A key parameter when deciding when to sign a long-term Power Purchasing Agreement (PPA) will always be the final offer price. The offer price will be based on long-term projections for the baseload power market but might also be affected by short-term fluctuations. So, the vital question is - when is the best time to lock in a long-term PPA?
In recent months European power prices have been rising continuously due to colder than usual weather and the rising carbon price. Higher carbon prices result in pulling the use of coal in Europe, directly affecting the gas price through greater demand, with power price increases following suit. Moreover, gas supply from Russia and Norway have been slow to react to increased demand. As a result, with no signs the price increases will slow down, this has caused added speculation into decreasing the price risk of volatile energy markets through a long-term PPA.
Would locking in a PPA today, when power prices are high, be a good thing or detrimental for a PPA contract? Futures prices in the UK dictate little seasonality despite market prices showing a clear distinction between lows in summer, and highs in winter. Therefore, it could be said there is no best time to close a PPA as they are solely dependent on the market. However, with winter prices looming and renewable subsidies decreasing, it will always be beneficial to start your PPA process sooner rather than later. The lengthy execution process of a PPA, often taking months to complete, reinforces this sentiment for relative urgency.
Securing a long term PPA can provide a guaranteed income for the renewable energy generator, and in return, a corporate will hope to achieve a discount to the market rate. This can help take out the volatile nature of the wholesale market, so market price rises like we witnessed in May, can be mitigated. As long as a corporate’s credit rating is acceptable and a sensible volume is agreed there will be benefits for both parties, despite the high prices that currently exist in the market.
One way to assess whether a PPA can be profitable in the long-term is to evaluate the price against market forecasted prices. The chart below depicts the high, reference, and low power prices produced by BEIS, against the average PPA offer price from the Zeigo platform over the first quarter of 2021. The average PPA offers for wind and solar are fixed at £45.8/MWh & £43.7/MWh respectively for a 10-year period, which sits at the lower end of pricing estimates produced by BEIS. From the figure below, it is clear that locking in a PPA at the start of 2021 could have saved a corporate ~£10/MWh on their energy over a 10-year period. This will obviously come with some volume and pricing risks however if the contract has been thoroughly negotiated and scrupulously checked risks can be mitigated.
PPAs are becoming the norm for corporates who are wanting to achieve net-zero, leading to an increase in PPA prices already, so there is no time like today to start your PPA journey to lock in the best price. With Zeigo’s renewable energy platform, you can request access to the Zeigo platform here and gain access to industry-leading data and reports, as well as the ability to run one free European PPA tender’ to lock in your PPA at the best price.