PPA risk shifts to buyers in sellers’ market

By Rachael Burnett, Montel

The risk faced by offtakers in signing power purchase agreements is growing amid strong demand in what has become a sellers’ market, consultancy Altenex said

PPA demand has soared with buyers increasingly looking to use contracts as a hedge against volatility and high energy prices, Andor Savelkouls, senior director at Altenex Energy, told Montel.
Hedging is a “strong secondary reason” to sign a deal, with the primary reason still “sustainability”, he added. Baseload contracts are now “very hard, if not impossible, to find” as buyers are lining up to sign deals, he said. Pay as produced is at the “far side of the spectrum” and puts the volume risk in a PPA onto the buyer with none for the seller. “Shifting risks to the seller comes at a higher price for the buyer and taking more risk for the buyer results in lower prices,” he added.

There are also “many flavours in  between” depending on the needs of the buyer and what is available in the market, he added. “More experienced buyers are doing more complex price structures – the volume and pricing structures can be separate,” he said.
One contract option is a price collar which sets a ceiling and floor to help mitigate buyer price risks. Price structures, such as discount to market floors, can be “very attractive” for more energy-intensive users who are increasingly coming to market because of volatility, Savelkouls said. These offtakers often pass their energy costs on to their customers so they are not as incentivised as others to go for the large benefit of a fixed price PPA and ant market-following prices. “Having more and more options available is all a sign of the market naturally maturing and this was happening before the crisis of the past year.”

Another aspect was offtaker experience and credit rating which are clearly becoming more of a consideration for sellers, he added. Inexperienced or newer buyers have found it increasingly difficult to compete in the market and demand for advisory services has grown, he said.
Less experienced buyers could also face a “slight disadvantage” because speed of execution is key in today’s sellers’ market, Corina Melchor, a clean energy advisor at Altenex Energy, said. However, many sellers are looking to diversify their pool of offtakers and not limit to a handful of companies to help spread credit risk and increase bankability, she added. “So, a relatively new inexperienced buyer can bring that advantage, as long as they can move with speed and focused strategy.”
Meanwhile, industrial group Borealis and Dutch utility Eneco signed a 10- year PPA for 150 GWh/year starting 2024 from an offshore wind farm in the Belgian North Sea. PPA prices continued to rise in many European countries this week, according to renewables specialist Pexapark. Average prices across technologies and contract structures in Europe were seen at EUR 95.55/MWh this week, up from EUR 92.20/MWh last Friday, its data showed.

For more insights, visit the full article by Montel.