European PPA market on track to reach record number of deals this year

The European Power Purchase Agreement (PPA) market is likely to see record number of deals closed this year, data from S&P Global Commodity Insights showed.

"So far in the year we've seen already more than 135 transactions, that is still below last year's record of 193 deals. If the year continues with the same pace, we might end up with more than 250 deals. This comes as smaller offtaker enter the market," Principal Research Analyst at S&P Global Diego Ortiz said.

Indeed, liquidity in the PPA sector has been rising this year so far, with particularly strong activity registered in July, with a total of 20 deals closed so far. This was the highest number for any single month in 2023 to date.

Alongside higher liquidity, the PPA market saw a shift towards longer-term tenors, with the 10-year being the most common tenor this year so far, followed by the 15-year, S&P Global data showed.

This will remain the case for years to come because of an increasing risk of cannibalization, according to Ortiz.

"...To avoid the merchant risk the natural evolution will be for developers to look at signing longer tenors. Offtakers will want to secure their supply as well, as demand will be high and even if market prices might fall in the future, the need for 'greener' corporate activity, will drive this appetite," the analyst said.

3pi step down

Another strong trend observed in the PPA sector this year so far are lower prices for main technologies and markets.

For instance, Platts-Pexapark Germany Solar 10-Year Pay-as-Produced PPA Index (3Pi) lost 25% since its launch on Feb. 20 and was pegged at Eur60.4/MWh July 24.

The corresponding Spanish 3pi edged down 7% over the same period and was evaluated at Eur39.53/MWh. German and Spanish onshore wind 3pi followed the same pattern.

"During 2022 PPA wholesale market prices went up, and because of a high corporate demand, PPA prices followed the upward trend. Now PPA prices are following a similar downward trend in the wholesale market," Ortiz said.

The bottom limit for prices will be Levelized Cost of Electricity (LCOE) of a project.

"A PPA won't be signed if costs cannot be recovered. As far as transactions are traded above the LCOE, prices will evolve according to supply and demand, but market prices do have a strong influence as offtakers will opt for the market otherwise," the analyst added.

PPA landscape changes

The PPA landscape in Europe has been changing too this year, as lower electricity prices and climate targets attracted more offtakers.

Traditionally the PPA sector is dominated by technology companies - such as Amazon and Google - that need to power up their data centers. Yet, this year a number of food and retail companies became more active in the space, with at least three breweries - Ursus Breweries, Svyturys-Utenos Alus and Royal Grolsch – striking deals in July so far, according to S&P Global data.

Moreover, in the past two years there have been a clear trend of more PPAs involving multiple technologies.

"Two kinds of deals exist: hybrid plants where a mix of technologies will help obtain a specific load profile. And 'portfolio' deals when corporates contract 'green' power directly from a utility's portfolio," Ortiz said.

Also, smaller offtakers manage to make their way in the PPA market, yet this has remained a challenge as they often represent a higher risk from the banks' view.

As banks get comfortable and governments have started to provide a financial guarantee - Spain, France, Norway - there will be more smaller-size offtakers in the market, according to Ortiz.