The Role of Battery Storage in an evolving European PPA Market
The European energy sector is undergoing a significant transformation, marked by pandemic-related disruptions, energy crises, geopolitical impacts, and potential changes in electricity market regulations. Despite these challenges, the renewable energy sector in Europe remains resilient and committed to a rapid transition towards clean energy. The Power Purchase Agreement (PPA) market continues to evolve, with emerging Eastern European markets like Poland, Czech Republic and Romania gaining prominence and offering corporates new renewable sourcing options in carbon-intensive electricity grids.
Drivers and Challenges in Corporate PPAs for Renewable Energy
Aside from the decarbonization benefit of long-term sourcing of credible renewable energy claims (especially in the case of a newly built project), offtake agreements also hold the opportunity to generate cost-savings compared to the market.
While significant cost-savings have become more challenging to achieve considering supply chain disruption, a lack of 24×7 renewable generation, and cost of financing impacting the bottom line for developers, many corporates still see PPAs as key strategic instruments. Signing a PPA allows corporates to fix the price for electricity with Guarantees of Origin (GOs), bundled in for a tenure of typically 10-15 years. Theoretically, the corporates then significantly reduce their exposure to price volatility and gain cost certainty, with a widespread adoption bringing greater stability to the market as a whole.
A factor which is increasingly affecting market pricing and producer products is the intermittency of renewable energy production (during the day and across the year). Intermittency can lead to a mismatch between the solar or wind asset’s production and the corporate’s consumption profile. Where a mismatch exists, price risks occur; excess solar electricity during the hours of high renewable production paired with zero production in hours of darkness means the producer must take care to ensure continuous supply, sometimes supplementing through fossil fuel-based energy. The variation leads to a fluctuating cost of supply for the producer, with companies running 24/7 operations with a relatively constant consumption (“baseload”) profile being impacted the most.
This has significant implications for PPA pricing, and we are likely to see more hybrid structures emerge. This might include combinations of solar (higher production in the summer and daytime) and wind profiles (higher production during the winter and nighttime) or the integration of storage solutions with PPA solutions to flatten renewable production profiles and offer more flexible, baseload-like solutions whilst minimizing the so-called “profile risk”.
Snapshot: Battery Storage PPAs
A Battery Storage Power Purchase Agreement (PPA) is a contractual arrangement where an energy company agrees to provide electricity from a battery energy storage system to a business or corporation, for a specified duration and at an agreed-upon price. These agreements are a subset of traditional PPAs but with a focus on electricity generated and stored by batteries.
Battery Power Purchase Agreements (PPAs) offer a direct path for businesses to secure storage capacity alongside renewable energy sources. By storing excess energy during peak production and selling it back to the grid during high-demand periods, businesses can benefit from additional battery storage.
Unlocking Value with Battery Storage PPAs
When structured thoughtfully, a battery storage PPA brings value to both the provider and the off-taker. The provider, often responsible for the operation of the battery storage system, ensures a steady revenue stream that supports project finance. Meanwhile, the off-taker enjoys a strategic hedge against the inherent volatility in battery storage pricing. This also contributes to a greener energy mix by reducing reliance on fossil electricity during low production periods.
The Evolving Battery Storage Landscape
As the demand for battery storage surges, the critical question emerges: Will there be enough battery capacity to meet this growing demand? The answer lies in the ever-diminishing price barriers that once hindered investment. In recent years, prices have plummeted, making battery storage increasingly accessible.
Although the demand for renewable energy in Europe is growing, with the UK and Germany leading the charge, government incentives for flexible power remain a challenge compared to countries such as China and the USA which outshine when it comes to developing technologies for battery storage capacity.
Take home message
Simply put, battery storage has a vital role to play to mitigate the profile risk for all parties, especially as we strive to replace the dependency on fossil-fuel based production. The sooner we can bring battery storage PPAs to the mainstream, the faster we can accelerate the transition to renewable energy.
Our expert team advises corporates on PPAs that accommodate different scales of power demand across different renewable energy technologies – contact us to learn more about how we can support your renewable energy transition.
get in touch
For more information on the European PPA market contact: chelsea.lok@actrenewable.net