LevelTen Energy, operator of the world’s largest power purchase agreement (PPA) marketplace, has published its Q1 PPA Price Index report, which reveals that solar PPA prices in Europe have dropped for the first time in two years.
According to the report, LevelTen’s 25th Percentile (P25) index of solar prices dropped slightly quarter over quarter, decreasing 4.7 per cent to €73.20 per megawatt hour (MWh). The drop is a noticeable change from the skyrocketing prices the solar industry has been experiencing for the past two years; Q1 2023 solar prices sit at 47 per cent higher than Q1 2022, and 76 per cent higher than Q1 2021.
On a regional basis, all markets except Spain experienced solar price drops. “There are several reasons for this drop. A primary driver is the fact that supply chain difficulties brought by the pandemic are abating as manufacturers ramp up production and logistical challenges resolve. Also, the gradual decline in inflation, although compensated by higher interest rates, is providing developers with improved visibility into their capex costs, which means fewer uncertainties to factor into PPA prices,” said Placido Ostos, senior energy analyst, Europe, LevelTen Energy. “In addition, the drop in natural gas and wholesale electricity prices is adding pressure to developers to decrease their PPA prices in order to remain a competitive option for buyers.”
In Spain, Europe’s most active solar PPA market, prices continue to climb – rising 9.8 per cent during Q1 and 32.2 per cent on a year-over-year basis. “Competition for PPAs in Spain remains extremely high, applying upward pressure to prices, even as macroeconomic pressures begin to subside,” said Ostos. That said, more supply is coming soon. In February, the Ministry of Ecological Transition in Spain approved 132 solar PV projects across the country, with a total capacity of 24.8 gigawatts (GW). “Although surely not all those GWs will make it to the finish line, what is sure is that more solar supply entering the market will likely put downward pressure on PPA prices in Q2,” said Ostos.
Wind prices, on the other hand, have continued to rise, as project developers face permitting barriers and rising costs that have pushed up prices by 35 per cent over the last six months. LevelTen’s overall index of wind and solar power purchase agreements across European markets rose 56 per cent year over year, sitting at €88.88 per MWh.
In Q4 2022, LevelTen was unable to produce a wind index because there were not enough wind offers available to anonymise the data; a clear sign of the challenges wind developers faced last quarter in bringing new projects to the market, and the paralysis brought by the regulatory turmoil in the last quarter of 2022. However, there was a resurgence of wind offers on the LevelTen Energy Marketplace in Q1, including offers from projects in France, the UK and Romania. These markets have higher wind prices than Sweden and Spain, which were also included in the wind index this quarter. In the six months between Q3 2022 and Q1 2023, P25 wind PPA price offers in Europe rose by 35 per cent to €106.06 – though this number is impacted by the re-emergence of the higher priced markets on their index.
“Land scarcity, permitting challenges, and local community opposition continue to challenge the development of onshore wind facilities across Europe,” said Ostos. “Recent data has revealed a substantial drop in wind investments, with 2022 investments marking the continent’s lowest since 2009 – an alarming figure. Trade groups have largely pointed to market interventions and other barriers as deterrents to investor confidence in the sector. With that said, we witnessed a resurgence in wind offers on the LevelTen Energy Marketplace during Q1 2023 compared to the previous quarter, an encouraging sign.”
The European Commission’s final energy market reform proposal, which was published 14 March, makes it clear that the Commission encourages corporate PPAs as a way for project developers to secure long-term contracts and reduce power price volatility. The proposal supports existing national auctions, which now must take the form of a two-way contract for difference (CfD), while also pressing member states to design them in a way that still leaves room for corporate PPAs.
In public supported tenders, the Commission is pressing Member States to give preference to projects that have already committed to a PPA for a portion of their project’s output with “one or several potential buyers that face difficulties in accessing the PPA market, such as small and medium-sized enterprises (‘SMEs’).” One of the purposes of the reform is to broaden the PPA market, and SMEs have faced challenges competing with larger, investment-grade companies for PPA opportunities. “If tenders follow the Commission’s guidelines, then project developers will be incentivised to enter into a PPA with small and medium enterprises so that they can become more competitive in public tenders,” said Ostos. “This will open up the market to many companies who have historically struggled to participate in PPAs because they were not credit worthy, or did not need a lot of energy.”