Imbalance of supply and demand across corporate PPA market significantly impacts availability and pricing of projects
Q2 Renewables Market Update Highlight: Altenex Energy’s Corina Melchor, Clean Energy Advisor, and Tim Broerse, Clean Energy Originator, break down the evolving energy landscape, growing corporate demand, and supply chain impacts across the EU.
See the first part of our Q2 Renewables Market Update Highlight Video here.
Continued pressure from geopolitical realm to bring more renewables online
As part of the ongoing energy crisis, the existing EU targets for renewable energy installations have been updated to reflect current geopolitical constraints. The new EU target for 2030 will nearly double the current share of renewables in the EU, to at least 40% of all its energy to come from renewable sources – up from the previous 32% target. Amended national energy and climate plans are expected to follow suit. Additionally, the new framework sets a quota of a 1.1%/year increase in renewable energy use for industry, alongside energy efficiency measures. With the increased adoption of hydrogen, the EU is pushing for a target of 35% of the hydrogen used in industry to be powered by renewable fuels of non-biological origin (RFNBOs) – mainly green hydrogen – by 2030.
Ongoing electrification measures will continue to shift energy needs from fossil fuels to cleaner, more sustainable energy. These efforts will ramp up in the current environment, driven by the need for commonsense climate action and to help meet energy independence mandates.
Demand from corporations continues to be strong, with shift towards PPAs
Increasing corporate demand for renewable energy continues to be strong. RE100 is the global corporate renewable energy initiative that brings together businesses committed to 100% renewable electricity by no later than 2040. Since the start of the Covid pandemic, RE100 membership has almost doubled to 370 corporations, with 45% of their electricity consumption coming from renewables. This has increased each year, showing a strong commitment from the private sector to reduce greenhouse gas emissions.
Additionally, RE100 members continue to increase their use of impactful procurement methods such as PPAs, which currently make up a third of green sourcing being conducted globally.
We are also seeing one of the highest carbon tax mechanisms in the EU set in place by the Danish government. Starting in 2025, companies subject to the EU Emissions Trading Scheme (ETS) will incur an additional tax of ~€ 10/tonne, rising to €50/tonne by 2030, to be paid in addition to the EU ETS fee, with lower tax levels for certain industries. For companies outside of the EU ETS, the fee will be twice as much at ~€ 100/ tonne by 2030. Therefore, we see a continued need for corporations to lower emissions across their operations in the long term.
Concepts such as emissionality are taking center stage in energy procurement
Within the realm of green energy procurement, corporations are also increasingly investing in emissionality, a method of procuring renewable energy in higher impact locations by assessing the avoided emissions variance for each project. Altenex Energy, together with Edison Energy, has partnered with WattTime to help corporate renewable energy buyers achieve carbon emission reductions by leveraging data to measure and compare avoided emissions of potential renewable energy projects. This will soon be added to the toolbox of metrics that are used to provide a holistic assessment of carbon impact.
Energy intensive buyers are changing the demand landscape towards fixed volume structures
As noted in the Q1 2022 Market Report, high energy prices are driving certain customers – notably energy intensive manufacturing industries – to seek long-term contracts to help mitigate impacts of the high-pricing environment in the long term. For example, large manufacturing operations require similarly sized energy consumption, coupled with a large share of energy costs out of total production costs. This exposes this market segment to the volatility and market uncertainties currently at play in the energy market. PPAs are a long-term solution that would enable these players to sustain operations in a profitable, predictable manner.
However, the load profile of these energy consumers is better aligned towards a baseload shape profile, which is a flat consumption pattern that is predictable. To mirror that need, we are seeing developers offering this firm structured product to corporates.
Notably, in one of the largest deals this year, Alcoa entered into a PPA with Greenalia for 183 MW of renewables projects in Spain. The aluminum producer has secured baseload power for 10 years, enabling it to resume operations in the region. Energy will be sourced from 29 wind projects in various stages of development within the same region.
Other similar contracts have been signed in Norway between battery manufacturer FREYR and Statkraft. The sourcing arrangement entails 23 MW of baseload power for 8 years in order to power battery manufacturing plants. The renewable energy will be produced from a nearby hydropower plant, further underscoring the fact that corporations are adding locality to their decision making.
Supply chain constraints continue to impact projects
Improvements in supply chains are unlikely to continue with the war in Ukraine and the zero-Covid policy in China. Although the long lockdown of the Port of Shanghai has had no direct or immediate impact on PPA prices in Europe, the congestion of ships will exacerbate current high transportation prices.
Beyond this, shortages in material and labor will continue to disrupt production and transport. Overall demand for technical personnel is increasing, while baby-boomers – which make up the majority of current technical personnel – will retire in the coming years. Due to these circumstances, it is difficult for manufacturers to commit to prices for engineering, procurement, and construction.
Despite these challenges, there have been some positive developments. During her opening keynote at the start of the recent SolarPower Summit, Energy Commissioner Kadri Simson said that the EC would do “whatever it takes” to bring the manufacturing of PV modules and inverters back to Europe, mirroring Mario Draghi’s famous words in 2012 as then-President of the European Central Bank (ECB).
This is evident in the recently announced plans by SMA Solar Technology to build a new manufacturing plant for inverters in Germany to increase its production from 21GW to 40GW per year. In addition, Romania aims to develop a large-scale battery sector while also committing to the training of 20,000 workers to prepare for this expanding sector. Plans have also been announced in countries like Spain and Germany to open new manufacturing plants. These commitments show not only the development of additional capacity, but critical investments in innovation and job training to prepare the region for the clean energy transition.
The current energy landscape has made reshoring supplies and production even more challenging. However, given the protracted timeframe, reshoring will likely prove to be more costly and lead to higher PPA prices. Although natural gas prices are trading at exceptionally high levels, EU member states will need to fulfill their natural gas storage capacity to 80% each year prior to the winter season, according to the European Commission. PPA buyers should anticipate further price increases due to these combined factors.
Delayed and cumbersome permitting procedures limit the number of projects available
As part of its ongoing efforts towards energy security, the EU council has passed new legislation around permitting, which has historically been a significant challenge for renewable energy developers. Complicated bureaucratic procedures and unending delays have made it difficult for developers to commit to specific online dates and for corporate offtakers to create a pathway to achieve their sustainability goals.
The legislation enables renewable energy resources to override public interest concerns if the project offers environmental benefits such as biodiversity protection. This special status will allow renewable energy projects to overcome potential legal and environmental challenges and will remain in effect until the European Union achieves its 2050 climate goals.
Additional legislative provisions are expected to make it onto the agenda, including “go-to-areas” and, more critically, permitting deadlines, with progress on these two measures expected by later this year.
The imbalance of supply and demand across the corporate PPA market significantly impacts the availability and pricing of projects. When selecting a renewable energy project, Altenex Energy advises paying close attention to the project development status and counterparty risk. Offtakers should choose reliable counterparties based on their experience with project development in chosen geographies as a way to mitigate the risk of failed negotiations
This article was included in Altenex Energy’s Q2 Renewables Market Report, released on July 31, 2022. Download the full report here.
Hannah Badrei, Altenex Energy’s Vice President of Energy Supply Advisory, will be sharing insights on PPA pricing strategies at RE-Source 2022. Come meet Hannah and the Altenex team on October 6-7 in Amsterdam.