We meet with our partner LevelTen Energy to discuss the European PPA market: a conversation around trends, obstacles, challenges, goals and opportunities.
"It is important for companies to prepare for 24/7 renewables, and this is the obvious next step in the evolution of renewable energy procurement" (photo: iStock)
30/11/2024. This interview was originally published by LevelTen Energy and included in its recent Energy PPA Price Index report. Find details to access the whole publication at the bottom of this page.
LEVELTEN: We know efficient and transparent negotiations are critical in achieving successful PPA deals. Can you share the most prevalent obstacles buyers you work with encounter during PPA negotiations, and the strategies you recommend for mitigating and addressing these challenges?
E&C: Before considering running competitive tenders and then negotiating contracts, it is key for our corporate clients to be fully prepared and ready to transact in today’s dynamic PPA markets. This means having in place a long-term strategy and pathway to reach the company’s energy and sustainability targets. In order to achieve this, our client engagements often start with educating the internal stakeholders, such as Energy Procurement, Sustainability, Finance and Legal teams, through extensive workshops. Our client is then able to have fully informed discussions and eventually obtain internal alignment on the PPA objectives and specifications. We have even had rare instances where the client decided after this initial phase of our engagement that PPAs were actually not the best product to pursue! As part of the implementation phases of our client engagements, our partnership with LevelTen Energy provides our clients the broadest view of the market and enables a more efficient and effective sourcing process. We always recommend our clients to assign a deal team, supported by specialised external legal counsel, to keep momentum during the contract negotiation phase. Of course, flexibility from clients to adapt strategies due to changing internal and external circumstances remains important throughout the entire PPA sourcing process, which may easily last for over a year.
LEVELTEN: What procurement, development, or policy trends in the European PPA market most excite or concern you?
E&C: The continuing growth of the PPA market in Europe is really encouraging to see. Whereas the global PPA market had always been dominated, both in volume and number of transactions, by the US, last year saw a record 46 GW of deals more or less evenly split (one-third each) between the US, Europe, and rest of world according to BloombergNEF. Moreover, it has been mostly corporates, rather than utilities, which have been stepping up recently as they have been searching for more impactful ways to procure renewable electricity and offset energy cost volatility. Some interesting trends that we are closely watching for our clients are hybrid (solar-storage or wind-storage) and agrivoltaic PPAs. The former is a way to shape more attractive renewable asset generation profiles for end-users. More of the produced electricity can then be consumed, which increases the hedge effectiveness of the PPA. The latter may be a practical solution regarding the debate, which is particularly prevalent in Europe with its traditionally strong agricultural policies, on whether to use land for food or energy production.
LEVELTEN: Energy buyers often implement hedging strategies to mitigate the financial risk associated with variability in electricity prices. Given the growing complexity of Europe’s energy sector, what do you view as key considerations for effectively managing price-hedge risk? For cross-border PPAs in particular?
E&C: We always take an integrated approach on energy procurement and risk management for our clients, considering both their conventional supply and any financial or physical PPAs. Our Advanced Risk Model estimates the financial impact on the total electricity cost for our clients, taking into account historical and potential future capture rates based on different market supply-demand scenarios. We have seen the importance of this in rapidly declining capture prices for solar and wind assets, and increasing occurrences of negative pricing across Europe. Such analyses become even more challenging indeed for cross-border PPAs when spreads and correlations between different markets need to be carefully considered to limit basis risk for our clients. In the end, the ancient risk management rule not to put all your eggs in one basket still holds true. An end-user can apply diversification and limit risks by building a portfolio of PPAs with a smart blend of tenors, technologies, and geographies.
LEVELTEN: Interest in achieving 24/7 carbon-free energy (CFE) targets continues to grow. What are the primary challenges, and opportunities, you have seen with clients when sourcing and structuring PPAs that fit into 24/7 CFE strategies? What do you view as essential elements of success when it comes to achieving a 24/7 PPA portfolio?
E&C: Some of our clients are definitely showing strong interest in this topic, but it is also f air to say that few have already implemented a 24/7 CFE sourcing strategy. Any associated goals are very ambitious (and still costly) to reach due to the intermittency of renewables. Having said that, legislation such as the European Union’s Delegated Act on Additionality will now enforce that any green hydrogen producers will apply over time increasingly stringent temporal and geographical correlation requirements, in effect requiring around-the-clock matching of renewable electricity production and consumption. Although it seems currently mostly reserved to some sustainability leaders and early adopters, we believe it could eventually be a very powerful instrument to make the corporate energy transition work and an element of future proofing its business for any company. Therefore, it is important for companies to prepare for 24/7 renewables, and this is the obvious next step in the evolution of renewable energy procurement. Not only because it is highly likely that this will have to be adopted at some point in the future to avoid greenwashing accusations, but also because it is a more clever, more comprehensive way of switching towards renewable energy supply.
LEVELTEN: Which European markets are your clients expressing the most interest in for procurements? Do you see market preferences changing in the near- or mid-term?
E&C: We find most of our industrial clients looking for PPAs in the same national (or even zonal) markets as their operating sites. Such alignment of the wholesale market index reference for production and consumption actually makes sense from a risk management point of view. It allows the PPA to be a much more effective hedge of energy cost which is often an important consideration and strategic driver for our clients. This also means that we see growing interest in newer PPA markets in Eastern/Southeastern Europe, which were perhaps neglected earlier due to their immaturity, to cover consumption needs there.
Such local procurement then also allows for physical delivery of the electricity from the PPA by sleeving it into the conventional supply contracts, thereby typically avoiding accounting practices such as regular mark-to-market or fair value calculations for companies reporting under the IFRS
accounting standard.
LEVELTEN: We welcome any further thoughts your team has on clean energy procurement best practices, or broader industry trends, that went unaddressed in the questions above.
E&C: In order to make the energy transition work, we need to keep momentum as a society and at the same time acknowledge that companies move at different speeds due to a myriad of internal and external factors. Let us not name and shame companies though for being behind other companies in their energy transition journey as long as credible public claims are made. Every step in the right direction is a good step!
→ To read this and other contents included in LevelTen's PPA Price Index, visit https://store.leveltenenergy.com/password
