannibalisation whereby renewables all generate at the same time.

PPAs therefore help to bring renewable capacity online and keep it online once subsidy payments have ended.

They remain a small fraction of the overall renewables market though. For comparison, 11.7GW of wind capacity came online in Europe last year, according to WindEurope. ICIS could confirm only 400MW of this stemmed from a corporate PPA, although the figure is larger if widened to include supplier PPAs where a utility is the offtaker.

ICIS calculates that 2.3GW in corporate PPAs were signed in 2018 in Europe across all renewable power sources. The vast majority of these deals were for new capacity to come online over the next few years.

Reasons for slowdown

While capacity signed for has roughly halved from 2018, the outright number of deals has been broadly the same since 2016, with 7-9 PPAs signed over the first five months of each year.

In 2017, companies signed a small number of mega-deals from June onwards. Last year, the number of deals signed shot up, reaching 21 between June and December.

This year has lacked both deals and volume. Looking at just corporate PPAs where the capacity was reported or could be easily established, volume per deal has fallen away since 2017 and is on track to reach a multi-year low.

What could be occurring is that countries where renewables subsidy schemes incentivise the signing of PPAs are running out of large-scale buyers that such a deal makes sense for.

Renewables installations in Norway and Sweden have signed the most PPA capacity in Europe, as the countries’ joint el-certificate support system leaves them exposed to market prices otherwise.

Heavy industry in these countries has taken advantage of below-market rates to power large manufacturing facilities for the very long term.

Likewise, its cool climate, low power prices and relatively central global location makes Scandinavia perfect for data centres, and technology giants have signed a number of PPAs in these countries, as well as the Netherlands and Ireland.

In most cases though, renewables installations require long-term financing, and not every company can commit to a power supply deal for a decade or more.

Demand from companies that can is limited. An estimate from the Federation of Norwegian Industries indicates that power-intensive factories in the country are close to fully hedged for the next few years, although opportunities will open up thereafter.

Outlook

There may be some limited scope for further expansion from heavy industry and technology companies in the Nordics.

Currently Europe’s third-largest market for corporate PPAs, the UK’s growth will be hampered by the expiry of the renewables obligation subsidy scheme and a lack of corporate demand.

Elsewhere, some deals have been signed in the Netherlands, but the market has suffered from the lack of a supportive regulatory environment in nearby Germany or France. These are Europe’s two largest economies, but feed-in tariffs have meant there is no need for renewables generators to sign PPAs as their income is guaranteed.

France is gradually moving toward a feed-in premium over the market price, but in Germany new installations are still disincentivised to sign PPAs under the tender system. In both countries though, older installations whose tenders are starting to expire will gradually sign more deals.

More widely, PPAs will continue to be signed in countries where there is no subsidised route to market for onshore wind and solar, most notably Spain, Portugal, and now the UK. This will help companies become more familiar with the terms of such deals and the risks involved. A standard template for corporate PPAs could even emerge. At the same time, costs will continue to come down for project developers, making more subsidy-free projects viable.

The PPA market is therefore likely to return to strong growth eventually, after a fallow period of some years. William Peck

ICIS Power Perspective customers have access to our new European corporate PPA statistics page . If you have not yet subscribed to our analytics products, please get in contact with Justin Banrey (justin.banrey@icis.com).