How are PPAs revolutionising the world of renewable energy?

Gradually, the renewable energy tariff framework that was introduced at the start of the 2000s is coming to an end, making way for a mature (and booming) market, stimulated by falling costs of construction for power plants well as PPAs. By giving market entrants full freedom to negotiate, these power purchase agreements (PPA) are opening up a number of new opportunities in the electricity market, particularly (but not exclusively) for developers of solar power plants.

Tariffs Captured in “FITs” Moving to “PPAs”

Mechanisms for state aid are in the process of expiring in a number of European countries. These mechanisms were introduced to encourage the start of electricity production and to provide an incentive for investors to finance projects, offering a certain security with prices that were fixed over a 20-year timescale. These “fit-in tariffs” (or FITs) were able to kick-start the renewable energy market by securing projects in the fields of photovoltaic and solar, geothermal, and hydro-electric energy generation.

As predicted, FITs are gradually giving way to standardised rates that are captured in the PPA model. These “power purchase agreements” involve a free negotiation between energy producers and their customers, often from the industrial or service industries, with no long-term price restrictions.

This deregulation provides an opportunity in the green electricity market that has been characterised by an unprecedented fall in prices. The cost of installing a solar plant is in free fall, with photovoltaic models costing 84% less than in 2010. This drop-in costs has attracted investors and enables renewal energies to compete with fossil fuels across the board, including on the basis of their cost.

A High-Growth Market for Renewable Energy

As such, PPAs are hugely sought after among certain industry sectors, especially Google, Apple, Facebook and Amazon. As major energy consumers, these giants of the technology sector are taking advantage of this opportunity to acquire vast quantities of clean and traceable power. For instance, Google has signed a PPA covering 200 GW/h with the German energy company, wpd, via its Kuuronkallio site in Finland. On a different scale altogether, the Qwant search engine selected Akuo Energy to supply its renewable energy needs.

With companies such as Facebook, Amazon, Apple, Ikea, Microsoft, and 3M publicly announcing PPAs, these arrangements have become much more common over the last few years. The majority of major corporations have an interest in increasing the proportion of renewable energies in their energy mix, whether due to their own ethics and values or as part of their approach to corporate social responsibility (CSR). Offering greater flexibility than producing their own energy, which needs a geographic location close to the customer’s production sites, energy purchases made using PPAs provide the attractive benefit of greater traceability than state-managed, centralised purchasing.

In 2018, this booming market has already surpassed all records set in previous years. After reaching 5.4 GW in 2017, the total volume of energy covered by PPAs exceeded 7GW in July, according to a study published by Bloomberg. Whereas 80% of agreements related to producers located in the United States and Scandinavia (which is at the cutting edge of solar technology), the phenomenon is likely to reach France and southern Europe in the very near future, where there is substantial potential for the solar energy market to develop.

Opportunities for Developers in the World of Renewable Energies

The electricity market is undergoing a radical restructuring in response to this transition. It now offers a range of solutions for operators of renewable power plants that are preparing to exit from FITs. PPAs are attractive to them, offering fixed, calculable remuneration and the ability to plan securely within a growing market.

More and more project opportunities are being approved for development in order to meet the ever-growing demand from businesses. In particular, southern Europe (including France and Spain) are markets with a great deal of future potential for the photovoltaic sector, with locations that are highly competitive for large plants generating in excess of 15MW.

Stakeholders are also diversifying via the formation of aggregators, which guarantee opportunities for operators of smaller plants. They act as intermediaries and specialise in renewables trading and risk management, sometimes acting on behalf of traditional producers including EDF’s Agregio, Engie’s EGM, Axpo, Neas, Statkraft and more. Behind the scenes, the banks also have a role to play, providing project financing and ensuring that partners remain solvent.

A Market to Approach with the Right Partner

While renewable energies (RNEs) have a very promising future ahead of them, they are not risk-free for investors, volatile prices and market entrants with short lifecycles in particular. The best way to arm yourself against these risks is, as ever, to make use of the services of an established partner with the right skills for the market. Victanis works with all major players in the RNE sector, including aggregators, banks, and corporate acquirers. With its ground-level expertise, it provides optimal support to help make a profit in this high-growth environment.

Summary

Gradually, the pricing captured in FITs is giving way to standard transaction agreements between producers of renewable energy and major corporations, PPAs, or power purchase agreements. Against a backdrop of falling production costs, the RNE sector is experiencing triple-digit annual growth with an influx of major corporate customers who are desperate for its clean energy. With a plethora of opportunities in the photovoltaic sector in southern Europe in particular, Victanis is your ideal partner in a booming market.