European energy crisis increases renewable PPA costs by 8 per cent in Q3

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A complex set of market forces is contributing to skyrocketing electricity prices in Europe as global natural gas markets tighten, carbon prices rise, and demand spikes as pandemic lockdowns lift, according to the latest figures in LevelTen Energy’s PPA Price Index series.

As a result, the Overall P25 Index for European PPA price offers on the LevelTen Energy Marketplace rose 8 per cent between Q2 and Q3. Year-over-year, the Overall Index increased by 7.4 per cent.

The Index series analyses over 4,000 wind and solar pricing offers listed on the LevelTen Marketplace across 21 countries in Europe and North America.

PPA prices in the UK and Germany have been particularly hard hit by the European energy crisis. Rising wholesale electricity prices, combined with increasing capex costs and supply chain constraints for renewable developers, are pushing up wind and solar PPA prices in both countries. In the UK, solar P25 prices increased by 5.2 per cent during Q3, while wind P25 prices shot up 16.1 per cent. In Germany, solar prices went up by 8.9 per cent, and wind prices rose 13.4 per cent during Q3.

In Spain, several consecutive quarters of PPA price decreases may have finally come to a halt. Spanish solar prices – the lowest in Europe – flattened out in Q3, and wind prices rose 2.9 per cent after dropping 17.3 per cent between Q2 2020 and Q2 2021.

“As part of an effort to keep wholesale prices down, the Spanish government has introduced a new Royal Decree that caps the profits renewable generators can make – a move that has sent shockwaves through Spain’s PPA market and has already slowed project buildout for some developers while project economics are re-evaluated,” said Frederico Carita, manager of developer services in Europe for LevelTen Energy. “Europe’s ongoing energy crisis seems poised to stunt the remarkable growth of the Spanish renewable sector.”

In Italy, solar PPA P25 offer prices remained flat during Q3, but the country’s onerous permitting processes are causing its robust solar sector’s project pipeline to shrink. Italy’s share of total European offers on the LevelTen Energy Marketplace fell by a factor of three between Q1 and Q3 of 2021.

“In May of this year, the Italian government approved a ‘Simplification Decree’ designed to streamline the permitting process, but it will take time for these new processes, if successful, to accelerate the development of renewable projects in the country,” said Luis López-Polin, senior manager of business development in Europe for LevelTen Energy. “Continued government support in making renewable development easier will be critical as Italy strives to add as much as 70 GW of renewable capacity by 2030.”

Danish solar prices have increased substantially year-over-year, partly due to price adjustments to electricity flowing in from Germany’s high-priced wholesale market. Year-over-year, P25 wind prices in the UK have increased by 20.1 per cent as natural gas shortages, pandemic-related maintenance issues on thermal generators, and unusually low wind capacity in the North Sea drives a short supply of available generation.

The crisis is almost certainly temporary, but more renewables can prevent it from happening again. To avoid this crisis in the future, Europe must build more renewable energy capacity that will reduce its reliance on natural gas. Doing so means Europe must prioritise upgrades to the electrical grid to accommodate not only more renewable resources, but also the resources that will allow renewable generation to serve as baseload power, like storage.

Enacting policy measures to speed interconnection queues and permitting for renewables will also be crucial. The EU’s commitment to decarbonisation through its ‘Fit for 55’ initiative will fuel more demand for renewable energy. Until market conditions stabilise, we may see renewable PPA prices continue to increase in Europe.

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