Going green with baseload PPAs

Power purchase agreements (PPAs) continue to grow across Europe as renewables subsidies get phased out and companies look to reduce their carbon footprint.

Listen to a discussion on the outlook for PPAs, and how in the Nordics firms are increasingly using them as hedging instruments, often signing “baseload” deals. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Kathrine Bakke of Afry, 
• Olav Vilnes, Chief Editor Nordics, Montel.

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:05

Hello listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. My name is Richard Sverrisson. Today the topic is PPAs, and which I think it would be fair to say, remains a bit of a hot topic. I'm joined by Kathrine Bakke of Afry, formerly Management Consulting, and my colleague Olav Vilnes, a warm welcome to you both. Thanks. Thank you, Katrina. Let's start by discussing the current market. Would you be able to tell us what happened last year in terms of PPAs in the Nordic region? How does it compare to previous years?

Kathrine Bakke of Afry: 0:42

I think what we've seen going back a few years is that there's been almost an exponential. Growth in PPAs, and especially looking at corporate PPAs. It's easier to follow them because they are marketed in a different way, but there's been a definite sort of almost exponential growth all the way up until 2018. In 2019, volumes are a bit lower or were a little bit lower than they were in the year before, but still higher than. The years before that again. So it's sort of a, still quite a hot market and it seems to me that most projects are now being financed based on long-term PPAs. We don't really see that many projects. I. Being exposed to market risk for the entire volume. It's a requirement from the banks it seems.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:35

But have you got some numbers, for example? So volumes how the years compare.

Kathrine Bakke of Afry: 1:39

We only have volumes for corporate PPAs. Okay. And of course, it's not necessarily complete because it's dependent on actually people making them public or us being able to observe them through other. Other means, but from prior to 2015, we didn't really see any corporate PPAs or at least very low volumes. We had Google doing a few, and then it all peaked in 2018 with about six, six and a half terawatt hours of new volumes being committed on PPAs. Last year I think we were more in the range of around four turbo hours, so it was a bit down, but I think. 2018 was the year of some really, really big contracts, like the contract, for instance. That, of course, pulled volumes up, even if maybe the number of PPAs meant that big. The corporate PPAs is just as part of the market. I would say maybe around one third, maybe a little bit more. It's the utilities and traders that offer the most of the PPAs. And then the volumes are a bit harder to follow, as I said. But we see that the number of projects being committed are growing and that should indicate that also the underlying PPAs are growing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:53

It's a very. Complex marketplace in a way. And what you've been describing now is mainly the corporate PPAs Katrina. So I'm just wondering if, for the benefit of those listeners out there that may not be able to differentiate between a corporate or a supplier, or could you just briefly summarize the main types of PPAs that are out there? Yes. If that's possible within a minute. I dunno whether that's possible.

Kathrine Bakke of Afry: 3:14

Well, well, well, you could say that the typical PPA that we have seen traditionally. I mean in, in the Norway for instance, we've had for a long time had long-term bilateral contracts between hydro producers and industries. But the typical PPA that we've seen in the VIN sector is a utility buying directly from. The wind farm and the utility could be the typically start craft wa file ox pool, or it can even be a trader that goes in and takes that role. So that would, we would call the utility PPA. A few years back you started to see a new development when. Corporates. So the typical industries in the Nordics, what we've seen is the aluminum companies like No Hydro and Alcoa, and also some of the owners of the big data centers like Facebook and Google and Amazon for their, their warehouses coming in and entering directly into contracts with the wind. SVP. And that is what we then call the corporate PPA.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:17

Exactly. It's part of the kind of, it's not exactly green washing and such, but it's more of a desire to be as sustainable and to appear to be green as possible.

Kathrine Bakke of Afry: 4:27

Yes. I think for industries and companies, they have various sort of means of becoming green and documenting that, that they are sustainable. So for some industries, it's sufficient for them to go into the market and buy. For instance, A GOO.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:42

Guaranteed Origin and

Kathrine Bakke of Afry: 4:43

Guarantee. Guarantee of Origins. Correct. But for other industries or other companies they want to make sure that they have what they call additionality, that they can be able to go out and say that, okay, we went into this contract and because of this contract, this wind park is being built, we can sort of point to the wind park that is rest sort of feeding us electricity.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:06

So that was built because of.'cause of us. Because of us, yes.

Kathrine Bakke of Afry: 5:10

Yeah. So that is clearly a motivation for many players in this corporate PPA market on the Offtaker side. But we also have in the Nordics, companies like Nor Hydro and Alcoa, who they're already buying hydropower. They can already say that their electricity is green, and I think for them it's actually been a good deal. Basically. I think they've been offered now win contracts that are really competitive with what the hydro producers are willing to give for the long-term contracts.

Olav Vilnes, Chief Editor Nordics, Montel: 5:41

Yeah. I think also we seen that also in some of the news reporting that there is an increased competitiveness for wind. In these PPAs and yeah,

Kathrine Bakke of Afry: 5:49

definitely. And

Olav Vilnes, Chief Editor Nordics, Montel: 5:49

is that something you expect even from solar, perhaps potentially in the next five years?

Kathrine Bakke of Afry: 5:53

No, not necessarily. In the Nordics, we see solar being merchant in Southern Europe. For Southern Europe, you would maybe expect to see the same development for solar, but. It's difficult to see at least big scale solar being developed with a small caveat to that, and that is that in Denmark and also in southern Sweden, solar is now being built with very low subsidies and market exposure and some of that they actually do have PPAs.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:27

When you say merchant Katrina, you mean, I mean basically profitable? Yeah, sort of private. Private private profit, basically. Yeah. I mean, it kind of makes sense because it's more windy in the Nordics and it's sunny in southern Europe. So, you know that, that kind of follows the, the fundamentals of these markets. But has there been any kind of, you know, noticeable trends that you've seen over the last few years in, in the PPAs? I mean, have, you know, we've seen more and more of the Google, the Amazon, the Facebook wanting to come into the Nordic region. Are there any other sort of standouts or, or things sort of interesting developments that you wish to, to share with our listeners?

Kathrine Bakke of Afry: 6:59

I think. The trend has been in a way away from the PPA being a route to market instrument. And what I mean by that is that when you have subsidies that guarantee your income, you don't really need. Hedging of the price in order to get a bank loan or bank financing. But if you don't have a subsidy you need so the project is merchant in a sense. In order to get financing you need to provide some sort of. Price security and the PPA becomes the hedging instrument. So over time, from, if you look in the long trend that is what sort happened, it's the development from the PPA as a. Route to market to being a hedging instrument. And I think the Nordics is in the forefront of that development in Europe just because the subsidy scheme here has provided much less price security for many years. Another thing that is happening, I think maybe as a result of the hedging nature is of course that while. You have seen in many of the European markets that the PPA price is very often an indexed price. It's moving with the market in some way or another, linked to the spot price, maybe with flaws and colors, but still it's sort of an index price. In the Nordics, what we see very much is a fixed price. Very sort of fixed, nominal for the lifetime of the project. Basically. It's been there for many years now in the Nordics, but it is a trend that we've expect to see sort of develop into Europe as they become more dependent on hedging element. And finally, what we see in the Nordics, and I think that is becoming more and more pronounced, is a trend towards base load PPAs, which means that you're actually. Keeping the volume risk with the generator, the base load PPA is a fixed volume every hour, every day throughout the year. What we've seen maybe more before is the as produced PPA. Where whatever you produce, somebody buys from you, but then the volume risk then is moved to the buyer. Especially maybe with the corporate PPAs, the corporates aren't really willing to take that risk. They want to fix profile and trying to get that. But even utilities we see now is requesting base, sort of offering base load PPAs to the wind parks. And that is I think, a bit of a. Uh, Nordic thing and also maybe a trend that's become even stronger in the last year from the number that we see. Of course, we don't see all of this market

Olav Vilnes, Chief Editor Nordics, Montel: 9:42

because when you also mentioned the, um, aluminum producers like Norsk Hydro and Alcoa, and they, and they also tend to buy this, um. PPAs and very long, long-term contracts. I think even one of them was up to 2050 from Huro. Do you see a difference there with the smaller companies coming in that they want shorter maturity on these PPAs and are the banks willing to accept that?

Kathrine Bakke of Afry: 10:03

I think what we've seen from some of them aluminum companies, the 20 and 29 years I think we've seen there is quite unusual. Most of what we see in the Nordics tend to be 10 years plus, and the banks. Will in general request a PPA that covers the duration of their loan. So if you have a 10 year loan, then yes, a 10 year PPA. And since most of these bank loans tend, or financing solutions tend to be quite long. So 10, 10, 10, 15 years, that is also the then the duration of the PPA, and that is a challenge for the market. Because there are a limited number of off-takers that are actually willing to commit for that long. It might be their budget horizon, it might be their hedging mandate. But unless you are very power intensive in an international market, you don't really need to hedge for that long. And you can see that in the financial markets as well. Liquidity for long-term contracts is quite. Low. And I think that is partly a result of the lack of off-takers in that market as well. I think that is a limit to the growth of PPAs. The willingness and the ability to develop a market that is significantly long-term on the offtaker side.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:27

What about on the other side? You have these big companies like Rotten File that you've mentioned, you know, et cetera start Craft Fortum. Is there a limit to how much they can do on this, on, on the PPA front? Because if they were to continually sign PPAs, they, their risk exposure would be huge.

Kathrine Bakke of Afry: 11:45

Yes. Yes, definitely. I don't know where that limit is, but I think it's clearly a limit to how much risk they can take on. And I've also heard larger utilities say that. And it's of course when they cannot offload that risk into a financial market or to potential customers that they have. For instance, for Start Craft, which has a number of long term bilateral agreement for their hydro contracts, they can probably also take on quite substantial amounts of win. But there is a limit to that. And you could say that maybe more companies could come in and take that intermediary position. Then the bankability of the contract and the bankability of the offtaker becomes an issue.'cause if this is going to be used as a price hedging tool as a security in a way, or a collateral for a, for some sort of financing, the offtaker needs to be bankable. It needs to be large and be there in 10 or 15 years.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:48

You don't wanna fly by night merchants.

Kathrine Bakke of Afry: 12:51

Exactly. So, so the man and a dog outfit will definitely be out, but, but even I think some of the regional utilities could be too small. Akua needed giac to support them in order to be assumed credit worth enough to be a counterparty on one of the big contracts that they went into at a,

Olav Vilnes, Chief Editor Nordics, Montel: 13:11

of course, if you look at the PPAs, it has in a way replaced subsidies. Across the Nordic region to finance new wind parks, and you are building a lot of wind parks, Sweden, Norway, and Finland. Quite heavy growth. Is there a saturation coming up in some of these countries that you will see more growth in, maybe Finland instead of Sweden or do you still expect a stable growth?

Kathrine Bakke of Afry: 13:30

Well, I think. From the Offtaker side, it seems that within the Nordics, it's one market in a sense. So an Offtaker in Norway can buy from Sweden. A Swedish one can buy from Finland and vice versa. So I think the limitations comes maybe more actually on the supplier side.'cause as you say, we. Building a lot of wind. We are actually building so much wind that in Avery's view, we are taking away. So at least short term, we are actually reducing the profitability. We've been talking in other contexts about this big north south divide in prices, and of course that can mean that you get a stop in developments for a period in certain price areas and even maybe some companies coming into getting trouble. Because of that in, in the early mid twenties. And that could change the mood in a way for being willing to enter into these type of contracts. And we're

Olav Vilnes, Chief Editor Nordics, Montel: 14:26

talking about the northern parts of Sweden, Norway, where you have lack of transmission capacity themselves. Definitely. Yes, yes,

Kathrine Bakke of Afry: 14:31

clearly. And what we see is that in the next couple of years, you get 25 t hours of new. Wind coming in, in this region. And the grid takes longer to develop. So even if you assume that everything that TSOs say will be built is going to be built, you will have some years in the early twenties with really, really low prices in this region, especially the capture prices for wind.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:56

Because the wind has nowhere else to go,

Kathrine Bakke of Afry: 14:58

the wind has nowhere else to go.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:59

I think if we stick to the issue of prices here at the moment, Katrina, we're seeing that wholesale power prices in the Nordic region are very low, close to 10 euros, a megawatt hour, and the forward curve is below, so 30 until 2025. Are these prices holding back investments?

Kathrine Bakke of Afry: 15:19

They should be. Makes sense. Yeah. Although I think the current prices that we see is very. Sort of weather related and, and it's a 2020 extreme when it comes to all bad things happening at once. So you have really full reservoirs, you have very windy winter, very low temperatures, no, sorry, very high temperatures. So low demand from that side. High,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:47

high gas prices. Exactly. Sorry. I mean, no low gas prices, low. I was just testing

Kathrine Bakke of Afry: 15:54

And also a lot of the interconnection has low capacity these days just for various reasons. And so it's everything together pushing prices down and in itself, you would maybe expect investors to look beyond that. And the coronavirus and what that means in terms of economic recession and so on is a different story. I think it's too early to have a view on that, but it's clear that low prices in general, and I think most wind parks, they say that they can have an L-C-O-E-O below 30, but I'm not sure it's really that many sites that can have that or that really do have that. So. If that is the level we see, the PPIs would normally be a bit below that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:39

So just for those listeners not aware with LCOE, that's the levelized cost of energy, is it? That's

Kathrine Bakke of Afry: 16:44

the levelized cost of energy. Yeah. And it's a long discussion in itself how to what that is, but, but it's probably somewhere in the low thirties for most projects in the Nordics at the moment.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:55

So that's like the break even point. That's the break

Kathrine Bakke of Afry: 16:57

even point that they will need. And if you're investing on the basis of increasing power prices, I mean, we do. See with our projections that these wind parks with lcoe at that level, they're profitable. But of course, when the forward curve is low, you can't really expect to get a PPA much higher than that. Probably lower than that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:17

Are any projects sort of threatened, would are, is there any danger that some of these projects could go under?

Kathrine Bakke of Afry: 17:23

I think that's a bit. Difficult to have a view on. In a sense. You know, they have secured their sort of minimum income in order to service their debt, presumably through a PPA, and that is going to sort of help them through that. A rough period, but there is very often a remaining share of revenues. So these projects are barely, probably, barely profitable, very marginal if they have a P for the PPA volumes and many investors that would then rely on the remaining volume and the tail end of the cash flow in a way to provide the upside. And with very low prices, you can get some years with the value of that remaining volume is quite low. That could be a challenge for some of these projects.

Olav Vilnes, Chief Editor Nordics, Montel: 18:12

I heard that on some different conferences that you have like, um, a PPA price just below 30 perhaps on a 10 year deal, and then, but that's maybe 60, 70% of the output while the rest is more open in the market. And then many people are looking at your analysis and other analysis and say, okay, they expect higher prices than the market. Because you can still see some analysis in the market, which says maybe Euro 50 in the late twenties. And then it's, it makes sense for them to be open for some of this to capture a greater profit from the, for the data. And this you, as you said where are you on this? Do you also expect a much higher price than the market is actually pricing in on the portfolio?

Kathrine Bakke of Afry: 18:47

We do. Not much higher, but we do have a growing price curve. You might know that we are not very happy to talk about our price projections. No, of course. No, of course.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:56

Then if there are further questions, they contact you directly, Katrina.

Kathrine Bakke of Afry: 19:00

But yes, we do see our price curve is growing going forward. But I think the challenge is that especially with a base load, PPA, you're not capturing the wholesale price. Or the captured price for that matter, for the remaining volumes, sort of the, the remaining 30 40% that you're not getting the wholesale price for that and you're not getting the capture price. And the reason is that since you have a base load volume as sort of fixed obligation that you have to deliver every hour, that means that if the wind is low. You actually have to purchase that in the market, and then probably at a higher than average price and vice versa. When you sell into the market, you sell on windy days. And if you're netting that effect out, that can be quite dramatic and you will get quite a heavy discount on those remaining volumes. Sometimes underestimated by, uh, the market, I think, and the investors.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:00

We could talk for hours about this Katrina, but I think to round off the discussion now, I'd just like to ask you about your expectations for this year. You've talked about some of the issues here, the perfect storm of sort of a bearish cocktail, if you like. What's the outlook for, for 2020? I know it's sort of a bit early days, you know, the, it's the early days of the coronavirus, et cetera, but what are your expectations for the current year?

Kathrine Bakke of Afry: 20:21

I'd like to split it in two in a way. One is what do we have? Expect in terms of wind development. And then secondly, what do we expect in term in terms of PPAs? And I think in terms of wind development, we will start to see the consequences of this big north south divide. I. Yeah, so investors are becoming more worried about the north and they are maybe more picky when it comes to where they're developing. So while we continue to see a growth, it is shifting a lot from north to south for the next sort of couple of years or a few years. And of course, that is affecting the PPA volumes as well. The other thing we see is that. We are actually seeing some projects now being developed without the intention of having a PPA. So we are starting to see some investors, sort of, of the more financial type that is actually willing to take on some risk. And, and that is in my view, maybe a slightly new development. We've been very much into the PPA trend for a long time. I've said that the availability of PPAs could be a limitation on growth in the wind sector. So with, if you're actually now starting to see. Sort of some investors and some banks being willing to take on slightly more market risk. It's actually a good sign for wind development in general,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:45

despite the protests in some countries.

Kathrine Bakke of Afry: 21:47

Yes, despite the protest in some countries.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:49

Well, Katrina, thank you for a very and Olav. Thank you very much for an excellent discussion. I look forward to taking this up again with you guys later in the year and we can see how the year progressed. So thank you Katrina, for joining them on our weekly podcast. Thank you. And thank you all Love. Remember to keep up to date with all our stories on Monte News and follow us on Twitter, LinkedIn, and subscribe to the Monte Weekly podcast on Apple Podcast and Spotify. Thank you. Goodbye.