AleaSoft Energy Forecasting, November 19, 2021. PPA are becoming increasingly popular in the European electricity sector thanks to the benefits they bring to signatories. They are a fundamental tool to mitigate the market prices risk for both generators and consumers. With their current boom, PPA will have to move a large part of the demand out of the daily market little by little.
On November 11, a webinar on the prospects for European energy markets in the global energy crisis was held. Specialists from Engie Spain and AleaSoft Energy Forecasting commented on the current status of PPA and their use as a risk management mechanism in the financing of renewable energy projects. Clients of Engie Spain and AleaSoft Energy Forecasting, as well as those interested in its forecasts, can request the recording of the webinar.
For both generators and consumers, the current scenario of high electricity market prices reaffirms the need to manage the risk involved in being exposed to the volatility of these prices. Electricity prices in the current year 2021 have so far been 200% higher than prices of 2020. Various factors contributed to this situation, including the recovery from the COVID‑19 pandemic, which is manifested with an increase in demand, the rise in CO2 emission rights prices by approximately 100% of their values of the previous year and high gas prices. This situation of uncertainty continues, as European gas reserves are at low levels, although in specific cases of countries such as Spain, France or Italy they are at normal levels. This generates an energy dependence that implies not only economic risks, but also transcends the political sphere. Market prices showed their volatility and, therefore, the risk of not having a diversification strategy for the purchase of energy that minimises the impact that this may represent.
From AleaSoft Energy Forecasting, on several occasions, it was said that PPA are a very good tool to mitigate these risks, also in the case of large consumers or electro‑intensive consumers, who are the most affected by this extreme situation. Although a PPA does not manage operational risk, it does allow market risk to be managed very well and it should be understood as an insurance to lock the price in a value that guarantees the profitability of the project at the mid‑ and long‑term and not as a mechanism to beat market prices. A PPA benefits both parties, offering a guarantee of cash flows for the generator and the security of a known price for the consumer.
The message that AleaSoft Energy Forecasting tries to convey in its webinars is precisely that a PPA is much more than getting a good price. Indeed, in words of Engie Spain experts, the time to market of a PPA can range from 6 to 8 months and the prices and terms negotiations are usually the fastest, with the guarantee agreement, exit clauses, action in the case of legislative changes, etc. occupying most of the time.
For the signing of PPA, the long‑term market prices forecasting is essential, in which AleaSoft Energy Forecasting has more than two decades of experience. A PPA protects the parties from market fluctuations and extreme behaviours such as those that are occurring during 2021, but it is necessary to have all the resources to be able to recognise and negotiate a price that adjusts in the desired way to the long‑term market prices curve. In Spain, the signing of these contracts is increasingly common and they are allowing to offer a contractual framework for the energy transition, since PPA bring with them guarantees of origin and other elements that may be of interest to the parties, beyond and even conditioning the agreed price. The future of the daily market is that, in addition to being marginalist, it should be marginal and that is the way that PPA will guide, transferring most of the demand to contracts in which the sustainability of the projects is ensured for both parties.
At the moment, in Spain, the scenario is favourable for the signing of PPA contracts. Currently, the possibility of contracting insurance policies on bank guarantees for electro‑intensive consumers is available, through the public insurance company Cesce, which would cover the entity issuing the guarantee against the risk of non‑payment by the payer. This coverage will allow accessing to guarantees for the signing of contracts between electro‑intensive consumers and renewable energy developers with the State’s guarantee as specified in the Statute of electro‑intensive consumers.
In the webinar of November 11 and the subsequent analysis table the current panorama of PPA and the financing of renewable energy projects were commented. Specialists from Engie Spain and AleaSoft Energy Forecasting presented their vision on the various energy supply strategies and how they should be used to assume the risk that they are willing to face in each specific case.
These topics, along with the evolution of the markets from 2022, will continue to be analysed in the next webinar, which will be held on January 13. On this occasion, there will be the presence of specialists from PwC Spain, in addition to the usual speakers from AleaSoft Energy Forecasting.