INTERVIEW: Pexapark sees 'golden era' for European PPA market, 350 deals forecast for 2024

Europe's market for renewable power purchase agreements (PPAs) could see a record 350 deals this year as new regulation supports standardization, Pexapark's chief operating officer (COO) Luca Pedretti said in an interview.

The year is also poised to see a rebound in utility PPAs after corporate deals dominated 2023, while deals for hybrid projects including battery storage are predicted to spread beyond Great Britain, Pedretti said.

"The European PPA market fundamentally is still a seller's market, while we have entered a more challenging price environment there is still much more need for green electricity," Pedretti said.

Over the past two years, sellers had to deal with supply chain challenges, some capex inflation and much higher interest rates.

Activity was highest in the first quarter after which some PPA negotiations paused as "certain assets did not manage to make the economics work," he said.

Pexapark's PPA Tracker registered 272 deals in 2023, supporting a record 16.2 GW new capacity. Solar accounted for 10.5 GW. Utilities accounted for just a quarter of PPA volumes.

For 2024, Pedretti forecasts over 20 GW of PPAs in what he describes as the "golden era" amid rising offtake appetite driven by hedging needs after unprecedented volatility.

"We had an explosion of price volatility and this significantly increased the risk to provide a long-term PPA. Now that volatility has come down, utilities feel more relaxed," he said.

Corporate and utility PPAs are seen as complementary with "utilities needed as market integrator, able to combine multiple buyers, multiple assets, adding storage or adding balancing services."

Europe's total electricity demand from industry & services is estimated at around 1,600 TWh/year, according to Pexapark.

Analysts at S&P Global Commodity Insights estimate almost 60 TWh of new wind and solar assets backed by PPAs were signed in 2023.

Regulatory support

New regulation under the EU's Electricity Market Reform (EMD) package could have a "tremendous impact by streamlining regulation" and providing the framework for how member states can support PPAs, he said.

Support can range from bank guarantees to giving preference in auctions if a PPA is in place.

"We can do more deals with standardization where you have platforms where PPAs are closed with smaller multi-buyers on the offtake side, but you need innovation on the credit side of PPA," the Pexapark founder said.

The cyclical nature of the capital intensive renewables industry could, however, be a stumbling block if there is a "mismatch between investment requirements and what the market can afford to pay."

"This can lead to delays," he said.

Pexapark's Euro Composite Index, an indicator for the fair value of a standardized 10-year PPAs weighed for technology and market size, averaged around Eur58/MWh in 2023 compared to Eur90/MWh in 2022.

The index is now pegged below the five-year average at Eur42/MWh.

Pexapark calculates over 1,000 daily price assessments across markets, technologies and tenors, but the Euro Composite remains Pedretti's favorite index as it "gives a sentiment on the overall long-term PPA price level ."

5-year PPAs at premium

Germany could top Pexapark's country ranking in 2024 as Spain's throne could be shaking amid signs of "saturation," Pedretti said.

The manager noted progress on the permitting front which had delayed German projects for years.

"Things are speeding up, especially on the repowering side. The latest solar tender was oversubscribed by factor three and many of those projects will end up on the PPA market," he said.

Meanwhile, Spain showed "first problems of saturation, especially on the cannibalization," Pedretti said.

The Platts-Pexapark PPA index for a standard 10-year solar PPA in Spain was pegged at Eur30.65/MWh on Feb. 9 for Spain and Eur44.51/MWh for Germany.

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

Contract length was a key driver for PPA prices with shorter contracts allowing for higher prices.

The premium of 5-year over 10-year PPAs averaged Eur18/MWh across Europe in 2023 ranging from Eur28/MWh in France to just Eur5/MWh in Finland, according to Pexapark.

Hybrid PPAs emerge

Pedretti's final prediction for 2024 is the spread of hybrid PPAs, mainly solar with a co-located battery storage, due to the increased grid saturation of renewables.

Cannibalization lowers capture rates and adds intra-day volatility.

Although Finland was Europe's country with the most negative hourly prices, capture rates for German and Spanish were lowest at 83% and 87% in 2023, according to S&P Global data.

Currently, the UK leads with up to 60 projects permitted and a few PPA deals concluded, but the model is to spread across Europe.

"Hybrid PPAs will become standard in advanced markets like the UK, Spain, Germany, everywhere where we have a lot of renewables," he said.

"I don't think they are too difficult to price. Standards are emerging on the contractual structures for hybrids. The key thing what many struggle with is that storage gives you so many options [compared to the standard pay-as-produced PPA]," Pedretti said noting that this optionality adds a premium to hybrid PPAs compared to conventional PPAs.

Finally, the record 2023 for PPAs was also "a record year for us as a company" with "significant and continuous interest in pricing and reference for PPAs."

Over 20% of all sellers and buyers use PexaQuote, the Pexapark founder said.

"What really has exploded in 2023 is investors making use of sophisticated PPA software for their portfolio," he added.

Overall, the biggest interest is in the most liquid market segments like 10-year solar in Germany or Spain, he said.

"We are in the midst of the energy transition and demand for green electricity is growing. Everything has been relatively easy when renewable penetration is low, but now we're reaching 40%, 50%, 60% in some markets which puts the focus on market integration [for renewables]," Pedretti said.

Pexapark's PPA Country Ranking

Source: Pexapark PPA Market Outlook 2024