Europe's market for green power deals set for strong 2024

A wind farm under construction in Germany, which is among the leading markets for PPA deal activity in Europe. Source: Sean Gallup/Getty Images News via Getty Images

2024 is shaping up to be a strong year in Europe for renewable power purchase agreements, but barriers also exist in some markets.

European buyers secured 21 TWh/year of new green electricity from 10 GW of new projects in the first five months of 2024, largely on par with 2023 at this stage, according to the S&P Global Commodity Insights PPA database.

The number of deals this year through May totaled 145, up from 94 in the year-ago period and 101 in the same period of 2022, suggesting that smaller players continue to enter the market. Growth so far this year was driven by 10.2 TWh/year of wind PPAs, mainly in northern Europe, as well as 7.5 TWh/year of solar PPAs, led by Spain.

Deal prices have declined amid lower electricity spot and forward prices compared to 2023. Iberian capture prices deflated to record lows this spring amid bearish fundamentals and rising solar capacity.

In Germany, May's solar capture price plunged to the lowest level since summer 2020. However, forward contracts recovered, with the benchmark German year-ahead power contract rising almost 50% from its own lows hit in February, briefly trading above €100/MWh in early June amid a tighter gas market.

"The levels have come down; however, they're still quite attractive," said Daniel Parsons, global head of PPAs at BayWa r.e. AG in a May interview.

The German developer is encouraged by an uptick in deal activity. "That actually shows that most of the corporate parties have come back to the market," Parsons said.

With wholesale power prices on the decline as Europe's energy crisis has abated, power buyers now have more options.

Spain, Italy supported by unappealing auction systems

In 2022, BayWa r.e. launched a first-of-its-kind seller-issued tender for renewables in Spain and Germany, and at the time proclaimed that the market dynamic had pivoted in favor of sellers.

Ultimately, early conversations centered on Spain, but the process did not turn out as the company planned, despite strong interest from corporates, Parsons said.

"Unfortunately, due to volatile market conditions, we were not able to contract PPAs from that process," Parsons said.

Power prices came down as fuel supply constraints eased, which also made the planned merchant share of the projects less attractive. At the same time, rising interest rates weighed on overall project economics.

Project supply is meanwhile being challenged by insufficient grid capacity, Parsons said, pointing to problems in Spain, Italy and Germany in particular.

According to Eduardo González Solá, director of business development and power origination at Galileo Green Energy GmbH, the tighter availability of projects is now slowing down PPA activity in Spain, where grid connection problems are well documented.

Galileo is working on PPAs in Spain, and recently signed PPAs with Cargill Inc. and another unspecified "global corporation" in Italy.

"In Italy the main barrier is not grid connection, it's the permitting stage, where there is a concentration of central permitting, and it's delaying the authorization of the projects," Solá said in an interview.

Both Spain and Italy have contract for difference-style auctions for renewables, but their design is not particularly compelling for developers, Solá said.

The Spanish system offers a 12-year PPA with the state, similar to what developers can get from a private PPA. Connection deadlines in Spain are also quite restrictive, the executive said.

Italy's auction system offers 20-year PPAs, but projects on agricultural land are not permitted, which excludes "90% of the projects on the market," Solá said.

Crowded out in the UK

The dynamic is almost the opposite in Britain, where the government-run contract for difference (CFD) auctions offer a comparatively attractive route to market.

So much so that the mechanism could crowd out the private sector from power deals, according to Robert Ogden, CEO and founder of PPA platform Renewable Exchange.

"You've got the best possible credit rating; you've got fantastic duration, ... the risk allocation is wonderful from a developer perspective; and you get indexation. The cherry on top: no inflation worries," Ogden said of the CFD auctions.

Projects pre-qualified for the latest allocation round are also unlikely to put pen to paper on a PPA deal, Ogden said in an interview.

The PPA market may, however, benefit from projects that missed out on government deals if developers did not want to wait a year to get back into the CFD queue, the CEO added.

A bigger barrier to deal-making in the UK is the ongoing Review of Electricity Market Arrangements (REMA), where a redesign of the power market — including the option of introducing zonal pricing — is on the table.

"We find clients in two camps. They either see REMA as too big a risk to do anything at all, so everything is on pause, or they need REMA clauses that allocate the risk away from them," Ogden said. A more pragmatic group of counterparties argues that no government will want to wreck the market, Ogden added.

With an election scheduled in July, it is unlikely that this issue will be resolved soon.

Meanwhile, Ogden said there are more immediate action items: "We need to build more grid, focus on solving bottlenecks, and not think we can solve this via some clever market dynamic. We can't."

Germany contender for market leader

Germany was expected to be neck and neck with Spain in Europe's PPA rankings in 2024 amid signs of "saturation" in Spain, Luca Pedretti, co-founder of PPA consultancy Pexapark, said earlier this year.

For the first five months of 2024, 21 deals were signed for 2 GW of capacity in Germany, according to Commodity Insights data.

PPA activity is focused on utility-scale solar and offshore wind projects, while Germany's onshore wind market seems tied to auctions that offer better value for developers.

While 2023 was a record year with some 9 TWh/year signed via PPAs in Germany, energy agency DENA pegs the country's 2030 PPA potential at 192 TWh, a quarter of national electricity demand. Germany's large industrial base is a key off-taker, alongside the tech sector.

Additional push factors for PPAs on the demand side come from new corporate sustainable reporting rules and mandatory requirements for datacenters. Regulatory uncertainty on the future of auction support, due to the EU's electricity market design reform, could be another driver away from direct state subsidies.

In a June 11 webinar, Pexapark noted that reference prices for some German solar PPAs so far this year were barely above minimal hurdle rates for new projects, a level it described as the "death zone."

However, actual PPA deal flow was sustained by an extraordinary willingness to pay a green premium for those PPAs, an approach not seen in other European markets, Pexapark said.

"The profile of a solar asset is becoming less valuable as more capacity comes online," said Dominique Hischier, head of analysis at Pexapark, referring to a record low 40% capture factor for solar in Spain this April.

Tech leads the charge

Tech companies are still the leading buyers of PPAs but offtakers are emerging from the consumer goods, industrial, chemicals and utility sectors. Developers are eyeing opportunities from an upsurge in artificial intelligence computing power, with signs of a boom already visible in the US.

Executives see potential in countries with large clean baseload fleets such as the Nordic countries, but Iberia is also seeing activity rise.

Datacenters need low prices, low taxes, renewables access and fiberoptic availability, Solá noted, adding that Spain "can become one of the main hubs."

While large buyers still dominate the market, medium-sized companies represent a growing share of buyers. The reform of the EU's electricity market aims to expand access to PPAs to more buyers and in turn should reduce credit risk barriers.

Creditworthiness in the market has so far been guaranteed by the large buyers, but opening markets to small to medium-sized enterprises needs "some kind of backup by the government in order to make those PPAs financeable," Solá said.