Renewables, the price storm doesn't scare off long-term contracts

Conversation with Miguel Marroquin from Our New Energy on the outlook onfor the PPA market, starting with the latest Spanish auction. “Energy prices will come back to stabilize but hardly under 40-50 €/MWh.”

The Italian version is available here.


Five years ago it was hardly even considered to enter into a ten-year renewable energy supply agreement, explains Miguel Marroquin, Partner and Managing Director at ONE – Our New Energy. Today the Spanish advisory firm that operates in the structuring, negotiation and closing of market parity PPAs across Europe having closed around  3 GW of long-term contracts on the Iberian market alone – is looking without undue concern at the  rally in wholesale energy prices, which is also affecting the long-term prices for new investments in wind and solar.

In the latest Spanish auction, the average auction price increased by 20% compared to the previous one to over 30 €/MWh. Is the reason the spike in gas prices or is there something else going on?

There are two factors: the first is the fact that future markets are much higher than last January. Then there is the increase in the cost of components, commodities (such as iron and aluminum) as well as transportation costs.

On the gas side, the reasons for the rally are primarily related to the economic cycle. Commodities as well as capital markets have cyclical trends: with the awakening of the economies from the pandemic with demand unsurprisingly increasing with the recovery. Additionally, we must consider the altered dynamics of the gas market, particularly LNG, which has made the gas market more global, thus putting European demand in competition with the rest of the world. Finally, in the astronomical values of the spot prices from the last weeks we can also find a strong speculative component. In strongly bullish phases, market operators are inclined to raise the price bar day by day.

Do you think auction and PPA prices in Spain will go up again?

Prior to this post-pandemic rally, the common sentiment was of a “bearish” market, it was believed that prices would continue to fall in part because of ever increasing  renewable capacity build out. Now we live in the opposite extreme. In my opinion neither one thing nor the other will happen, the market is always the result of the intersection of supply and demand and the extremes are not sustainable for anyone in the long term. For this reason, we are likely to see that in the medium-term prices will return to stabilize, but hardly below 40-50 €/MWh in real terms, a price at which most technologies are still competitive and investments for the energy transition profitable.

Can too high prices end up damaging the market?

It depends, obviously if we just look at the offer side, the higher the prices the better. However, we must not forget that for producers the “certainty factor” is just as important. In a capital-intensive business such as the one of renewables assets, in which the investor assesses the remuneration over the investment over a thirty-years horizon, here uncertainty is a decidedly negative factor. And in this sense, we are not only talking about the factors causing high market volatility, but also about regulatory decisions such as the last Real Decreto-ley of last September or the sudden changes in market design. For example, it has been clear for some time now that if the objective is to bring renewables to 60% or more of the national mix, a marginal price mechanism for spot markets is not sustainable and different solutions must be found. However, having postponed the discussion of this topic, we are now facing the consequence and these last-minute temporary solutions – such as the Real Decreto-ley 17/2021 – only create further uncertainty.

Agreed, but for the demand, a too high market price situation can disincentivize long-term purchases. Is there a critical threshold?

That limit exists and from the point of view of an industrial consumer, prices should remain between 50 and 60 euros (always expressed in real terms), an acceptable range and one that allows Spanish and European industry to remain competitive. Prices permanently above 60 euros could create problems, because in this way only two requirements of the energy trilemma are met, sustainability and security, but not the competitiveness. In a pure market situation, if we see prices permanently above 60 euros in the medium term, it means that something is not right.

Spain is asking for the use of marginal price system to be overcome, but many EU countries are opposing. Wouldn’t a natural Ppa growth in the supply mix solve the problem on its own, without getting into that quagmire?

Ppa growth can solve much of the problem. The point, however, is who benefits: if utilities sell green energy with long-term PPA contracts at 40 euros per MWh to industries, the cost advantage goes only to that type of consumer, but household consumers do not benefit from it. That’s why something else is needed.

In your opinion, would any regulatory support be needed to facilitate the closing of PPAs?

In the past, some have argued that specific regulations are needed to facilitate the conclusion of PPAs by end consumers, but the real bottleneck is not on the regulation, but on educating the market on the concept that the purchase of energy is also a long-term business. And part of the market has quickly understood this, given the growth rates of contracted volumes over the long term, in Spain as elsewhere in Europe, without any kind of external support.

Coming back to the October auction, the offer has been much lower than in January. Why is that?

There may be several reasons, I would focus on two. First, perhaps those who participated in the first auction were not satisfied with the price levels. Another explanation, which unfortunately is also familiar to the Italian market, is the delay in the permitting of the plants. Those who won in the first auction last January and have to start feeding energy to the grid in 2023 are now encountering unexpected delays and difficulties.

Some big players who had been the drivers in the previous auction did not even participate. Maybe a controversy towards the government for the September decree, as El Pais wrote?

Pride is not at stake here, but money. Some operators need these mechanisms and if they ever wanted to “take revenge” for the decree they would certainly find other ways. Some had certainly won sufficient volumes in the first auction and in this one they preferred to stop and monitor the situation in view of the next round. As we were just saying, last January the average price was 23 euros, now it is over 30, and personally I think that the next round could be even higher and at that point we will see the return of several operators. On the other hand, also analyzing the results, it is clear that theseauctions are designed for a specific category of operators: those with a pipeline of projects so large that they have no other way to bring it to the market. In short, players cannot access  the PPA market with a pipeline of several GW of projects each, as finding an off taker would be almost impossible.

ONE – Our New Energy

ONE was founded in 2016 by Miguel Marroquin with the expectation that the future of renewables would be unsubsidized and market-driven. ONE’s core markets in Southern Europe are Italy and the Iberian market, where they hold a market share of approximately 40% of transacted long term PPAs. Miguel Marroquin holds a double degree in Energy Engineering and International Finance. During 15 years working within energy markets, he held top management positions at Enovos and at Danske Commodities.

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