A good PPA or just a PPA?
A good PPA or just a PPA?
Market parity in Italy: why overlooking complexity means missing out on potential value
As leading advisors on structuring, negotiating and closing long term power purchase agreements (PPA), Our New Energy (ONE) deal with many different PPA types and offtakers in the expanding Italian PPA market, Partner of ONE, Dario Gallanti, said on July 13th in Rome, sharing with the audience of Solarplaza Italy his views on what makes up an attractive contract.
Italy’s PPA market features approximately 1.2 GW of actual long-term transactions executed to date, with most of the corporate agreements in the country still closed with utilities as sellers.
“As the market expands, driven by decarbonization targets and more projects and permits becoming available, more investors without power market or even renewables experience are facing counterparties who have concluded many PPAs in Italy and abroad - Dario pointed out - sometimes overlooking the increasing complexity of the market, missing out on potential value during negotiations and oversimplifying terms and conditions or, even worse, completely overlooking these. On the other hand, off takers, having concluded deals and on the back of their knowledge of the energy markets and transactions, are well positioned to extract all potential value drivers”.
The Italian PPA market is evolving very rapidly, and seemingly moving away from standardization which we saw, for example, with the simpler balancing and route to market agreements. This results in a big disparity in attractiveness among seemingly identical PPAs: a good agreement differs substantially from just “an” agreement.
The current environment raises ever-new complexities and challenges, Dario emphasized: from an extreme seller’s market driven by a lack of authorized projects and a spike in energy prices, the market is quickly shifting to a more buyer friendly market, with bearish prices in which PPA market dynamics, being the balance of PPA demand and offer, are gaining importance over forward energy market dynamics. In this context, the value of additionality for Corporates is becoming an even more important value driver and is expected to shift their interest towards Pay-as-Produced profiles.
Moreover, merchant exposure, from being an opportunity in 2021-22, has now shifted back to be a risk factor that requires a management strategy, something that ONE team has been increasingly involved with through Dynamic Asset Management products.
Last but not least, the decline in PPA prices, coupled with divergent long-term price perspectives among market players, has sparked interest in more sophisticated price structures like cap and floor contracts, where corporates have shown greater openness compared to utilities.
“Now more than ever it is clear in the Italian market how, in order to achieve the ambitious goals of newly installed wind and solar power by 2030 - Dario concludes – one of the bottlenecks will be represented by a lack of human resources. While this has already been acknowledged in parts of the value chain such as EPC, it is rapidly expanding to include off-takers themselves and the various advisors involved in PPA and M&A transactions. Staying close to the market and being able to differentiate a deal from competitors by risk allocation, size, technology, or profile to make it more appealing to off takers will become increasingly essential to secure the best conditions. Only investors embracing these changes will unlock the full market parity potential”.
