European PPA offer prices up 10%-15% in Q1 2022 as cost pressures rise

First quarter 2022 offer prices in Europe's Power Purchase Agreement markets rose by 10%-15% depending on project location, reflecting rising commodity and raw material costs, according to the latest data from climate tech platform Zeigo.

This was unsurprising given the previous period of relative stability in PPA price and the recent geopolitical events, said Freddie Lyons, Zeigo's Head of Energy Markets.

PPA offer prices in the UK increased 17.6% from an average GBP51.64/MWh in Q4 2021 to GBP60.75/MWh in Q1 2022, Lyons said April 29.

"The Ukrainian-Russian conflict has exacerbated existing issues around the cost of shipping, EPC services, logistics and commodities," he said.

These factors had combined to increase the cost of constructing new solar and wind farms, impacting the cost of a long-term PPA contract.

Short-term focus

Many energy buyers, meanwhile, have had to react to heightened price volatility and seek near-term solutions when looking to quickly sign a new supply contract, Lyons said.

"There seems to be bigger appetite for short term operational deals to help sign a new contract that isn't at current market rates. Corporates have been willing to engage with higher pricing as utilities seek to manage price risks by breaking long-term PPAs into shorter wholesale market trades, known as stack and roll hedging," he said.

Zeigo has seen the average PPA term decrease on its platform from 11.6 years in Q4 2021 to 9.5 years in Q2 2022.

Higher prices, less activity

The large number of tenders for operational PPAs on the platform had also contributed to the increase in the average PPA price for the quarter.

"Buyers have become more willing to accept higher prices if it means distancing themselves from the spot market for the next few years," Lyons said.

This had benefitted utilities who were looking to manage the price risks by offering short term market trades as part of their hedging strategy.

Overall, this has meant that the European PPA market has been less active than usual during February and March.

"March has been a very quiet month for PPAs. Both buyers and developers are showing hesitancy to enter or price up a contract during this period of volatility," he said.

This would ease over the coming months as wholesale power prices started to drop and as participants get more accustomed to the new market conditions, he added.

Long-term solar

The price trends that have not changed on the Zeigo platform are that longer terms, greater volumes, and solar assets will offer cheaper contracts than the alternatives.

"There is no question that Europe's reliance on Russian gas must be addressed, with increasing LNG re-gas capacity and diversification of import suppliers among the numerous short-term solutions on offer. In the long-term, a European renewable power infrastructure will be essential for achieving low carbon solutions whilst also localizing supply and providing regional energy security," Lyons said.

In its latest five-year European Electricity forecast, S&P Global Commodity Insights sees Solar PV leading capacity growth amid well-subscribed auctions, raised government targets and robust capture prices.

"By 2027 capacity lifts by 58% and 65% in GB and Italy, respectively, vs end-2021 and at much higher rates of 111%-135% in Germany, France and Spain," it said.

Schneider Electric, which acquired Zeigo in January, has supported over 13 GW of corporate PPAs since 2014.