How high electricity prices represent an opportunity for renewable energy producers
Over the past year, electricity prices in Europe have climbed by several orders of magnitude, mainly due to high gas prices. This was only made worse by Russia’s invasion of Ukraine. However, as painful as it was for end users, savvy renewable electricity generators were able to turn the situation to their advantage.
Since the price of electricity is the same on the wholesale market, regardless of the mode of production, the increase in the prices of natural gas and coal has improved the competitiveness of wind and solar photovoltaic – which don’t have to spend money on fuel – noted the International Energy Agency in December 2021.
Whether producers benefit from subsidy programs such as feed-in tariffs – which guarantee a certain rate for normally small-scale producers – or contracts for difference – which may actually result in producers refunding money to consumers when the wholesale price is high – they are quite likely immune to high wholesale electricity prices. However, for renewables producers operating without subsidies – in a market like the UK, which no longer provides feed-in tariffs to newly built assets – the opportunities presented by high electricity prices are immense.
These generators typically sell electricity through a power purchase agreement (PPA), contracts that allow them to sell their electricity to larger utilities over an agreed period. The value of these renewable PPA contracts in the UK increased “significantly” during the fourth quarter of 2021, according to energy consultancy Cornwall Insight. Seasonal contracts through winter 2026 increased by an average of 25%, while short-term seasonal contracts increased further, up nearly 70% quarter-on-quarter through summer 2022.
Cornwall Insight’s market price index for wind and solar generators in the UK shows a massive increase in wind and solar generator revenues as the wholesale price has risen.
Solar and wind generators saw massive returns in late 2021
Monthly prices captured in £/MWh for solar and wind power in the UK, valued using market price index
Source: Cornish Perspectives
Take the chance
One outlet that is watching PPP developments closely is the Revolving exchange, the largest PPA marketplace in Europe. The company provides 2,000 independent generation assets in the UK with a platform through which their operators can sign PPAs with power utilities. Renewable Exchange works with a variety of operators, ranging from farmers to large-scale assets held by pension funds.
Renewable Exchange founder Robert Ogden explains that when the feed-in tariff ended in the UK three years ago, after allowing some 28,000 companies to produce solar power, “many small-scale developers simply gave up.” However, a few have continued to develop project pipelines, seeking new sites, building permits and power connections, even though the economy hasn’t worked out yet.
“These guys are in an incredible position now, and they can’t get their projects off the ground fast enough,” Ogden says. “The returns they could get are huge, comparable to the very high prices guaranteed by the feed-in tariff when it was first introduced by the government in 2010.”
UK Government data, which covers all UK renewable energy planning applications for sites below 5MW, shows an increase in planning applications towards the end of 2021, with 35 new applications in just November. Renewable Exchange, for its part, says it has worked with a slew of new renewable energy operators over the past year, some of which are currently in negotiations with to find the best possible PPA terms.
“We’ve seen a huge increase in the number of clients coming to us with grant-free projects, and we’re seeing contracts being offered for five or even ten years. [long after short-term increases in price are expected to subside] from some of the most competitive vendors, which means it makes perfect sense to develop these assets,” says Ogden.
History in Europe
In continental Europe, many markets have more extensive subsidy programs for renewable energy producers, which will protect them from any short-term benefits resulting from high wholesale prices. However, current market conditions are nonetheless encouraging businesses and individuals to generate their own renewable electricity to protect themselves from higher than usual consumer electricity prices.
“Right now, the main issues driving solar development are climate change policies, high electricity prices and energy security issues following the war in Ukraine,” says market analyst Christophe Lits. to the industry body SolarPower Europe. “These are not listed in any order and are somehow related to each other.
“Both the residential and commercial segments are looking for ways to reduce their electricity bill,” he adds.
Previously, it often did not make sense to operate an ‘old’ wind farm once the guaranteed payments from the subsidy scheme had run out. Today, with high electricity prices, the data shows that for European operators, it makes sense to take the risk and extend the life of the project.
Across Europe, 396 MW of wind capacity was taken out of service in 2021, according to data from wind energy industrial group WindEurope. WindEurope’s Christoph Zipf says this is “not the increase in decommissioning we expected”, given that 4 GW of onshore wind projects have reached the end of their feed-in tariffs in Germany alone.
High prices remain, of course, a nightmare for consumers, and even for unsubsidized renewable energy producers making high profits, abnormal conditions come with complicating factors. Volatility has made PPA pricing more difficult in the UK. “It’s such a volatile market that prices can move 20-30% in one day, which is totally unheard of,” says Ogden. Accepting fixed-price PPA contracts – as opposed to those more tied to the wholesale market – can be “extremely difficult”, he adds.
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Tim Dixon, principal analyst at Cornwall Insight, adds that “the rise in wholesale electricity prices is not proportionately represented in renewable asset revenues”. This is partly due to price cannibalization, which is the phenomenon of weather-dependent renewables driving down wholesale prices during times of high production. The cannibalization means that the captured prices obtained by wind technologies in the fourth quarter of 2021 were 8% lower than the base prices.
Renewables generators are also unlikely to capture the full wholesale price hike in their contracts if advanced PPA terms were designed before the current price hike.
Current market advantages for unsubsidized renewables are ultimately the result of an outdated pricing system that favors fossil fuel-burning utilities by setting the same price for all energy. But one day, as the energy transition progresses, producers will find themselves in a situation of long-term low electricity prices that small, unsubsidized producers may find it more difficult to take advantage of.
“Ultimately, in the long term, the more renewables on the grid, the lower the price of electricity will be,” says Ogden. “We will eventually reach a world where the current pricing system no longer makes sense, because the low cost of running renewables will mean that everything will essentially run for free.”
At the moment, however, there remains an opportunity for profit. “For developers building assets right now, there’s a lot of money to be made,” says Ogden.
“Even customers who move to longer-term contracts, which could mean giving up excess profits in the first two years, are able to get a very good rate at the moment,” adds he.