Rising gas, electricity prices create new opportunities for short-term PPAs in Europe

Rising gas and electricity prices might open up new opportunities for short-term power purchase agreements (PPAs) in the Italian and European renewable energy markets.

“More flexible, shorter-term deals may be closed more favorably by independent power producers amid the current power price volatility,” Stefano Cavriani, the founder and director of EGO Energy, an Italian company that specializes in PPA hedging, told pv magazine.

With current day-ahead prices, a 10-year PPA for a solar project in Italy could be closed for a price ranging from €45/MWh to €50/MWh, and contracts with a length of a maximum of three years may be the easiest solution to achieve, said Cavriani.

“A year ago, after the first effects of the Covid-19 crisis, we reached an all-time low for spot electricity prices ranging between €20/MWh and €30/MWh. And now we have reached an all-time high, with prices standing firmly above €100/MWh,” he explained. “And this is the average price for the entire day over several weeks, which means these prices are stabilizing at a value that is unpredictably high.”

He said that the ongoing rally, which was triggered not only by renewed energy demand, but also by rising gas prices, started at the beginning of 2021, when spot prices were around €55/MWh.

“At the time this price rise was considered by many analysts as a sort of bubble, as we were still under a series of lockdowns,” Cavriani said. “In February, however, it became clear that some pressure had started on gas supply across Europe.”

Asian countries such as China, Japan, and South Korea began buying more gas via maritime transport. European countries ended up seeing gas prices increase.

“During the first Covid-19 crisis in 2020, gas prices had also reached an all-time low of €5/MWh and now they have reached an all-time high of up to €30/MWh,” said Cavriani.

Last year was particularly cold in Europe and gas for heating was needed in many countries until the end of May. On top of this, CO2 prices, which are now around €60/ton, have also been on the rise over the past few months.

Cavriani said that electricity prices should not increase more, but they may stabilize at current levels, or slightly below the €100/MWh threshold.

“Every news concerning gas and electricity supply, at the moment, triggers upwards price pressure,” he said. “For example, all the tensions around the gas pipeline Nord Stream 2 connecting Russia with Europe have also played a role in the price scenario. When it will be finalized, gas supply should improve across Europe. However, uncertainty on gas prices will remain.”

The scenario with stabilized high prices should not change at least until the end of winter 2022, according to Cavriani. And solar developers could take advantage of this time window to secure new deals.

“In the next winter, gas supply may also face some shortages, as gas storage in European countries is at lower levels than usual,” he said. “Gas prices for the end of the year and the beginning of 2022 are expected to be extremely high at around €48/MWh, which added to the current CO2 prices means an electricity price largely above €100/MWh.”

EGO Energy estimates the average spot market price for Italy in 2022 at more than €90/MWh.

“With this average price, any kind of unsubsidized PV project may be competitive in the energy market in the short-term,” Cavriani added. “Even a two-year PPA would ensure a very high level of profitability.”

In a post-pandemic scenario, gas prices could drop again, although not to pre-Covid-19 levels.

“Decarbonization targets will raise CO2 prices and this will change completely the way we see at the electricity market,” Cavriani explained. “The electrification of the European economies will raise demand for electricity and prices may not drop too much from current levels.”

EGO Energy estimates that rising PV module prices across Western Europe have determined an increase in prices for PPAs of between €3/MWh and €5/MWh, which means average PPA offer prices in Italy could currently stand around €50/MWh – a figure that is still much lower than current spot prices.

“Big energy consumers may now find a short-term PPA extremely attractive,” Cavriani stated. “A good deal with an independent power producer would not only be about making your power supply more sustainable, but it would be a highly favorable business case. This is not the right time for a wait-and-see strategy.”

What might be missing, according to the analysts, are shovel-ready projects that have secured all required approvals, at least in the Italian market, where large-scale PV projects face growing opposition from local communities and administrations.