LevelTen Energy, operator of the world’s largest power purchase agreement (PPA) marketplace, has released its Q2 PPA Price Index report, which indicates that wind and solar PPA prices are stabilizing following years of price increases. LevelTen’s 25th Percentile (P25) Index of wind and solar PPA price offers dropped 4% quarter over quarter.
“The modest price drops we’ve seen over the past two quarters are an encouraging sign that clean energy project developers are gaining greater clarity into project costs, and are able to reflect these growing certainties in PPA prices,” said Frederico Carita, Global Director, Developer Engagement, LevelTen Energy. “Lower gas prices contributed to the decline, but they are far from the only factor that developers take into account when determining what price to offer for a PPA. Developers still face rising costs, including escalating financing costs due to high interest rates, and ongoing supply chain challenges. These added costs, in addition to record-high corporate demand for PPAs outpacing available supply, leaves uncertainty as to where prices might go in the future.”
Spanish Solar Buildout Drives Down PPA Prices
Spain’s above-average land availability, sunny climate, and active PPA market have all contributed to explosive growth in Spanish solar development over the past several years. According to the Spanish solar association Unión Española Fotovoltaica (UNEF), Spain more than doubled the amount of installed solar capacity from 2021 to 2022. This rising supply has helped to keep prices low; Spain has consistently had the lowest solar prices in Europe, according to LevelTen’s PPA Price Index data.
As a result of this development, many parts of the country’s grid are flooded with solar energy during daylight hours, causing electricity prices to decrease, an effect known as solar price cannibalization. And more projects are coming soon; in February, Spain approved nearly 25 GW of solar projects, which will increase the PPA supply in the market over the next two years. Solar developers in Spain are aware of this and may be, at least in part, lowering solar PPA prices to account for this increase in negative pricing risks. According to LevelTen’s Q2 report, the P25 Index for solar offers in Spain dropped 9% in Q2.
“Spanish residents have certainly benefited from the lower electricity prices that are caused by Spanish solar availability,“ said Carita. “But as a result of solar price cannibalization, Spain is becoming a less attractive market for solar developers, who will earn less revenue for new solar projects. While industry participants were anticipating this, by many accounts, it has arrived sooner than expected. Accelerated battery storage buildout and improved interconnection to neighboring markets will help address the issue. But in the interim, some buyers and developers in Spain are looking to wind projects as an alternative clean energy source that doesn’t face the same cannibalization issues.”
Wind Development Buoyed by Permitting Reforms and Market Stabilization: Germany a Country to Watch
In Q2 LevelTen Energy had enough wind PPA offers on its marketplace to produce a wind price index in Finland, France, Greece, Ireland and Spain, which is an indication of increased wind development in those markets. The growing supply is putting downward pressure on prices; LevelTen’s market-averaged P25 Index of wind offers decreased by 7% in Q2.
“A lack of land availability, permitting challenges, and difficult national-level regulations have challenged Europe’s wind sector in recent years,” said Carita. “But thankfully, wind development across the continent is beginning to resurge as governments amend policies that slowed its development. In addition, prices for commodities and raw materials, which have been sky-high, are coming back down to more normal levels. These factors are contributing to the price decreases we’ve seen in wind offers on the LevelTen Energy Marketplace.”
Germany, in particular, is a country to watch when it comes to wind development. This quarter, the only German offers on the LevelTen Energy Marketplace were from solar projects, but that’s likely to change in future quarters. In May, Robert Habeck, Germany’s economics and climate minister, announced a goal to reach 160 gigawatts of operational onshore wind capacity by 2035. The strategy includes plans to simplify permitting procedures and allocate additional areas for onshore wind development, ease rules around repowering the country’s older wind farms, and ensure better coordination between grid infrastructure expansion and wind development plans.
Offshore wind development may also open up new opportunities for corporate clean energy buyers in Germany. Over the past six months, LevelTen Energy has tracked 22 signed PPAs for offshore wind projects, and there is likely going to be more capacity available as additional offshore capacity is built. “Right now, there are more solar projects available for corporate PPAs in Germany, but the market is evolving,” said Gabriel Umaña Gómez, Customer Success Manager, Europe, LevelTen Energy. “Wind project developers are looking to diversify their portfolio with corporate PPAs, and at the same time, corporations are becoming more knowledgeable about them. Many large manufacturing and industrial organizations have a presence in Germany, and they’re seeking to reduce their emissions by procuring clean energy in the same market as their operations.”
Rising Demand Expected to Temper Price Decreases
In the first half of this year, LevelTen Energy tracked 10 gigawatts of clean energy capacity contracted via PPAs in Europe, setting 2023 on track to beat the 18.4 gigawatts signed in 2022. One driving factor behind the rising demand for PPAs is the EU’s Corporate Sustainability Reporting Directive (CSRD), which requires companies to start reporting all emissions starting in 2025. In addition, the rise in electricity prices in Europe following Russia’s invasion of Ukraine has caused corporations to seek out ways to reduce volatility in energy costs. Finally, corporate leaders are feeling pressure from a variety of stakeholders, including investors, customers and employees, to support sustainability and Europe’s energy independence.
“The growth in demand for clean energy, not just among corporations but also among utilities and load-serving entities, will continue to put upward pressure on prices,” said Gómez. “Corporations that can move swiftly to execute PPAs will be best poised to successfully enter into a PPA that will meet their energy and sustainability goals.”
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