Contract prices for renewable power are up 30%. What’s going on?

The cornerstone of renewable energy’s growth over the past decade has been the consistent and long-term decline of wind and solar prices. But now these prices are trending significantly upward. 

Russia’s invasion of Ukraine exacerbated global energy market volatility and adds to the existing supply-chain, regulatory and interconnection challenges that have already caused increases in prices for renewable power-purchase agreements (PPAs).

According to the latest quarterly PPA Price Index report by LevelTen Energy, the operator of the world’s largest PPA marketplace, prices have spiked by nearly 30 percent over the past year in both Europe and North America. In Europe, PPA prices for wind and solar projects are now $62 per megawatt-hour, an uptick of 8.6 percent in the first quarter of 2022 alone. In North America, PPA prices average nearly $40 per MWh, an increase of almost 10 percent this quarter.

An already-challenging environment made worse

In Europe, the Ukraine conflict has underscored the urgency of moving away from imported Russian fossil gas, which accounted for nearly 40 percent of the gas consumed in the European Union in 2021. In response, many European leaders have called for accelerating the transition to renewable energy and pledged to ramp up their energy transition efforts. The North American response has been more nuanced and contradictory, including the call for a quicker transition to clean energy but also vocal calls from the fossil fuel industry in support of increased oil and gas development.

On both continents, though, it’s clear the war in Ukraine is exacerbating an already-challenging environment that has been driving PPA prices higher since the beginning of the Covid-19 pandemic. For example, a report released by the Solar Energy Industries Association in March blamed supply-chain and logistics problems for one-third of the solar capacity that had been scheduled to come online at the end of 2021 being pushed into 2022.

Crowded interconnection queues are also delaying projects and pushing PPA prices higher. PJM Interconnection, which operates the wholesale electricity market in 13 states and the District of Columbia, recently proposed a two-year halt on reviewing new projects as it works through a backlog of nearly 290,000 megawatts’ worth of solar, wind and storage applications. 

Similar interconnection woes are vexing European developers, along with a host of regulatory hurdles that add risk and expense to projects. In Italy, which has the continent’s second-largest volume of PPA contracts, the federal government changed its permitting regulations in an effort to hasten project development.

Reasons for optimism

One clear reason prices are high is simply because demand for PPAs remains so strong and will likely only increase. The natural instinct of buyers to wait for prices to go down could jeopardize corporate decarbonization targets. It could also be a financial misstep, as PPA prices are benchmarked to rising fossil gas prices. 

Recent LevelTen surveys of developers and consultants who advise PPA buyers revealed a real commitment to solving near-term challenges and finding ways to speed up renewable energy projects. For example:

• 40 percent of developers found new suppliers able to deliver components more reliably. 
• 32 percent of developers said they are doubling down on investments in regions where they have historically worked in light of the conflict in Ukraine, while 29 percent said they were increasing investments in countries aiming to accelerate renewable development in response to the war.
• 55 percent of consultants said the war in Ukraine had not changed buyers’ procurement timelines, and another 20 percent said the invasion had accelerated them.

Embracing flexibility and speed

Changes to the structure, terms and risk-sharing of PPAs can keep projects moving forward. Here are three ways that is already happening.

1. Sharing the upside of higher prices

A PPA pricing structure that allows both buyers and sellers to benefit from higher wholesale energy prices is gaining traction in Europe. ​“We are utilizing different contract and pricing structures in PPAs that have more mutual upside benefits,” said Flemming Sørensen, vice president of Europe at LevelTen Energy. ​“In an upside-sharing structure, the buyer and seller share revenues that are above the fixed-price PPA. That incentivizes the developer to offer corporations a lower PPA price in the beginning by agreeing to share some of the upside.”

Market-following contracts are also gaining popularity. These structures allow the offtaker to pay the wholesale electricity price during the term of the PPA, but with a floor price that is typically much lower than a fixed-price PPA. This lets developers capture more value from selling the power at a price higher than the fixed-price PPA would have offered. At the same time, offtakers are able to avoid locking in a fixed price for the commodity for a long period of time, which some corporates are reluctant to do.

2. More flexibility

Traditional PPAs include financial penalties that are imposed on developers that don’t meet target dates for beginning a project’s commercial operation. As supply-chain and interconnection challenges linger, PPAs are increasingly allowing more flexibility around when a project must begin producing electricity.

“Instead of hard-coded dates, we are seeing term sheets that provide a window of time when a project has to produce electricity,” said Gia Clark, senior director of developer services at LevelTen. ​“Those can change based on milestones hit, as well as supply-chain and interconnection timelines. That’s a pretty easy way for buyers and sellers to share risk that developers used to bear alone.”

3. Move faster

Corporate buyers were once able to sit on PPA offers for months before agreeing to terms and pricing. Today, waiting can mean having to renegotiate and pay a higher price. ​“Corporations work internally to build a procurement strategy and get executive committees to approve it, and then work with consultants to build a roadmap for finding solutions,” Sørensen said.

“But when those PPA solutions aren’t available or don’t match what they are looking for, they have to go back and talk to the committee in a 15-minute slot during a quarterly review. If they miss it, they may have to wait another quarter to make a decision.” Sørensen believes that ultimately PPA contracts will need to be standardized so that a procurement manager can sign them instead of waiting for CEO, CFO and board approval.

Accelerating the transition to renewable energy is more important than ever. With market volatility only increasing, adopting new thinking and strategies is the only way to move ahead in the face of higher PPA prices.

For more insights on PPA pricing and how developers in the U.S. and Europe are assessing supply-chain issues, the war in Ukraine and interconnection challenges, check out the Q1 2022 PPA Price Index report by LevelTen Energy.