European Renewable Energy Marketplace PPA Landscape Across Europe

Uncertainty created by price cap mechanisms stalls some PPA contracting, particularly in Poland and Romania

As European nations seek to address high electricity prices, a resulting patchwork of regulations across the EU is creating uncertainty for project developers and threatening to delay PPA contracting. Thus, risk assessment for PPAs is a challenge in the short term.

The core proposal from the European Commission is a cap on electricity market prices, which could result in energy project owners owing the government market revenue that is above the cap. This would be particularly problematic for financial PPA settlements, as the same revenue could be owed back to the government - and to the offtaker.

The European Commission has recommended a price cap of €180/MWh for electricity generation that meets certain criteria. However, individual countries are passing on the cap in a variety of ways, and most countries have set this rule to expire in 2023.

One exception is the German market, where the government has extended the revenue cap mechanism until April 2024. Project developers will likely follow the evolution of this policy closely, as there is potential risk that the European Commission and its Member States will make this measure permanent across the EU.

The potential impact appears to be most concerning in Poland and Romania, where the governments have not universally exempted both physical and financial PPAs from the electricity revenue cap mechanism. The European Commission had recommended exempting PPAs from the revenue cap, and most other countries have followed this guidance. However, it will be critical to track whether both physical and financial PPAs have been exempted, country by country.

For buyers aiming to procure in the current market, they may see developers adjusting strategy and investment plans to align with these regulatory market changes, as investors are reluctant to make decisions in the current environment. It is critical for buyers to understand these risks in detail and use available commercial and legal mitigation options when contracting PPAs.

Following auction in Spain, PPA prices expected to be above €47/MWh

The Spanish government’s renewable energy auction in November did not meet expectations, with just 46 MW of new wind energy awarded from an available 3.3 GW, likely due to the government’s low price cap of €47/MWh. The major impact for corporate buyers is that most of the projects remaining on the market are expected to be priced above €47/MWh going forward.

One reason for the lackluster outcome of the auction was misalignment between the government and developers. While developers’ bid pricing considered the increased costs of new wind energy projects spurred by inflation, supply chain bottlenecks, and rising raw material and shipping costs, the government’s price ceiling held steady.

Post-election uncertainty could call into question future renewable energy auctions. While solar PV is the most competitive technology and will likely see minimal impact, onshore and offshore wind could potentially face significant barriers to development should auctions be dialed back or discontinued altogether.

This will also contribute to project prices remaining above the € 47/MWh mark, which aligns with current bids and market PPA prices in Spain for corporate buyers, as seen in Figure 10. While this represents a significant price increase - up by at least 30% from last year - projects in Spain continue to show positive expected financial settlements against current long-term energy price forecasts, representing an attractive opportunity for corporate buyers.

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