Record PPA boom highlighted at Pexapark investment forum

Power purchase agreement (PPA) volume records have been set during the first quarter of 2023 in a surprise return to form for the market, experts have highlighted at Pexapark's recent Renewables Investment Forum.

During the first quarter of the year, 5.5GW of capacity was awarded in PPAs across 68 deals – representing a surprising rally given the turbulence seen on energy markets in 2022 and representing 60% of the deal flow seen during the whole of last year.

A PPA record was also broken in February [2023], with 2.26GW being awarded in European PPAs across 29 deals.

The transformation in fortunes is quite considerable given the slow-down in the European PPA market witnessed in 2022, which saw inspiratia's recently released European PPA outlook place the continent third in terms of PPA's signed, behind North America and the Asia Pacific, with 9GW of deals inked.

The PPA boom is largely being powered by corporates, a trend that has been visible for some time.

Overall, the 2023 PPA boom comes as a direct result of a more hospitable trading atmosphere, spurred on by falling gas prices and declining futures, as well as a series of regulatory interventions aimed at making project development easier in Europe.

For example, both the German and Italian governments – which represent two of the busiest PPA markets – have recently passed legislation to speed up permitting for renewables schemes in an attempt to alleviate a backlog that is slowing down project development across the continent.

It was also highlighted during the event that a future investor, operating in a fast moving market, will need to become more adept at canny portfolio management, developing a portfolio that is diverse and backed by flexible financing.

Storage

The stark requirements expected from the storage sector were also laid bare during the event, which saw considerable discussion of a perennial question – can storage keep pace with renewables development?

The Italian and German markets were again highlighted as having a particularly strong storage sector and the virtues or collocated projects were spelled out, particularly the complex operational usage profiles that such projects create, all whilst reducing risk.

Despite advances in the market though, revenue streams remain complicated and some storage technology is still not mature enough and there remains uncertainty over long term performance.

However, storage does offer investors an inevitable market opportunity, with considerable first-mover advantage.

Organisational challenges

In order to take advantage of booming markets, discussions were also held on how renewables developers and investors can best structure their companies to take advantage of this.

It was stressed by panellists from across the sector that the renewables market is still young, meaning it can often be difficult to find the right people for the right jobs within the market.

The discussion also focused on the difficulties and challenges involved in moving from being a developer to becoming an independent power producer.

"There are a lot of investors that have difficulty in understanding the complexity of energy markets, especially with various risk matrixes that have to be in place," Soren Petersen, head of energy markets at Low Carbon commented.

"If we talk to investors about basis risk, volume risk, cannibalisation and issues like that, it is often hard to grasp and needs a bit of teaching to get them on the right learning curve."

Glenmont Partners has moved from investing in ready to build projects to developing schemes from scratch and the company's non-executive director Francesco Cacciabue also highlighted the need to have the right people, as well as the right hardware and software on board to manage this journey.

"At Glennmont we have a very policy orientated approach, so we need a team that can put in place all these procedures. To make decisions – such as if to sign a short-term PPA for example – you need to have a risk framework in place too that allows you to make these kind of choices," Cacciabue added.

Roberto Pizzini, head of origination at Galileo Green Energy, also highlighted the growing trend of developers holding on to the projects they develop, in order to become independent power purchasers (IPPs).

"Every developer is different and it depends on capital structure and other factors, but for Galileo although we don't yet have assets under operation, it is our plan to do so, as our investors are keen to see us become an IPP," Pizzini commented.

"We see value that can be extracted from projects in operation, especially in a market where assets are more and more exposed to merchant opportunities. Of course it is more risky, but if you develop the capabilities to manage that then there is value to be found and potentially higher returns than just selling a project when it is as the ready to build stage."

It was also highlighted that for some technologies, such as battery storage, while operating an asset is not the only way to build a business case for such projects – it does offer a very strong one that should be seen as an enticing option for developers and their backers.