Asset Management, Wind Power

Wind sector needs to take initiative on off-taker risks to drive European PPA surge

Robust view of long-term financial risk and structural innovation by wind power producers will be essential for adoption of PPAs by buyers in central Europe

In order for wind energy power purchase agreements (PPAs) to see sustained uptake in central Europe, sellers need to take a lead in managing long-term risks including power price forecasting, covenant strength and buyer inexperience. 

With just 140 MW of wind PPAs signed in 2018 across central Europe, but significant growth predicted, providing long-term price confidence for off-takers will be vital for driving a surge in future renewables development outside of current hotspots such as Scandinavia. 

These are findings from Augusta & Co. (Augusta) a specialist financial adviser to the renewable energy industry, discussed in London this morning at the European PPA Trends report launch hosted by wind industry intelligence service, A Word About Wind. 

At the event, industry decision makers, including speakers from Everoze, Blackrock, Augusta & Co. and Bird & Bird, highlighted the importance of providing simple, attractive deals to off-takers as a way to secure interest from prospective buyers, and discussed the challenges inherent in ensuring continued PPA growth.

Alongside the latest European PPA, installation and investment figures, three core challenges are outlined by Augusta and A Word About Wind in the European PPA Trends report:

Accurate power price forecasting

Any long-term PPA deal relies upon power price forecasting. While wind resource estimates are now very accurate, when it comes to power pricing, the market needs to do more than just ‘buy the curve’ from technical consultants in order to safeguard returns and guarantee successful deals. Further market sophistication is required in modelling of long-term power pricing, but, in the short-term, the onus is on sellers to manage this risk.

Mortimer Menzel, Partner at Augusta, said, “Forecasting returns now boils down mainly to power prices, rather than wind resource or turbine technology, and you need to develop a sophisticated risk analysis around those to not get into trouble.” 

Assessing the ‘covenant strength’ of smaller buyers

A challenge for PPA-driven growth is finding new buyers beyond the large data center owners that have spurred on previous deals in the Nordics. This means that, as well as considering a wider range of off-takers – including investors – power producers need to have an acute awareness of their buyers’ commercial strength and longevity.

Covenant strength is rarely discussed in the renewables space, but as energy buyers change, this is likely to become a growing focus. When offering deals, we expect power producers to start considering counterparty insurance products and other innovative ways to facilitate deals with smaller, more inexperienced companies.

Tackling buyer inexperience

Demand for PPAs is expected to rise as companies across the board look at the range of clean energy options available. Menzel noted, “The perception is there will be market off-take mechanisms, including PPAs and other hedging products, available for wind, as there should be.” 

However, many potential buyers in Europe still lack the experience in energy procurement to match their green ambitions and negotiate a deal to meet their needs – again putting the onus on sellers to develop bespoke structures. Menzel added, “Many corporates, although they may strongly desire a fixed-price power contract, even a long-term one, do not have the expertise to find, structure and execute one.”

Nonetheless, as power producers rise to meet these challenges, PPAs are expected to drive significant growth in the central European renewables industry.

Europe is on the cusp of a PPA revolution – it won’t be an easy journey, and there will likely be stumbling blocks, but replicating the Scandinavian model is the first step to driving new installations across the continent. The emphasis is still very much on sellers to “make the first move,” but we will increasingly see buyers increase in sophistication too, which will make a significant difference in the long-term. 

The European PPA Trends report launch took place on Thursday, 21 March. In order to view a copy of the report and find out more about A Word About Wind, please click here.


Richard Heap is Editor-in-Chief of A Word About Wind, a membership organization that provides intelligence, insight and connections to senior industry decision-makers.