European solar comes of PPAge


Last month, a single contract signed into existence 708 MW of photovoltaic arrays to be built across the Iberian Peninsula. The mammoth deal between offtaker Audax Renovables and developer WElink will roll out as much solar capacity as was installed in Spain and Portugal from 2013 to 2017 combined.

It is no isolated event. Artur Lenkowski, Senior Associate at IHS Markit, says that solar PPA activity in Europe grew from 360 MW in 2017 to more than 2.4 GW in 2018. These projects bring together a colorful range of investors and operate across diverse jurisdictions, but one point many have in common is that they are being built without government subsidies.

“We are competing head-on with market rates,” says Peter Alex, head of investor relations at Energiekontor, which has just signed a 15 year PPA with electricity supplier EnBW for an 85 MW solar farm near Rostock, Germany. “The project came as a big surprise to the market and politicians, but we can already sell solar electricity in Germany that is competitive with fossil fuels and nuclear.”

“We see a lot of projects across Europe, especially in the south,” says Anne Joeken, head of communications at Statkraft, a leading supplier of renewable energy in Europe. Her employer notably closed a 175 MW PPA in early 2018 to buy electricity from the Don Rodrigo solar power plant near Seville in Spain. “There are various sources for funding new PV capacity with PPAs becoming a more relevant one as grid parity evolves,” she says.

The news offers timely respite to Europe’s battered solar sector as governments across the region phase out financial incentives for renewable energy. “In the past, there was a lot of solar implementation in Europe, but it was usually supported by subsidies,” says Georg Hoefler, Investment Director in the renewable energy team of Allianz Capital Partners. “The difference now is that offtakers are private and there is no government support.”

Low risk takeoff

Hoefler explains that new European photovoltaic parks have attracted investment on the back of falling costs for solar technology, relatively high electricity rates, and – usually – excellent irradiation. But the final ingredient that has brought these projects into existence has been the security of a long-term buyer for their electricity. “The reason we sign PPAs is that banks won’t finance the solar park if its developer doesn’t know who will buy the electricity,” says Jaime Jaquotot Núñez, Head of Strategy at Audax Renovables.

“We chose to sign our PPA with EnBW because they have a very good credit rating,” says Energiekontor’s Alex. “This helps a lot when you can go to a bank and show a solid company balance sheet.”

When, in late 2018, Allianz Capital Partners acquired Portugal-based solar projects Ourika and Solara 4, their PPA with Audax Renovables was bundled into the purchase. MEAG, the asset manager for Munich Re and ERGO, purchased the 175 MW Don Rodrigo PV plant in December 2018 also with the Statkraft PPA included.

“As long as the probability of default of the offtaker is low and PPA terms and conditions are reasonable, funding should not be an issue at all,” says Robert Pottmann from MEAG, adding that other PV projects in the EU are likely to be funded through PPAs in the future. “We have valid indications from banks that they would be highly interested in providing non-recourse finance to the [Don Rodrigo] project.”

Green demand

Jaquotot Núñez points out that the cost of generating electricity from renewables dropped below wholesale electricity rates on Southern European electricity exchanges over a year ago. He says that in principle it should no longer be necessary to sign a PPA but guarantees of price stability entice investors, lowering interest rates.

“The pool price of electricity offers only a snapshot of the electricity price as of today,” says Hoefler. “Investors need long-term visibility with regard to their revenue line and I think the emergence of long-term PPAs is a very important factor in that.”

In this respect, PPAs will prove crucial, explains Lenkowski. “They will provide the long-term revenue certainty needed for future projects to be bankable and obtain financing as government support for renewables is phased out.” He adds that IHS Markit believes solar costs have dropped to a level where the majority of future additions will not require government support.

Audax has agreed to buy the electricity produced by Solara 4 and Ourika for 20 years. Over this period the energy supplier will sell the power without subsidies to some 300,000 clients spread across Europe.

“Many of our customers are small and medium-sized enterprises that consume a lot of power during the day and little at night,” says Jaquotot Núñez. “Thanks to the PPA, we can offer them a fixed electricity rate with no uncertainty in their bills and with all the environmental benefits of 100% renewable electricity.”

Alex points out that the arrangement also results in more photovoltaics coming online. “Today only solar parks smaller than 10 MW and that fit a range of conditions can benefit from German subsidies,” he says. “With this breakthrough, we can build a solar park anywhere where we find suitable sites.”

Market hurdles

When asked why the European solar industry did not organize itself this way sooner, Jaquotot Núñez points out that government incentives like feed-in-tariffs, net metering schemes, and auctions were necessary to roll out renewable energy technologies on electricity markets until their cost dropped below that of incumbent energy sources. Since this transition, the second challenge has been to remove the subsidies.

“Until the feed-in-tariff disappeared, the PPA made no sense,” he says, as Spanish utilities were legally obliged to buy renewable energy at a centrally determined cost.

“We are not keen on informing politicians that we can realize solar projects without the help of the EEG [German Renewable Energy Act],” says Alex. “We still profit from it in other projects and don’t want it canceled any time soon.”

However, from the perspective of consumers and the energy transition, the trend towards corporate PPAs will make it possible to install more solar at less expense to society. “Every time a PPA is signed, electricity consumers should celebrate,” says Jaquotot Núñez. He adds that the best thing governments can do to encourage the emergence of solar PPAs is to stay away from them.

“Every time a government says that it will hold an auction or feed in a new incentive for renewable energy, international investors paralyze capital flows until they know what will happen,” says Jaquotot Núñez. “That slows down the roll-out of PV and forces unnecessary costs onto consumers. Today, the largest and fastest moving solar projects in Europe are unsubsidized. They produce the same environmental benefits for the grid but cost nothing to their users.”

One area in which Jaquotot Núñez still welcomes the intervention of policy is in removing market barriers. He says that the European Commission has taken commendable steps in revising the regulatory framework for the European energy sector, setting a 32% renewable energy target for 2030 and eliminating hurdles to sign private PPAs.

“The revised Renewables Directive is much more than just a target,” said EU Climate Action and Energy Commissioner Miguel Arias Cañete at the Global Wind Summit in September 2018. “There is a clear requirement to remove regulatory barriers to long-term renewables power purchase agreements and to facilitate their uptake.”

The Spanish government infamously backtracked on state-backed deals on feed-in tariffs in 2013 and introduced (now removed) taxes on self-consumption of solar electricity. Similar measures have crept into law across the EU as legislators struggle to accommodate the volume of solar and wind that has come online.

“We have enshrined the key principle in legislation that support should be predictable and stable, with no retroactive changes,” said Arias Cañete. “The revised Renewables Directive includes elements, which, taken together, should ensure a more stable development of the investment framework for renewables than we have seen in the past. Ultimately, the best recipe for a positive investment climate is long-term visibility and clarity.”

Safety in diversity

Dealing with risk is exactly where PPAs can help. “For us, these investments are all about structuring projects to meet long-term insurance liabilities,” says Hoefler. “We are trying to structure a relatively risk protected proposition. In that respect we prefer entering projects at a later stage and securing long-term stable cash flows which are not correlated to any financial markets.”

As partners work more closely together on Europe’s emerging PPA market, Jaquotot Núñez says that all players are gaining confidence with this kind of contract and moving towards ever larger installations and longer-term agreements.

“With the European impulse for this kind of deal, PPAs will happen in all countries,” says Jaquotot Núñez. Energiekontor notably plans on expanding its operations in Portugal, southern France, and the United States. “We are planning PPAs in the USA with more than 100 MW each,” says Alex. “Electricity prices are much lower there, but meteorological conditions are fantastic.”

Hoefler says that the volume of new solar installations without governmental subsidies constitutes a big shift in the market and hopes to see more projects of this kind in the future. But he also warns that more PPAs will require more offtakers to provide price and revenue certainty for new projects.

Audax is willing to help with the task. “Our customers are definitely interested in green and renewable power,” says Jaquotot Núñez. “That is something that we see all over Europe.”

Today, 5% of the electricity that Audax Renovables sells on the Iberian Peninsula comes from wind and 2% from solar. As the PPAs signed to date come into operation, the company will ramp the contribution of solar up to 25% and plans on formalizing solar PPAs to cover at least 50% of its supply with solar in due course.


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