Covid-19 halting European PPA market – Part IV

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The Covid-19 pandemic might end up having a limited impact on the European market for power purchase agreements, according to Jason Tundermann, vice president of business development at US-based trading adviser LevelTen Energy.

“When it comes to corporate renewable procurement, fortunately, temporary economic shocks are likely to be less important than long-term energy price trends,” Tundermann told pv magazine. “On the LevelTen Marketplace, we run 20,000 independent Monte Carlo simulation trials on more than 750 PPA offers every day, so our clients have a complete picture of how a PPA could perform over the life of the contract.”

Tundermann said the price drops of the past month are within the range of values that LevelTen Energy’s risk analysis approach would produce. Although energy demand and prices have fallen dramatically, the impact on renewable energy projects is not yet dire, as the vast majority of developers have long-term contracts in place to guarantee a price for the energy they produce.

Only merchant projects that sell power to the spot market may be seriously hit by the crisis, he claimed. “Corporate buyers that previously signed virtual PPAs, and therefore bear market price risk, will also be experiencing increased virtual power purchase agreement settlement costs,” he said. “At the same time, however, it’s important to note that these same corporate buyers would presumably also now experience lower energy bills – which specifically illustrates the potential hedge value of a virtual PPA, if structured properly.”

He has not detected a dramatic decline in the present net value of long-term PPA offers, which should provide comfort to the many corporate buyers who have decided to proceed with their procurement strategies. “Corporations with renewable energy goals still see climate change as a looming threat and remain committed to reaching their sustainability goals,” Tundermann stressed.

So far, corporations have indicated that they are still interested in procuring renewable energy through new PPAs to meet their greenhouse gas emission targets. “RFP activity is continuing; in fact, LevelTen just launched its first European RFP for a large energy buyer,” Tundermann said.

Supply chain delays

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The most immediate near-term Covid-19 impacts have come from supply chain delays and uncertainty about financing. Projects that are in the middle of the construction process could experience equipment delivery days and labor constraints, which could push back their expected commercial operation dates, Tundermann said. This means they could miss key delivery milestones in their offtake agreements.

“Even though the industry is facing significant energy price reductions and project supply chain disruption, we’re heartened to see the business community maintain renewable procurement momentum,” he said. “Only a few planned transactions on the LevelTen platform are on pause during the COVID-19 crisis, and no buyer has asked to cancel.”

The good thing about PPAs, Tundermann explained, is that they are long-term contracts for projects that aren’t expected to reach commercial operation for one to three years out, so short-term volatility does not have a major impact on the value of deals.

“Although Covid-19 is having a material effect on energy prices – and causing lower settlement values in the short-term – we believe it’s important that corporations and developers maintain a long-term perspective on what drives project valuation,” he said. “This means keeping their eye focused on the intersection of demand growth and the cost of supply, and not on short-term disasters or their economic effects.”

Climate change is still critical to long-term corporate sustainability, Tundermann added.

“If a corporation signs a PPA now, the project won’t start construction until next year, when (hopefully) everyone is back to work,” he concluded. “That work will not only be critical for getting our economy back on track, it is critical for reducing emissions in the long run.”

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