Green image seekers

Last year remained a busy year for power purchase agreements (PPAs) despite the Covid pandemic, and activity looks set to accelerate as the market sees a post-virus bounce. 

Listen to a discussion on companies who are keen to brand themselves as green – the green image seekers – and those for whom cost is paramount – the green giants.  

Host: 

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

Guest: 

• Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters, an informal setting. In today's pod, we'll discuss the expansion of renewables across Europe and the ways in which to finance green energy projects across the continent. In particular, we will delve into the complex world of power purchase agreements or PPAs for short, and what's happening in this segment across many countries on the continent. What's new, what's hot, and what's not. Joining me, Richard Resin, to discuss these matters is Thekla von Bulow of Aurora Energy Research. Who luckily for us, is an expert in this field. A warm welcome to you, Tekla.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 1:14

Thank you very much Richard. Glad to be here today.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:16

And how are you doing in, in Berlin and how's the COVID situation where you are?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 1:21

We're slowly starting to open up a few things again, but we're obviously far from a normal situation, still very much working from home meetings happening virtually, but I feel like after a year of being stuck at home. Have come to quite a set of terms with the conditions and it's working really well. So I'm looking forward for things to open up a little bit more but we're doing well. But in so far

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:46

that's good to hear. There is light at the end of the tunnel now. Now we are here Thekla to discuss PPAs in particular in your home country of Germany now. Could you tell us a little bit about what happened in 2020 in terms of PPAs?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 2:00

Yeah. So very happy to, in general, I think it's fantastic to see the activity that has been going on. I think a lot of people were expecting COVID to put a halt on many things, including action on climate change and especially also hold on the PA market. We were quite happy to see that 2020 was not able to put a halt to all of what is happening, including the PPA market. And so this has been an ongoing rising trend in Europe, but also in Germany, more PPAs being closed. And we do see this trend continuing. A lot of interest from corporates especially that are coming in asking to decarbonize their activities. Five PPAs. It is an extremely hot market for the moment,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:47

and that's continued into this year. As we discussed just a moment ago as the, maybe the end of the pandemic is looming. This is the beginning of the end of the pandemic.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 2:55

Hopefully. Hopefully. Yes. No, definitely. Luckily. We're all so able to work virtually. All the discussions around closing PPAs contract negotiations and so on can all happen virtually with all the information being shared online. So it is not something that has been put a whole by the COVID situation. And if we look at the general market development, also with quite a bit of volatility last year, this also, since we're looking at PPAs, which is a bit looking at the long-term developments of our prices, depending of course how long or what kind of tenants we are looking at, but it has been something that hasn't put a hold in closing PPAs.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:37

Absolutely. Could you. Talk us through the sort of main types that you're saying. You mentioned corporates. Is that the main type of PPA deals that you're seeing or have seen so far in the last sort of 12 months?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 3:47

You have to differentiate between the corporate activity happening, but of course you also have utility PPAs that. Are strong in the market as well as intermediate structures where you have an intermediate player having the relationship with with the asset and then selling on a to, to a another party. On the corporate side especially, I've seen a massive increase in, in interest and some of the European markets. Especially in Germany the utility side has been developing as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:15

Can you give us some indication of numbers here? The trends that you see Tela?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 4:19

Yeah. So the, if we look at the different European markets, you have to look at the individual markets to, to identify clear trends. There's a huge difference between the maturity of the different markets. You have much more mature markets. For instance in the UK and the Nordics and Liberia, then you have countries such as my own in Germany. But we do. We do see continuing interest and there's very little standardization both in terms of the size of the PPAs, really from small PPA sizes to very long PPA sizes. We also see a huge variety in the tenders depending on what kind of projects we're looking at. If we're looking at new build projects. Where you really have to use the PPAs in order to secure the cash flows and ensure that the projects are bankable. We see longer tenors, but with very long tenors. We also see new, innovative kind of structures emerging in terms of trenching. The PP. Into different sub tenors to enable of a fixed price at the start. And then becoming more flexible as the tenor evolves to take into account insecurities around the price developments. We also see. A big variety also in terms of structures in general or volume clauses, both as produced but also base load structures emerging. It really depends on kind of the the legislation. And the technology we're talking about, and within the technologies also, whether it's a new build asset or a lifetime extension asset,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:50

You hit the nail on the head there in a way, Tekla, because, it is such a non-standardized area or market in a sense that it's very hard to generalize between, countries and also and deals.'cause even, the PPA. Contract is a beast of immense complexity in many ways. But if I could say you, you've highlighted some areas that, some innovative deals that are emerging. Are there any other standouts that you'd like to sort to tell us about?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 6:13

Yeah, so an interesting trend that I could see emerging. Is, especially when we talk about the corporates, is whether the corporates will continue to have the direct relationship to the assets, right? Putting their logos on the wind farm and saying, this is our wind farm, the one we're procuring the green energy from, or do you are you more of a price hedger? Are you less interested in kind of direct relationship? With the asset, just asking the seller to ensure that a certain price level is given and a certain load is provided, but less having the needs to have this direct relationship with the asset. It's quite interesting when you see really short term tenants between corporates and developers. Where the seller is actually carving out a PPA from the existing portfolio to provide the buyer with what is required by the buyer. So quite an interesting development in that sense.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:09

So corporates, selling themselves is green here is very important. Whether that's. Naming the wind turbines are on the solar panels or whatever. This is becoming more and more important.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 7:19

It really depends on what corporates we're talking about. There's some of them which we called the green image seekers. The one that really have high stakeholder pressure. And the ones that really want to demonstrate their green activities, these will be the corporates that would be more interested in putting their logo on a wind farm. But if we're talking about very energy intense companies where the price of A PPA actually makes a huge. Difference in, in terms of of their commercial competitiveness. The likes of kind of the metal industry, for instance or the chemical industry, they are looking for good deals. And here, the direct relationship with the asset less important. The other really interesting or important aspect. If we talk about corporates especially is the point around additionality. Ensuring that you are greening the local economy, which is something that, especially for instance the big tech that are coming in are really interested in ensuring that the PPAs that they close have the stamp that a project might not have been developed without the PPA, that they're closing. Is is something that will also become increasingly important now with the implementation. So the renewable energy directive of the European Union which is being translated international law.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:40

What kind of sectors are these? The green image sellers? It is fascinating. Are they, are we talking tech? Are we talking, transport. What kind of area, or is it across the board? Tela.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 8:50

Yeah. So the green image seekers are really the ones that have in our categorization, really have high stakeholder pressure, which is both from their end customers or, and clients. As well as their own employees and more and more the shareholders also. So typically we're talking about the big retail companies. The hotels also in some sense the transport, automotive companies depending on how they calculate their emissions and so on and so forth, right? So the green image seekers are the ones that not necessarily high, have high energy intensity. While what we call the green giants have, in addition to high stakeholder pressure, also have a really high energy intensity and are looking both for the green image or the or the publication of their, but also.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:42

Very interesting and of course this aspect of additionality I is key now in Germany. Would you say that Germany is a kind of sleeping giant here in, in the PPA market because of, a lot of the feed in tariffs are coming to an end. We're seeing wind farms that are no longer receiving subsidies and also changes to the guarantee of origin legislation. Can we expect to see more demand or bigger, bigger moves, bigger activity in, in Germany than we've seen before? Maybe that's a bit of an obvious question 'cause we probably see it, but what's your view here? Tela?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 10:16

Yeah. No, so definitely, it's a market that is becoming more and more interesting and compared to other European countries where. We're a quite early phase still, but I think it's a very interesting and exciting market to be looking at. So again, you have to differentiate between the different technologies, right? So on the solar side, you can in, in terms of ppa, so most of the PPAs in Germany are in solar and will continue. On the solar side, we see merchant build out for everything that is not eligible to go into the auctions, which is everything above 20 megawatts. These actually are really interesting projects because they do comply with the high additionality requirements, so great projects that require PPAs in order to ensure bankability. You also have a little bit of lifetime extension coming in. So the first, the solar assets will run outta the 20 years subsidy scheme. So these will also in part be looking for PPAs for some lifetime extension. But on the solar side it's mostly the March build out in addition to a PPA on the onshore wind side. This is a market as very much as you might know. Lagging behind, or has been slowed down in recent years with auctions being heavily undersubscribed. So we nearly don't see any merchant built out until the end of the decade. Thus also means that you will see very few PPAs being closed in the onshore wind segment. What you do see though, is some lifetime extensions again. So for all the plants that run outta the EEG subsidy scheme in Germany are eligible to or are have, provide the opportunity to continue running with A PPA and it is being used as some projects still require secured cash flow for the land pieces, for instance. Offshore wind will be really interesting. We have currently the zero bid offshore wind parks from the tenders of 17 and 2017 and 2018. The big one from, and. Both will be or in the case of have been already closing, PPAs might be more coming. So these are really high quality PPAs in terms of additionality with really long tenders. And these are the ones that also provide the big volumes and enabling some of the corporates to decarbonize via the offshore wind. In all the other countries, you really have to look at what kind of technology. We're looking at what kind of assets

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

Many countries have opted for auctions and contracts for difference, also known as CFDs. Tela, can you explain the differences on how these may influence PPA deals?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 12:59

Yeah. So specifically looking at Iberia for instance, we do see a kind of a competition between going into the auctions and building out fully merchant. The impact on the regulation is still a bit unclear. We, we think that the proposed support scheme for renewables in Spain might lead to a bit of a lowering of the supply potential as some of the new generation would benefit from CFDs. However, in general, for instance, Spain, we still believe that the market will be oversupplied in 2030.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:31

We've seen wholesale. Electricity prices rise quite significantly in, in some countries, especially in Northern Europe. What kind of an impact do higher wholesale power prices have on PPAs and on PPA deals?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 13:44

Yeah I think that's a really fair question. Again my, my answer would be it depends, and I, and in that case it really depends on the tenor of the PPAs, right? The more, more long term you look at PPAs, the less kind of the current market situation. Plays a role. However, if you look at the really short term PPAs, you have to, or oftentimes it's being used as a hedge, and there you would have a stronger impact on kind of more, more recent developments on market prices. What is really important with PPAs is getting the price forecast as right as possible and ensure that the structure of the PPA is taking into account your risk position in your market view. Especially. If you look at the more long-term market developments in many countries, cannibalization of renewables will play a significant role. What we mean by cannibalization of renewables is that wind tends to blow in one region, so that in, in times of high wind or the renewable assets are producing at the same time, the same with the sun shining. So in times of high renewable production at the same time, it has a big impact on the base load prices. Having a good view on how renewable expansion will develop over the next couple of years. Taking into account also insecurities around regulation and government targets of renewable expansion is really important to feel comfortable with the PPA pricing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:19

Absolutely. I think we've also seen some severe, instances of severe weather. Tela. I think we, in, in Texas for example you see a lot of the wind farms and the wind produces there being hit by. Extreme conditions. And I'm just wondering, are you noticing or have you seen any movement to include more kind of force majeure clauses into PPA contracts?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 15:44

Yes, definitely. I think both COVID and events like Texas have made parties on both sides more, more aware of these kind of events. So I think lawyers are much better positioned to comment on this. But have definitely seen much more discussion around the importance of force maja in the PA market, right? Both in terms of the delivery of power, but also security around the construction of the asset.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:11

Telo. I often ask the guests on this podcast if they had a wish, what would they want from the regulators or the policy makers in their countries or in their markets? So what would your wish be for Germany and its policymakers?

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 16:25

From our analysis, it's become quite apparent that Germany will need more renewable expansion in order to really achieve the targets set in terms of getting on the road to net zero and in, in Germany it will be very much about enabling more expansion. Offshore wind, but also reducing the hurdles for onshore wind, ensuring the participation on onshore wind auctions, reducing regulatory hurdles around the extension of lifetime, but also repowering of assets falling out of the subsidy scheme after 20 years. I think there's an enormous willingness of both the supplies, the utilities, or in general the sellers. Of PPAs to, to push this market forward. And on the corporate side very much so as well. Trying to understand how they get to net zero through PPAs but also through other ways the job of government. And it will be interesting because we have general elections this year. To see how the different parties will plan out this topic for Germany.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:33

Excellent. Tekla, I think we'd like to welcome you back perhaps after the election would be a good time.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 17:38

Absolutely.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:39

But thank you very much for being a guest on the Montel Weekly podcast this week. Thekla.

Thekla von Bulow, Principal Commissioned Projects, Aurora Energy Research: 17:44

Pleasure, Richard. Thanks a lot.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:45

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