Corporate PPAs: What’s in store for 2023?
2022 has been a busy year for our Power Purchase Agreements (PPA) team, working with corporates to navigate through what has been a complex and volatile market. Head of PPA services Katharina Winter, shares her main observations from 2022 in our engagement with the corporate market and a look ahead at what 2023 holds.
Despite recent price decreases, power prices will remain high
The policy support that has been put in place by governments has seen energy prices ease in the near term, however, Katharina shares that “we have experienced a mild autumn across the European continent, and we have seen in a decrease in prices. However, by comparison with 2021, prices are still considerably higher. With no clear solution in place to guarantee security of supply as we move into 2023, the market will remain volatile, and prices will suffer as a result.”
Katharina notes that particularly within Germany we are seeing huge demand for PPAs, but there is a potential undersupply of projects during the next years We certainly see options for corporates considering assets that are nearing end of life, however this is not a solution for the greatly sought-after criteria for credible sustainability claims, namely the requirement to add additional capacity to the grid via funding a newly commissioned project.
Transitioning to renewable energy remains a key focus
Katharina shares that in 2022 and beyond, carbon reduction and transitioning to renewable energy to support science-based targets and net-zero ambitions, remains a key strategy pillar for many corporates. act renewable recently held a workshop with Pexapark at RE-Source 2022, where this was reinforced. During the session 70% of corporates confirmed sustainability targets formed their strongest motive to close PPAs, with 20% strengthening their commitment to these goals in the last year.
With this in mind, many corporates have interim targets for 2025 and according to current developer pipelines, commissioning dates are currently sitting around 2024-2026, meaning that the pressure is on for many to secure contracts as soon as possible. Furthermore, those already claiming 100% renewable energy through certificate purchases are looking for a more commercially sustainable option for the long term. Demand-led price fluctuations in the certificate market, plus the additional costs associated with so-called ‘unbundled’ certificate procurement creates added price risk and expenditure corporates are keen to move away from in the longer term.
Demand is sky-high
The above factors have culminated in an increasing demand from corporates to offtake renewable energy and 2022 was the year that demand clearly outstripped supply. Katharina notes that if we look back to 2019 the annual RE-Source event connecting corporate off takers and renewable energy project developers, saw developers actively selling their project pipelines. This year, there has been a dramatic shift, with corporates now vying for what has become a very limited supply. This has impacted market dynamics considerably, giving sellers of renewable energy the ability to cherry-pick the off takers that represent a smooth contracting process and a safe pair of hands.
“ This pronounced shift from a buyer’s to a seller’s market means we are seeing the need to ‘sell’ our corporate buyers as attractive off takers to the developers. It is becoming a really competitive space whereby certain corporates are getting prioritized, namely those with larger demand, a solid credit rating, prior experience of closing PPAs and able to act quickly. ”
– Kathrina Winter, Head of PPA Services at act renewable
What does 2023 hold for the PPA Market?
PPA structures provide stability that is more valuable than ever before and so in 2023 we expect to see a strengthening demand, particularly in countries with heavy industry and dependence on gas imports such as Germany. Looking to 2023, when approaching the PPA market corporates should bear in mind that they will likely be competing against utilities and high-energy consuming industrials well-practiced in hedging energy procurement.
We will also see developers take advantage of their current market position with new procurement structures such as participatory tenders and later CODs (commercial operation dates) of the renewable energy asset. In terms of dealing with corporate off takers, Developers are increasingly reluctant to pay success fees to intermediaries and provide speculative offers to corporate off takers ‘testing’ the market, which has been common practice in previous years.
Our advice for corporates entering the renewable energy PPA in 2023 is:
- Ensure that you have a clear procurement strategy for PPAs, starting with the basics of stakeholder alignment. We can’t emphasize enough how important it is to have a common understanding of what a PPA will mean for different business functions. Procurement, finance, legal, Sustainability all need to input into what is acceptable risk from the start.
- Beyond alignment, undertake scenario planning to enable a quantitative assessment of price tolerance; this helps to refine the procurement strategy with a clear view of what pricing, structures and tenors etc. can be accepted by the business and where to draw the line.
- Be clear and precise with requests to the market – corporates should consider the position of developer when launching the tender. Requests for pricing with a clear scope, which demonstrate preparation, understanding, and ultimately demonstrate confidence to proceed are more likely to yield responses.
- Be clear, but also open to alternative procurement routes offered by developers. These could include bilateral negotiations, tenders, and other new structured offerings emerging from the developer market.
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