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PPA: Importance in the proposal for the electricity market reform and in the renewable energy financing

AleaSoft Energy Forecasting, March 28, 2023. In a webinar of AleaSoft Energy Forecasting, experts from EY highlighted the role of PPA in the decarbonisation of companies, in stabilising prices and for the development of green hydrogen projects. Although the PPA market is slowing down, it continues to be the preferred option for financial institutions. The 30‑year price curves forecasts are key for a vision of the future that covers the entire duration of the PPA and most of the lifetime of renewable energy projects.

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Last March 16, 2023, the 31st edition of the series of monthly webinars organised by AleaSoft Energy Forecasting and AleaGreen took place with the participation of EY. The guest speakers from EY were Alfredo Salcedo Rivas, Strategy and Transactions Partner, Antonio Hernández García, Partner of Regulated Sectors, Javier García Seijas, Partner of Infrastructure, Modelling & Project Finance, and Marta Sánchez Álvarez, Spain Energy Consulting Leader. In addition to the usual update on the evolution of the energy markets in Europe, during the webinar all regulatory novelties of the Spanish energy sector and the prospects for the reform of the electricity market of the European Union, the renewable energy projects financing, the importance of PPA and self‑consumption, and the portfolio valuation were addressed. On the AleaSoft’s website it is possible to request the recording of the event.

PPA in the proposal for market improvements proposed by the European Commission

The proposal for improvements in the electricity market made by the European Commission includes the promotion of long‑term agreements as a mechanism to reduce the volatility of prices for final consumers and encourage investment in renewable energy. The experts from EY highlighted the importance of the proposed contracts for difference (CfD) co‑existing with private PPA.

The importance lies in the fact that PPA are fulfilling a very relevant function for companies in their decarbonisation and price stabilisation processes in the medium and long term. In particular, the Spanish market has a leading position in the ranking of corporate PPA worldwide, according to an EY’s report.

It is also worth noting the increasingly important role that PPA are going to play in the development of green hydrogen projects, both to ensure competitive prices for the renewable gas production, and to make the most of renewable energy and avoid the feared curtailments.

Financing of renewable energy projects with PPA

Although more and more banks accept the market price risk of 100% merchant projects, projects with PPA enjoy better financing conditions, and it continues to be the preferred option for almost all financial institutions.

The conditions that entities offer for projects with PPA include a leverage that is usually between 75% and 85% up to 22 years, compared to a maximum leverage of 70% at a maximum of 24 years for merchant projects. The financing cost is also more advantageous for projects with PPA, which is between Euribor + 1.75% and Euribor + 2.50%, than for merchant projects, which amounts to a range between Euribor + 2.25% and Euribor + 3.25%.

According to the experts from EY, currently the PPA market has slowed down and it is not very active. The reason is the drop in electricity markets prices as a result of the drop in gas prices. With declining market prices, buyers hope to close PPA at better prices in the future. There, the importance of having 30‑year price curves forecasts was highlighted, to cover the entire lifetime of renewable energy projects, and with hourly detail for the estimation of captured prices of each particular project. At AleaGreen, long‑term hourly price forecasts are provided, of which a promotion is being carried out during this month. More information can be obtained on the AleaGreen’s website.

Financing alternatives

Beyond the usual financial entities, the range of financing options for renewable energy projects is increasingly wide. The new sources of financing, unlike the traditional Project Finance with a commercial bank, no longer require a PPA and more naturally accept the market price risk of full merchant projects.

AleaSoft Energy Forecasting’s analysis on the prospects for energy markets in Europe and the valuation of renewable energy assets

The next webinar of the series will focus on energy storage and its key role in the energy transition and will take place on April 20, 2023. In addition to the usual review of energy markets, there will be the participation of Raúl García Posada, Director of ASEALEN (Spanish Association of Energy Storage), and Jorge Barcelona de Pedro, Head of Sustainable Solutions at Rolls Royce Solutions Ibérica, who will provide a vision of the future on energy storage.

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