Is South East Europe catching up with the global rise of corporate renewable energy procurement

By Mariyana Yaneva, Managing Editor, Renewables Now

Ten years ago, investing in renewable energy was economical only when backed by some kind of subsidies, as in the case of Southeast Europe (SEE) they were either in the form of feed-in tariffs or green bonuses and long-term power purchase agreements (PPAs).

Today, things look different. In just a decade, the cost of wind power fell by 69% while that of photovoltaics (PV) plunged by 88%. Lazard’s latest Levelized Cost of Energy (“LCOE”) analysis (dated November 2018) shows that unsubsidized utility-scale wind and photovoltaic projects are already the cheapest source of electrical energy out there. In other words, subsidies provided the boost the industry needed to get the market going but now the rapid reduction in the price of renewables is shifting the economics of renewable uptake towards business models that do not rely on state subsidies.

There are two main challenges that unsubsidised wind and solar PV projects need to overcome. The first is volume risk – the inherent variability of wind and solar irradiance, and the other is price risk. Corporate PPAs, if properly structured, can be the answer to both of these challenges.

Last year saw corporate PPA take off

As social pressure on companies to respond to climate change concerns grows and the price of green energy has become more than affordable, many firms are ready and willing to switch to clean power sources rather than relying on electricity generated by fossil-fuel-fired power stations. As a result, the global corporate PPA market grew from a mere 200 MW of deals signed in 2008 to over 13.4 GW contracted in 2018, according to data from BloombergNEF’s (BNEF).

The U.S. is still by far the largest corporate PPA market accounting for 69% of the 8.6 GW deals that were signed globally from January to July 2019. Europe, the Middle East and Africa (EMEA) collectively form the second largest market for renewable corporate PPAs, with companies in these regions settling 950 MW of clean energy purchase agreements over the same period, according to BNEF’s recently published, 2H 2019 Corporate Energy Market Outlook.

In Europe, the Nordics historically lead the corporate PPA market due to a favourable regulatory backdrop, integrated regional wholesale power market, a concentration of creditworthy industrials, as well as a cool climate and abundant power supply that makes the area perfect for data centres. Since last year, however, the European corporate PPA market has started to diversify geographically with the first such contracts being signed in the south of the continent. Portugal, Spain and Italy lead the way and the unexpected first mover in Central Europe was Poland. So where does SEE stand in this trend?

How ready is SEE?

Major players in the industry share their views for the imminent market development.

The region is yet to announce its first corporate PPA deal but conditions seem to improve for such deals to appear in the very near future. This summer, Renewables Now surveyed leading project developers, finance and legal consultants, energy traders, as well as potential industrial buyers in the region for their take on the market development.

Not surprisingly, many of them have been looking with interest into the corporate renewable energy procurement market but most (68% of those surveyed, to be exact) believe that countries in SEE currently lack the political will, proper regulatory framework and the level of power market liberalisation and regional energy trade integration needed for such contracts to become common in the next three to five years. Single, flagship deals, however, may be announced sooner than expected.

Corporate PPS Adoption in the SEE

Bulgaria and Romania, closely followed by Croatia and Slovenia, are viewed as the countries in SEE where corporate PPAs are most likely to be signed in the next couple of years.

Over 90% of the survey respondents believe that solar PV will be the underlying technology for corporate PPAs in SEE for new projects.

Leading technology for the corporate PPA

For legacy projects that were built under previous incentive schemes, wind energy producers are the ones more likely to be on the look for corporate deals since their long-term power purchase contracts are generally shorter than those for PV. In Bulgaria, for example, wind power producers signed feed-in tariff contracts for 12 years, compared to 20 years for PV power plants and the majority of the wind farms were built between 2010 and 2012, meaning most of these assets will have to sell at market prices in three to five years.

All survey respondents unanimously point at the price stability (hedging against market fluctuations) as the driving force behind corporate renewable power deals in the region, although about 20% also think that climate change concerns and corporate sustainability goals will also play a role in energy procurement choices.

The right price for buyers seems to fall in the 40-60/MWh euro range for both wind and solar PV power.

Producers generally have slightly higher expectations in the 60-80/MWh euro range though a few solar project developers said a price under 40/MWh euro could also be possible in some cases.

Roadblocks on the way

In the context of rising electricity prices throughout the region, corporate PPAs provide a nice business opportunity for renewable energy producers and electricity consumers alike. So, what stands in the way?

Our survey respondents identified the various administrative and regulatory barriers across the different jurisdictions as the single most important roadblock standing in the way of corporate PPA proliferation in SEE.

For example, in Romania it is mandatory that all power from renewable sources is sold only via the Romanian Power Exchange (OPCOM). Neighbouring Bulgaria has the same rule.

In Bulgaria, for example, the requirement to sell renewable power on the exchange, although manageable, does create some needless constraints. But the main obstacle is really lack of a well-developed forward market – there is no hedge available for buyers beyond 1-2 years,” Ken Lefkowitz, managing partner, New Europe Corporate Advisory, commented.

That brings us to the second major challenge – lack of experience and capacity among the C&I buyers to negotiate such deals. With the global market still relatively immature, each PPA is different and there is little standartisation in contracts. This more or less limits the pool of eligible buyers to big, energy-hungry corporations with a very strong credit ratings and large energy procurement departments, capable of managing volume and price risks of power purchases. Smaller buyers generally need to aggregate their consumption in order to benefit from the same price levels as the big players.

Most of the C&I sector in Europe, SEE included, do not have in-house energy risk management capabilities or experience with renewable energy procurement. This makes it hard for them to enter the long term PPA market (10-15 years), due to lack of competence and also no underlying need for hedging. In the Nordic region, for example, the C&I sector generally hedges more short term (1-3 years). Companies like Axpo can close this gap in both competence and hedging need.” Domenico Franceschino, Head of Origination Eastern & Western Europe at Switzerland-based energy trading company Axpo, told Renewables Now.

Who gets to sign the first SEE deal?

If we are to make a forecast how the corporate PPA market in SEE will develop, we at Renewables Now bet on the pattern already observed in Spain and Italy where energy traders and utilities were the first to enter into renewable energy PPAs and then re-sell the contracted volumes to C&I clients.

There were some good omens in that direction.

Similarly to most of the European markets, wholesale electricity prices in SEE remain on an increasing trajectory. The latest quarterly report of the DG Energy notes the baseload contract in SEE for the first quarter of 2019 reached 67/MWh euro on average, up 35% compared to the same quarter a year earlier.

At the same time, the European Federation of Energy Traders (EFET) launched a standard corporate power purchase agreement (CPPA) in June this year. The contract allows for physical and financial PPAs with an election sheet approach allowing for tailoring of the agreement. It is supported by legal opinions in key jurisdictions, and is translated from English into other EU languages to encourage uptake across Europe, EFET said.

Also in June, the European Energy Exchange (EEX) announced it is expanding its financial futures products in SEE, starting with new power futures for Bulgaria, Serbia and Slovenia. Poland, Romania, the Czech Republic, Slovakia and Hungary are covered since 2017. Since then, EEX trading volumes for these markets have increased more than three-fold, the exchange said.

Fingers crossed, we are likely to see the first corporate renewable energy power purchase agreement in SEE as early as next year.