Welcome to the new PPA market paradigm

The last few years have seen extreme volatility in power prices and, with it, power purchase agreement (PPA) pricing. Although PPA values have fallen from record levels as worries over gas shortages in Europe subsided, contracted PPA rates remain above pre-crisis levels. In fact, prices will not return to historical levels in the short- to medium-term, as demand for renewable energy procurement only grows further and project supply remains constrained somewhat by grid bottlenecks. A recent rise in CfD bidding prices due to supply chain inflation has also raised the minimum asking rates for PPAs.  

For buyers, the main implication is that executives should not wait any longer to sign new deals in the hope of further price declines, particularly as sustainability requirements grow. Asset owners may benefit from holding off for a few years on signing deals if they wait for equipment costs to fall as forecast, though increasing curtailment and grid issues are forcing sellers to move quickly in certain markets. Welcome to the new PPA market paradigm. 

Our recent report, ‘PPA pricing in 2024 and beyond: a shift from pre-crisis benchmarks’, explores the latest PPA pricing trends and main factors influencing valuations moving forward in great detail.  

You can download your complimentary copy of the report by filling out the form at the top of the page, or read on for a summary of some of the takeaways. 

While wholesale levels have fallen, GoO (Guarantees of Origin) prices have supported PPA asking rates    

Even though wholesale rates have fallen in recent months, baseload power prices will continue to spike to elevated levels over the next few years as European power systems wrestle with surging renewables output and limited grid flexibility. Bar any significant electricity market reforms, natural gas will continue to have an outsized role on power prices in most markets for a while, despite the fossil fuel increasingly making up for a smaller share of total generation in Europe. 

Meanwhile, even though shaping discounts will increasingly drag down PPA prices in all markets as price cannibalisation accelerates, this will be somewhat offset by increasing GoO pricing. While certificates typically fetched for around €1/MWh pre-crisis, they have risen considerably in recent years, spiking to nearly €10/MWh early last year in major European markets. GoO prices have softened in recent months, though they will be supported by stricter EU sustainability reporting requirements moving forward. 

Ever-increasing demand to keep a floor on PPA prices  

PPA prices will also not revert back to pre-crisis levels in the near future due to strong demand signals. Even as corporate PPA demand dropped in 2022 due to the heightened uncertainty and price volatility, contracted volumes picked up again last year to total nearly 14 GW, and activity will continue growing year-on-year. 

Corporate sustainability targets are pushing an increasing number of corporates to sign renewable PPAs. New European ESG requirements for companies to disclose sustainability impacts and risks are also coming into effect, mandated by the EU Corporate Sustainability Reporting Directive. 

Demand from data centres, the more traditional driver of PPA procurement, is also set to further accelerate as several countries have begun limiting new data centre licenses only to those with renewable energy PPAs in place. Over 8 GW of PPA volumes have already been signed for technology corporate offtakers in Europe between 2015 and 2023. 

Elevated project costs and constrained supply will also support PPA valuations 

Meanwhile, on the supply side, inflated project costs stemming from supply chain issues and higher costs of financing have pushed up PPA asking rates from developers. Indeed, commodity prices have generally hiked up over the last few years, including for key renewables technology materials such as copper and steel. Official European Central Bank interest rates currently stand at 4.5%, up from 0% in 2020. As a result, Wood Mackenzie’s LCOE analysis calculated a 54% and 44% increase in solar PV with trackers and onshore wind costs between 2020 and 2023, respectively. LCOE levels for these technologies are only expected to return to 2020 levels until after 2026, further supporting the floor of PPA asking rates in the short-term. 

Grid bottlenecks in particular are limiting the number of PPA-backed projects that come online across Europe. Curtailment is accelerating across the continent as the share of solar and wind supply in the total power mix increases exponentially, dampening project economics and disincentivising further development activity. With electricity demand growth, battery developments and interconnection capacity not able to keep pace with the surge in renewables output in the short-term, expect some developers to shun certain markets in the coming years until project returns look brighter. 

CfD auctions across Europe offer developers alternative routes to market

Competitive bid dynamics also play a crucial role in determining PPA asking prices. Since CfDs are considered relatively low risk due to the contract’s tenor length (typically lasting for ~15 years) and the government largely acting as the offtaker, many developers are not willing to sign PPAs at rates below CfD prices.  

Due to supply chain inflation over the last few years, average and ceiling bid prices in CfD tenders have also trended upwards. In Germany, solar PV average and ceiling rates for auctions have increased by 13% and 29% from 2022 to 2023, respectively. Until these CfD prices begin to fall down again, developers will find it difficult to negotiate extensively on PPAs. 

Learn more

You can download your complimentary copy of our recent report – ‘PPA pricing in 2024 and beyond: a shift from pre-crisis benchmarks’ - by filling out the form at the top of the page.