18 Jan 2024 | 10:28 UTC

Rising costs, lower revenues for European wind and solar lift PPA breakeven points

Highlights

Platts 2023 capture prices fall across Europe

Wind leads 2025 breakeven estimates higher

Solar to lead Europe's 500-GW expansion to 2028

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Breakeven levels for European wind and solar power purchase agreements increased in 2023 amid higher project costs and falling revenue forecasts, according to a report by S&P Global Commodity Insights.

Modelled breakeven points for standard 10-year PPAs starting in 2025 rose above forward curve-based indexes, with Spanish wind and solar contracts seen around Eur70/MWh, up Eur10/MWh and Eur5/MWh, respectively, since June 2023.

"With newbuild costs well supported and wholesale capture rates falling, 10-year PPA prices [Pay as Produced] will need to be at premium versus wholesale prices for plants to be able to recover all their costs," said Bruno Brunetti, head of low-carbon electricity analytics at S&P Global Commodity Insights.

Related: Interactive: Platts Renewable Energy Price Explorer(opens in a new tab)

Volume-weighted average capture prices, VWAP, across most European markets fell sharply in 2023 amid record generation and record capacity additions for both wind and solar, according to Platts assessments(opens in a new tab) for S&P Global Commodity Insights.

The market value of 2023 wind and solar output in the Big Five markets -- Germany, Spain, Great Britain, France and Italy -- was estimated around Eur45 billion, based on the VWAP and annual generation for each asset category.

Since 2017, S&P Global has tracked over 900 corporate and utility PPA deals covering some 94 GW of capacity. For Europe, 2023 is set to be a record year for volumes and deals led by solar and Spain.

"While 2023 was a record year for PPA deals, the sharp rise in negative and low-priced spot settlements started undermining appetite for stand-alone solar pay as produced PPAs, as agreeing on forward capture rates is becoming more difficult," Brunetti said.

The market focus may shift to hybrid PPAs involving multiple technologies, he said.

For example, Spain-based energy company Cepsa (opens in a new tab)in June 2023 procured 5-GW solar, wind and hybrid renewables through a third-party PPA with Ibereolica Renovables, with the mix to be used in production of green hydrogen.

Financing cost, capacity factors

The breakeven point for a 10-year onshore wind PPA in Germany starting in 2025 has risen to around Eur89/MWh to recover construction, operating and financing costs, according to S&P Global's Clean Energy Procurement report.

For utility-scale ground-mounted solar projects in Germany, the PPA breakeven was pegged around Eur91/MWh with capacity factors and other individual project specifics key swing factors.

This "fair value" perspective on PPA prices differs from "mark to market" approaches, that are more impacted by swings in near-term forward pricing signals from wholesale markets.

"While PPA prices are influenced indirectly by the development in wholesale power prices and capture rates, the development in newbuild costs also has an impact," Brunetti said.

These values also include Guarantees of Origin, with a forecast sharp decline in value in GOs another reason for the higher required breakeven level.

Higher financing costs also require higher PPA prices.

Further out, PPA price falls after 2025 and into the 2030s are less pronounced than in the prior report, especially for wind.

For solar PV this may boost battery storage or other flexibility solutions, with solar facing higher cannibalization risks in the long term.

The Platts-Pexapark PPA index for a standard 10-year solar PPA was pegged at Eur33.35/MWh for Spain and Eur49.93/MWh for Germany on Jan. 16, 2024, down sharply from spikes seen in 2022.

Platts is part of S&P Global Commodity Insights, which is a minority stakeholder in Pexapark.

Solar capture rates in 2023 fell sharply during summer months, pulling down the annualized capture rate to 83% for Germany and 87% for Spain based on VWAP assessments around Eur79/MWh and Eur75/MWh, respectively.

German auction floor

The fair prices for a 10-year German solar PPA rose some Eur5/MWh since June's report, while wind breakeven was Eur10/MWh higher.

"Our models still point to steep PPA price declines in the next five years, but less so than previously expected with PPA prices moving toward the mid-Eur60s/MWh by 2030," the report said.

In the 2030s, solar PV will likely break even in the mid-Eur50s/MWh.

"Following industry feedback, we now assume that government auctions(opens in a new tab) are implicitly a floor for PPA prices," the report said with Germany confirming late December higher 2024 maximum bid prices above Eur73/MWh for onshore wind and ground-mounted solar up to 20 MW.

Capacity factor assumptions remain a key factor in PPA price evaluation.

A 10% increase in the assumed plant capacity factor leads to a 15% decrease in the breakeven PPA price and vice versa.

Europe is to add over 500 GW of new solar and wind capacity by 2028 with over 10% to be underpinned by PPAs, according to the International Energy Agency(opens in a new tab).


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