Pexapark, a Swiss PPA advisory, published a new report on Thursday stating that the energy price volatility observed at the end of 2021 will have a long-term impact on the green energy power purchase agreement (PPA) market, including a drop in long-term contracts.
According to Pexapark’s “European PPA Market Outlook 2022” report, volatility in 2021, fueled by rising gas prices, resulted in a 58% increase in PPA activity, with December seeing the biggest volume increase.
In 2021, a total of 11.2 GW of PPAs were signed in Europe, with corporate contracting 6.5 GW compared to 4.63 GW from utility buyers. Among corporate clients, U.S. retailer Amazon was the biggest PPA off-taker, accounting for 16% of the year’s contracted capacity and 30% of European corporate PPAs.
However, the report revealed the market uncertainty amid energy crisis. Utilities’ hedging tactics were badly disrupted by price hikes in the fourth quarter since the correlation between hedges and PPAs broke down. The energy prices rally resulted in considerable mark-to-market losses and cash drains on margin payments for them, which could lead to a reduction in classic PPAs with 10-year maturities in the future, it noted.
Pexapark suggests, utilities must manage price risks by breaking down long-term PPAs into shorter wholesale market contracts, a process known as “stack and roll hedging.”
Corporate clients, on the other hand, often acquire PPA volumes to power their own operations and are willing to pay a higher PPA price. Pexapark expects this trend to continue in 2022 and foresees the advent of corporate “mega purchasers” that would seek out offshore wind farm PPAs as well as equity investments to satisfy massive energy needs, such as global data center operators, chemical businesses, and green hydrogen makers.
Pexapark also predicted the development of new major funds from renewable investment centers such as Hamburg, London, and Copenhagen, which would have the risk management skills of a trading house and might become “next generation utilities” by actively managing shorter-term PPAs.