Boosting PPA demand

PPAs are a vital component of Europe’s green energy transition. This week’s episode discusses whether deals have slowed down amid the Covid crisis, and the outlook in the coming years. 

Listen to an expert view on the changes required to increase the involvement of small and medium sized firms, and how companies should deal with counterparty risk. 

Host: 

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

Guest: 

• Sam Ebohon, Transaction Association Director, Arup. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:35

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters, an informal setting. In today's pod, we return to a topic that is of interest to many of you out there. And there will be a key component of Europe's green energy transition. Yes. We're talking about power purchase agreements or PPAs. What are the current drivers and what can we expect in the months ahead while we are still in the midst of the Corona crisis and its immediate aftermath. I'm Richard Sverrisson and helping me discuss these issues. Is Sam Ebohon of Arup. A warm welcome to you, Sam.

Sam Ebohon, Transaction Association Director, Arup: 1:08

Thank you very much, Richard. It's a pleasure.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:11

How are you doing at the moment? I can see that the UK seeking to impose even more restrictions.

Sam Ebohon, Transaction Association Director, Arup: 1:15

Yes, I'm well. Family's well, thankfully. Yeah. You know what can we do, I guess listen and to do what we can to try to. Stem the flow of this virus. So yeah, we've been encouraged now as of yesterday to work from home more, and that's a change. I, I think from the summer where we actually were encouraged to go into the office more. So slight backward step. But, hopefully it's enough to halt the transmission.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:42

Fingers crossed. We maybe want to come back to discussing the impact of a potential wave on. PPA deals or negotiations. But I think initially I'd like to say, Sam, that PPAs, they're not new, but they seem to be increasingly used to expand renewables in a post subsidy world. In a recent webinar, I heard someone say that that subsidies. Were a form of PPA as there were a deal to finance green energy, but albeit with a state and not with merchant or private firms. What's your view here about, the newness of PPAs?

Sam Ebohon, Transaction Association Director, Arup: 2:12

Yes. No, I agree with the comment that was made earlier. I think in a new context, PPAs definitely are important to that post subsidy world. So now instead of contracting with the state. You are contracting with a corporate directly with the end user. So PPAs have a great potential to help us in this next phase of the decarbonization and the clean transition.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:38

So what's happened this year? We're still not out to this COVID-19 crisis yet, but have you seen a slow down or dip in PPA activities so far, Sam?

Sam Ebohon, Transaction Association Director, Arup: 2:46

Oh so yes and no is the answer really in terms of the. Global corporate, PPA volumes BF do a really good job of reporting. They've been doing this a while now, so I'll lead into some of their statistics. So they've reported that in the year, up to July, 2020, that we've seen just under nine gigawatts of, corporate PPA deals achieved, and this is actually slightly up compared to last year where we saw Fox 1,000,008 and a half gigawatts. Looking at that, you would say actually, things are heading in the right, on the right track. But when you dig into the numbers a bit more, we are actually seeing a significant reduction. In the PPA the corporate PPA deals that have been achieved in the us. So we've seen around five and a half gigawatts in year to July compared to about six gigawatts in the same period. But fortunately, other regions have picked up the slack. So we've seen quite a lot of deals that have been announced coming out of Latin America. These are firms, Argentina, Brazil, and Chile. And also in Europe. We've had a strong performance in the year to 2020. The end of July, 2020.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:53

So Europe still there and it's the deals are still being struck as it were?

Sam Ebohon, Transaction Association Director, Arup: 3:57

Yes, they are.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:58

Certainly, I in Europe and presumably beyond COVID-19 has had quite an impact on demand and on power prices. Is that affecting negotiations? Are you hearing anything along those lines, Sam?

Sam Ebohon, Transaction Association Director, Arup: 4:10

Yeah, so unfortunately, COVID-19 is still with us and it's. The economic uncertainty that it's brought with us is still present. I think it's been a really kind of incredible feat for the market to still be on track to record another year on year volume record. What we're seeing in terms of corporate off takers is understandably, they are more cautious about going into long-term agreements on, on their energy procurement. And they're dealing with kind of unprecedented challenges, so it's quite understandable that they've been preoccupied on in terms of pricing. What we have seen actually is that pricing has rebounded compared to where they were in the midst of the coronavirus period. Pricing in the PPA side is, was generally tracking the, what we've seen in the wholesale electricity market prices. And now we've recovered the majority of those losses. The PPA pricing has rebounded as well. The corporate buying has been particularly strong, again, from the tech firms We've seen Taiwan Semiconductor manufacturing company, they've led the pack, actually signed a huge PPA with Sted to take all of the output from 920 megawatt offshore wind farm in Taiwan. And you've seen the regulars I in the tech space such as Amazon and Microsoft also recording significant PPA purchasing volumes in, in the first half of the year, and maybe, I guess slightly newer firms outside of the tech sector. We've seen General Motors and Anglo-American and Dow Chemicals also, announcing deals too. So there were good signs. We've seen a recovery, let's say. Compared to when we're in the very midst of the COVID-19 lockdown period.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:04

So that initial blip or initial dip, even in terms of prices and also deals you've seen, seen movement returning, if you like, then and Sam, if that'd be a fair way to summarize it.

Sam Ebohon, Transaction Association Director, Arup: 6:14

Yes. Not quite pre COVID levels or I think in terms of the pre COVID levels, wholesale electricity pricing is. I think back above, those levels. We've seen a, I guess a slide in prices in Q4. So we haven't recovered those losses, but I think in terms of the COVID-19 losses, the wholesale electricity prices and the PPA prices as rebounded from that, we're in a situation where Spain and Sweden have the cheapest PPA pricing in Europe from a solar and a wind. Onshore wind energy perspective respectively. So you're seeing Spain Solar, PPA deals being struck in a narrow range, actually of about 34 to 36 euros per megawatt hour. And in Sweden, on the onshore wind side, we are seeing PPA deals being struck at, between 27 and. 32, 31 euros per megawatt hour. These are the markets where pricing is the lowest. And that has been supported by continued improvements in LCOE and continued, developments there and, great Britain, on the other side remains the prier market in terms of. PPA deals with probably both solar and wind, PPAs being struck at around 50 euros per megawatt hour at present,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:38

so in Sweden and Spain. Sam, would you say are these deals being struck at a premium or discount to the forward curve At

Sam Ebohon, Transaction Association Director, Arup: 7:45

present at a discount to the forward curve? We are seeing, industrial players comfortable at, taking the opportunity to strike those deals as secure long term. Lower pricing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:57

Is that also encouraging small and medium sized companies to come into the PPA space? You talk about the big techs. We've talked about them before. I think even on this podcast, Amber, if we want to move quickly with these very ambitious targets that the EU has set. We need to get more and more companies involved in this. And I know there has been movement with the with the re 100 index, but what's happening in the levels or the, below the big tech giants?

Sam Ebohon, Transaction Association Director, Arup: 8:21

Yeah, I think you make a very strong point there. We definitely need more sectors to be, involved. There's a few sectors that I think should be next and we've already seen some involvement from these sectors. Finance with retail and investment banking corporations. So this could be an area where we see good appetite for them to acquire long-term renewable energy via corporate PPAs. I think as well, their demand situation isn't as challenged or uncertain. In comparison to manufacturing and, truly industrial companies and even those on the maybe fashion retail side and then of another sector, I guess is on the, in the energy side. So oil and gas majors, we've seen some announcements where firms are committing to responsibly source their energy for their operations. And also on the, I guess the retail side, supermarkets, grocery chains, so the likes of Tesco lid, Aldi, they have great potential to, to enter in this space. And Tesco, avoid the, done some deals, but I think going forward there's more, there's great potential and opportunity there for them to step up in those areas. And I think as well in terms of regions, because we talked about regions a little bit earlier. We need more kind of in Europe.'cause I think to date it's largely been Nordic, Nordics led. We are seeing that growth in Spain, but we also need more out of Great Britain as well and more out of the Latin America. We've seen some. Some improvements. We've seen some buying there this year, but also from Asia as well. India, Malaysia, Vietnam, and these countries.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:10

Interesting. I'm wondering also whether within Europe, France, Spain, Eastern Europe, I know Poland's very interesting now has had quite a big explosion in terms of solar capacity. What's holding back the more move into PPAs in, in these areas? Is it pricing or is it the complexity of the deals? Are there other factors involved?

Sam Ebohon, Transaction Association Director, Arup: 10:29

I think the point we started with on subsidies in some extent is still holding things back. I know in the German context, Germany is, a huge is a, renewables powerhouse, but there the rules don't allow you, as much to go into corporate PPAs if you are also receiving subsidies. So this is a big, challenge there, but. Also, in Great Britain and in other regions as well. So to some extent, subsidies are holding the market back. I would say also regulatory reform. We're still seeing the evolution of regulation in a number of different markets. So for instance, in the US with the Federal Energy Reg Regulatory Commission and their minimum offer price wall. So that which was recently upheld in April. That has an impact on the pricing of renewables in, in the markets in Britain. The targeted charging review and the forward looking charges and network access off gem processes, they are resulting in changes in network charging. So this is also leads to uncertainty and it may be finally on the ancillary balancing services. We're still seeing procurements. Evolving there as well. So this leads to some uncertainty as to how the renewables will engage with these markets and what their obligations are. So I think these are some of the things which are holding the market back. Certainly

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:02

on the regulatory side, there's a lot of room for. For progress. I assume, but if we look at these deals, how long does a, if we can say a normal or, I suppose it's all very complex and they're all quite non-standardized, but if we look at a, an average PPA deal, how long would these negotiations normally take?

Sam Ebohon, Transaction Association Director, Arup: 12:19

So I think in the negotiation stage, in the proposals that we. Extend, we would typically see this stage lasting for about four weeks. However, I will say that, there is scope that we have, seen creep in this area. This is a stage which, we would work closely with a legal consultant. In order to hammer down the terms and conditions in the PPA contract. Four weeks is, I would say, what we, we open with. But we do, we allow some wiggle room, some, kind of potential creepage there. I think it would be nice to be able to say that it is very standard and when I say four weeks, I'm really referring to the sleeved PPA. Route, which is the ubiquitous kind of solution in Europe. So I think if you're doing a private wire deal, for instance, the negotiation can be longer. But also I would say there's a potential if you're doing the synthetic route. For the negotiation actually to be shorter. So there, I think those are some of the considerations when talking about the length of the negotiation. It also depends on the counterparties as well, and the extent which they are involved and the extent to which they see risk on. We're looking across the desk.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:44

Just for my own benefit really to remind me, and also for those listeners who may not be aware of the difference between sleeved, synthetic and private wire, could you very briefly summarize the differences?

Sam Ebohon, Transaction Association Director, Arup: 13:55

Yeah. So very briefly, a sleeve PPA, you would use your existing energy supplier and the, you'd have no physical connection between yourself and the facility producing your electricity. They produce electricity into the grid. Contract to buy the electricity at a, given price. But there's a, an agreement back to back if you like, with the supplier who's essentially taking that energy into their portfolio and kind of reselling it in a sense to yourself. So there, you would still be exposed to, some of the things which the retailer would have to pass on in, in your billing, non-energy costs. For instance. The network charges would all still be passed through. Private wire, you have a physical connection that's in place, so you have an opportunity to potentially there, avoid some of the non-energy costs, network charges, and social and environmental levies. And a synthetic PPA is really a financial instrument. Like a swap or, A CFD where it's about cash. Flow and against the, given strike price. Thanks

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:01

For summarizing that. Very neatly and elegantly Sam. What I'd like to then I'd ask, 'cause I think part of it is, for the, some of the counterparties, maybe especially some of the corporates. Are these contracts too complex and do a lot of the parties involved understand the sort of pricing structures or the drivers involved here?

Sam Ebohon, Transaction Association Director, Arup: 15:21

I would say that there has been a concerted effort by, suppliers and utilities when engaging with corporates to simplify things and to demystify the and to. To remove that complexity. So there has been a normalization in the structure of PPAs, which have been offered to corporates, at least from the supplier utility perspective. So there's a recommendation there for developers and independent power producers to take those lessons and to, put in front of corporates something which is similar to what they've already seen from the suppliers and utilities. As I mentioned before, I think this empathetic PPA in the European context does actually have quite a lot of upside and. There is an opportunity there to use this as a way to reduce the complexity. It's already quite common in the US and I think potentially here it has merits too. On the pricing side. I think corporates do understand the difference in the pricing. So this is something that they are. Now more used to engaging with the difference between, a long-term fixed or a discount or variable prices, which are attached to the wholesale market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:35

If we move on to the financing Sam, is some of this too restrictive? In terms of counterparty risk, the bankability, I. Is there a kind of a small pool of companies that can be, for example, off takers in this market and how would you be able to expand that out?

Sam Ebohon, Transaction Association Director, Arup: 16:50

Yes there's relatively few corporate PPAs outside the US so that's the slight caveat to my answer there. But I will say where the generator has more than one route to market the ability and has the ability to sell their generation into the wholesale market and isn't wholly dependent on. The Corporal Offtaker, so therefore there isn't, it's not. Via private wire, then the corporate credit risk isn't as critical and therefore isn't too restrictive in the development of PPA landscape.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:23

I've been at conferences, when we're looking at PPAs or geos. The companies on the supply side often massively out outnumber those on the demand side. So I think is there enough demand in the market for PPAs to meet the huge growth in renewable supply expected until 2030 and beyond? There

Sam Ebohon, Transaction Association Director, Arup: 17:41

definitely needs to be an improvement there. On the demand side I mentioned a few sectors where I think demand could come from in the future. I would also say that there is. A role maybe for platform or a number of platforms to encourage the aggregation of demands, say from small to medium sized enterprises, and also from smaller renewable generators, and then to facilitate this matching process from a second feature. Is the secondary trading of PPAs. I think this will mitigate the credit risk and counterparty risk concerns that are present if there is an ability for somebody else to pick up the PPA if somebody else decides to reduce or step away from that commitment. So I think these features, which could help to bolster the demand and bring in, smaller firms because, our market isn't just full of Googles and Microsoft. The bulk of our economy are, is, smaller, small, medium side enterprises. So we need to find a way to get them engaged in the process.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:55

Absolutely. And I think that's correct because they are the engine of the economy in many ways. When you say platform, Sam, what do you mean?

Sam Ebohon, Transaction Association Director, Arup: 19:00

So I guess in terms of online platforms, so in a similar way, we have, exchanges on the electricity side, which have developed. Over time we can also see a PPA platforms which are doing, supporting the aggregation and the matching, and also supporting the secondary trading. This is the suggestion, we as APAR in that space.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:23

No, absolutely. It sounds, it's a very viable proposition, I think is a good way to match those elements of the market. I think we are running a bit outta time, Sam, so I'd like to finish off really with a topic that I know maybe you are grown at, but Brexit and there's a core element of all PPAs is the guarantee of Orgen. So certifying the renewables renewable energy that's been produced from the facility. Now, would a hard Brexit threaten the exchange of geos between the UK and the eu? What are the risks here? I've heard of up to a stop of imports which could remove up to 60 terawatt hours of annual demand of geos. I

Sam Ebohon, Transaction Association Director, Arup: 19:57

think the short answer is yes. Okay. I think the log of answer is disappointingly. We, despite it being I think about four years since the vote now we are, we don't seem to be any closer to understanding what. The new relationship looks like with the eu, and this is, I guess the full it's a failure in negotiation. At this point, what I'm trying to say is there's huge uncertainty. I think we don't yet know, not just on the go side, but the whole of the energy side. If I'm just gonna focus actually on that uncertainty, there's difficult uncertainty there. We don't know how trading is gonna work from come the 1st of January, 2021 after the implementation period is. Has ended. We're not sure whether we're going to still have the very efficient usage of the interconnectors that we have in market coupling or whether we're gonna have to. Approaches. What is, Claire is the UK government, and I'm sure the eu and its member state governments are advising everybody to prepare for a no deal. So I think that is the reality of where we are. Those are clearly very useful to energy suppliers, largely in the uk and they've been taken advantage. Let's say from the cheap flow of goes coming in from the continent, I would say the one upside, I'm looking for upsides now, if the flow of these goes is halted coming into the uk, that does provide support for domestic additionality, those projects will have to, should come to bear in order to address the demand for those. They're used in the fuel mix disclosure situation in the uk. So there is a compliance requirement for these goes or rego as we call them here in, in uk. So hopefully that leads to more renewable projects being having to. Be built in order to facil to address that demand.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:54

So a big upside for the domestic UK players, but probably a very big downside for those continental or even Nordic players who've been selling those certificates into the uk. Sam, always great to have you on the podcast. I'm sure we'll discuss these issues again at some point, and I look forward to welcome you back.

Sam Ebohon, Transaction Association Director, Arup: 22:10

Thank you, Richard. It's a pleasure.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:12

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