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The importance of understanding now what the future of the electricity market holds

AleaSoft, October 21, 2020. Having a clear vision of the future of the electricity market in the long term is essential for both the investment planning and the valuation of renewable energy projects for their financing. The objectives of the NECP are aggressive and, at a time of uncertainty such as the current one, the importance of the long‑term forecasting becomes even more relevant.

The importance of having a clear vision of the future at a time of recovery from the economic crisis

At a time like the present, in the middle of the second wave of the COVID‑19 pandemic, it is not at all clear how this new onslaught of the virus could affect the recovery from the economic crisis that caused the first wave. All economic sectors are swimming in this sea of uncertainty, also the energy sector. The new restrictions that the governments may enact to halt this new wave could sink the electricity, oil, gas and CO2 emission rights markets again as happened during the first wave in March, and who knows if, on this occasion, the consequences could affect the long term.

This uncertainty about the immediate present, which is also passed on the medium and long term, can have a very important impact on the new renewable energy projects. A blurred future for the energy markets may lead to difficulties in financing new renewable energy projects, and this may jeopardise the ambitious objectives of the National Energy and Climate Plans (NECP) of the countries of the European Union in the 2030 horizon.

For a bank or an investor, there is nothing less attractive than uncertainty and risk. The forecasting of markets prices curves, if it is reliable, stable and made from robust scientific models, is the recipe that allows us to clearly understand what an uncertain future may hold. The prices forecasting is necessary for the project’s portfolios valuation, for audits, to responsibly estimate the necessary financing or to assess the return of the investment in a renewable energy project.

How to finance the objectives of the NECPs

To meet the objectives of reduction of greenhouse gas emissions and the renewable energy share of the Energy and Climate Plans that the countries of the European Union set, a large amount of money will be necessary and, in an uncertain situation of energy transition and economic crisis, this is not easy to get.

Obviously, not all investors have the same tolerance for risk. Some will be able to take the risk of investing in a merchant project that sells all its energy directly to the market. For this it is necessary to have a clear vision of the electricity market prices in the future, a vision that will be provided by a long‑term prices forecasting.

Other financial entities will require a PPA or a bilateral contract that ensures the sale price of at least part of the energy with predetermined conditions and that mitigates or cancels the risk of market prices. But for the negotiation of a PPA, a vision of the electricity market in the future is also necessary to establish conditions that adequately and fairly equate the premium that each of the signing parties will assume: energy buyers and sellers.

Next AleaSoft webinar with the participation of Deloitte

In the next webinar organised at AleaSoft of the series “Energy markets in the recovery from the economic crisis” that will take place on October 29, there will be the participation of two invited speakers from the consulting firm Deloitte, Pablo Castillo Lekuona, Senior Manager of Global IFRS & Offerings Services and Carlos Milans del Bosch, Partner of Financial Advisory. In this second part of the webinar, the topics analysed in the first part will continue to be deepened, and on this occasion special attention will be focused on the needs of investment and financing of the renewable energy projects, the risks and the difficulty of the preparation of the financial information.

The role of the auctions in the renewable energy financing

To understand the future of the electricity markets, it is necessary to take into account the role that the renewable energy auctions are going to play in the financing of the projects and which impact they will have on the evolution of the markets and the prices. This is one of the topics that will be debated these days, between October 21 and 23, at the VII Solar Forum of the Spanish Photovoltaic Union (UNEF), where the CEO of AleaSoft, Antonio Delgado Rigal, participates in the table “Are auctions the appropriate response to uncertainties in the electricity market? ”, on Wednesday, October 21.

Source: AleaSoft Energy Forecasting.

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