As a part of Cornwall Insight’s Green Power Forecast report, we interviewed a number of suppliers, offtakers and generators in the market to identify key trends in the renewables Power Purchase Agreement (PPA) market. Here we detail five key trends that came from our interviews and research.
The PPA market remains very competitive
The PPA market for renewables remains in good shape with regular re-tendering of single sites and portfolios and a stream of new projects coming forwards, although to a lesser degree. It is a competitive field with approximately 40 offtakers active in signing short-term PPAs and while market participants noted that there had been no new entrants, margins continue to be squeezed and value retention for generators continues to reach record highs. Most tendering sees 8-12 bidders per renewables project, with some participants noting up to 20 for more attractive sites.
While newer entrants, typically new entrant independent suppliers, into the PPA market tend not have the credit requirements to participate in many tenders, they commonly seek renewable power through the e-POWER auction. This is in part due to the relative ease of the auction, but also due to the lesser credit requirements to participate.
Generators are opting for short-term contracts over long-term deals
Market participants noted that generators are continuing to opt for 6-12 month deals over PPAs that are 18-36 months in length. This has largely been driven by backwardation in the wholesale market, meaning that prices for delivery in the future are priced lower than they are for delivery in the short term.
Also a driver is the number of new projects coming to market. The majority of long-term PPAs are required by new projects for debt financing purposes. Unless debt financed, renewables projects are now opting for short-term deals, resulting in high levels of retendering. Many projects are now coming to the end of their original long-term year project-financed PPAs and have the freedom to opt for shorter-term deals.
However, this means that low levels of liquidity have continued in the long-term PPA market. With the RO closing to new capacity, and the FiT scheme now bound by deployment caps, the Contracts for Difference scheme is one of the only routes to market for new projects.
FiT generators are drifting away from the export tariff
Market participants noted that liquidity in the FiT market has risen, as higher wholesale power prices have pushed commercial PPA values above the export tariff. The administered export rate for Feed-in Tariff (FiT) projects accredited during or after December 2012 is £50.30/MWh (2017-18 money). At the end of Q417, the administered export rate sat approximately 5.3% above the annual April 18 baseload power price. As commercial PPA’s also include the value of embedded benefits, and sometimes Renewable Energy Guarantees of Origins, PPA values for many FiT sites are now trending above the export tariff.
Subsidy free renewables is gaining traction
Subsidy free renewables is slowly coming to fruition, particularly for solar. Some recent announcements have included Anesco’s subsidy free solar farm with a co-located battery storage, INRG solar is plotting the 120MW Little Crow Solar Farm near Scunthorpe without the use of subsidies, and NextEnergy Solar Fund announced it has acquired the rights to four subsidy-free solar sites which it plans to build all four sites within the next 12 months.
A relatively new route to market being explored for subsidy free renewables is Corporate PPAs (CPPAs) – an agreement between a generator and a corporate rather than between a generator and an offtaker. There are many mutual benefits from CPPAs for the generator and corporate alike. The most significant of which is that the renewable developer can gain long-term price certainty for their project from a credit worthy counterparty, while the corporate is able to secure supply from renewable power and reduce its exposure to fluctuating wholesale power prices.
However, despite increasing optimism in this space, many market participants noted that negotiations remain lengthy and often break down over final price agreements.
Renewables players explore flexibility
Renewables players continue to explore flexibility and battery storage opportunities. Numerous participants in this survey, and various other renewables generators, have been either actively scoping for or developing storage projects. However, despite opportunities there remains numerous challenges to the business case for storage.
~90% of storage is being developed through frequency response markets. However, this market is likely to become saturated and will force batteries to search for alternative revenue streams. An alternative being explored is wholesale arbitrage. Multiple market participants have been exploring this option, but most respondents found this route currently unviable. Excitement also surrounds opportunities in the Balancing Mechanism (BM), with more marginal pricing to be introduced from November 2018. Renewables and flexible generators are further exploring BM lite/ BM access as it may open to smaller-scale generators in the future.
At the very least, Ofgem have now published guidance on co-location of storage with renewables under the RO and FiT schemes, and this could provide some incentive to explore storage options further for a vast amount of existing capacity.
Our Green Power Forecast projects the value of power from Renewables Obligation, Feed-in Tariff and subsidy free projects by technology, and through different types of Power Purchase Agreements. If you are interested Cornwall Insight’s Green Power Forecast, please contact Tim Dixon at firstname.lastname@example.org, or 01603 959881.