The rush in wholesale prices of gas and electricity also drives up the average prices of long-term contracts (PPA) for renewable energy.
Long-term power purchase agreements provide the assurance that the project will bring the expected return on investment upon completion, reducing the uncertainty of cash flow derived from the sale of energy on the spot market, which is determined by hourly day-ahead auctions.
The prices are being impacted by severe volatility in the energy markets, rising inflation, and surging interest rates, pushing developers to recalibrate PPA prices, which could slow down the current deal negotiations.
Given the current high profitability of selling electricity on the wholesale market, sellers are able to negotiate a premium based on the high wholesale price, having a strong bargaining position.
The reason why consumers agree with producers through PPAs is to reduce the long-term uncertainty given by an unpredictable spot market and by its variability. In fact, PPAs are today’s most effective way of protecting businesses from skyrocketing wholesale power prices. Nevertheless, through a PPA, parties can transfer risk on long-term projects and share it through negotiations.
In addition, upon purchasing renewable energy and certificates from renewable projects, the customer receives the green certificates, which improve the scope 2 emissions reporting of the company by reducing its total carbon accounting coming from electricity and heat use.
As a result of PPAs, the producer transfers the risks associated with capital-intensive projects (low operational costs) to the off-taker in exchange for the prospect of receiving electricity at an advantageous price compared to one’s market view during the period being discussed.
The big price spike developing now across Europe, driving PPA prices over 100€/MWh, has allowed many projects to be more bankable through PPAs or merchant-based remuneration, although lower volatility on the spot market price would guarantee much better conditions for the market to develop and gain momentum.
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