"Super weapon" PPA
More and more companies are focusing on power purchase agreements for green electricity
The international power market is facing another change: Numerous countries in Europe are decreasing subsidies for renewable energy production such as solar and wind. After years of seed financing, the market will now play a stronger role. As a result, many renewable energy producers will lose fixed feed-in remuneration payments - and are increasingly approaching large companies that want to cover their power needs from renewable sources. This offers the providers and brokers of power supply and procurement contracts, so-called Power Purchase Agreements (PPAs), a growing business field - and Axpo is at the forefront.
Today about one third of European wind power capacity is supported with feed-in remuneration. According to industry insiders, by the year 2030 this will only be the case for about 6% of the capacity. While the subsidy of environmentally friendly projects by governments is decreasing, the number of worldwide PPAs reached a new level in 2017. The trend indicates that energy-intensive end users are prepared to buy green electricity under medium and long-term fixed price contracts. Hence many market players are positioning themselves to offer or broker PPAs to companies that support Europe's ambitious goals in the area of renewable energies.
Purchase agreements for green electricity at a record high
In principle, power purchase agreements are nothing new: They have been in use on international power markets for some time in order to ensure producers long-term purchase of their energy. Buyers have the benefit of a guaranteed energy source, often at fixed prices. A new aspect is that PPAs, particularly in the US power market, are being used by major corporations such as Google, Microsoft and Facebook in order to achieve their goals in the area of renewable energies and to ensure long-term, cost-effective, reliable energy supply for energy-intensive operations such as computer and data centres. According to the industry service Bloomberg New Energy Finance, the number of worldwide power purchase agreements reached a record level with a volume of 5.4 gigawatts (GW) in 2017. Since 2008, some 19 GW of green electricity was procured through PPAs, 76% in 2015.
Europe following the US example
In Europe, companies signed PPAs with a volume of one gigawatt last year. It is expected that the interest will grow in order to control price and volume risks. In October and November of the previous year, Microsoft announced two separate procurement contracts with wind farms in Europe. The first of these two PPAs has a term of 15 years and defines the purchase of all the power produced at the Irish 36-MW wind farm Tullahennel. Microsoft's second agreement regulates the purchase of the entire power volume from a 180-MW wind farm in the Netherlands.
Axpo is at the forefront in this business: In March 2018, the Unilever Group signed an agreement with Axpo Italia setting down the conditions for the purchase of power from the WinBis wind farm in Southern Italy for all its factories in Italy. Several months prior, Axpo concluded a PPA in Portugal for the financing and construction of a non-subsidised solar project on the Iberian Peninsula, laying the foundation for the development of similar construction projects in upcoming years, particularly in Southern Europe. These types of projects are particularly interesting for corporations.
EU climate protection targets as the driver
What is the reason for this development? The EU has set ambitious climate protection goals: By the year 2020, individual countries will harness 20% of total energy consumption from renewable energies. It appears to be realistic that these targets can be achieved - and so a new goal has been set for 2030 with the aim of covering at least 27% of consumption with renewable energies. The costs for renewable energies are going down and more and more companies have established defined sustainability goals, while governments are focusing more on auction models where, as a rule, power producers are exposed to market prices and only the most competitive projects are subsidised.
By the year 2030, fully commercially operated wind power plants that do not benefit from government subsidies could be generating up to 155 terawatt-hours of electricity annually from wind - enough to cover the yearly power needs of a country like Poland. Experts estimate that the installed wind energy capacity will increase by 50 GW by 2020 and by 166 GW by 2030 reaching a total of 323 GW. This increased capacity along side the reduction of governmental subsidies will likely drive significantly more market-players to use power purchase agreements than was previously the case because the uncertainty of power prices and volumes will increase for renewable energy producers and customers. According to industry circles, power purchase agreements with corporations are often viewed as the "super weapon" for the power markets in this environment.
Axpo Nordic: A big player in the country of trailblazers
Someone with special PPA expertise is Håkon Røhne, Managing Director of Axpo Nordic and Member of the Management Board of Axpo Trading: "These agreements are a great opportunity for the European energy markets: On the one hand they foster renewable energy development, providing renewable energy producers with strong and reliable business partners. On the other hand, European corporates get affordable, secure and clean energy, which reduces energy bills and supports sustainability goals.”
A transparent market that has verifiable, credible prices is the key to creating stability for producers and consumers - and hence the fundamental prerequisite to enter into power purchase agreements with companies. Håkon Røhne explains: "The individual markets in Europe are largely divergent - not only in terms of the culture, but also relative to market structure and liquidity, as well as transparency and regulations. That's why it's so decisive to have local offices in order to succeed locally. Scandinavia is a European trailblazer here and that is probably why the first European PPA providers for renewable energies entered the market here in the far north."
From zero to full risk - anything is possible
Since power purchase agreements with corporations generally minimise price risks, the user can opt for a range of options featuring different risk levels, says Håkon Røhne: "At Axpo Nordic we offer a solution where the power producer gets a fixed volume and a fixed price, basically translated into a fixed cashflow each month or each year. As such, the producer has no market risk, no volume risk, no weather risk – only technical risk and regulatory risk. That’s probably the most risk-reducing kind of structure available.”
At the other end of the spectrum are the power purchase agreements that offer a variable price for the entire production from a project. The risk structures also change depending on needs: Some customers, such as large industrial companies, have enough experience in terms of energy trading ability and even have their own energy trading experts, while others need more security and advice. As a result there are great differences between the various PPA structures. A long-term character is common to all renewable energy power purchase agreements.
Power purchase agreements for renewable energies
are designed for the long term.
Catchword: Long-term growth
Are corporations rewarded for their trust in the market in the long term? In principle that remains to be seen, but the current market players are for the most part optimistic. Axpo Nordic is no exception: “The ambitious climate policies that Europe has put in place, not just for 2020, but for 2030 and beyond, are really the driving force behind PPAs. The fundamentals here point towards many more PPAs, many more corporate PPAs, and many more new names in all parts of the value chain of renewable energy production,” adds Håkon Røhne.
It goes without saying that Axpo wants a big slice of this pie in the long-term.