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March 30, 2022

How high power prices present an opportunity for renewables generators

Current high power prices are a nightmare for consumers, but if you are generating renewable electricity outside of government subsidy schemes, there is serious money to be made.

By Nick Ferris

The past year has seen electricity prices across Europe soar by orders of magnitude, largely as a result of high gas prices. This has only been compounded by Russia’s invasion of Ukraine. However, painful as this has been for end-users, canny generators of renewable electricity have been able to turn the situation to their advantage. 

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Because electricity is priced the same on the wholesale market irrespective of how it is generated, higher natural gas and coal prices have improved the competitiveness of wind and solar PV – which do not have to spend money on fuel – said the International Energy Agency in December 2021.

Onshore wind turbines in Cornwall, South West England. (Photo by Stephen Barnes via Getty Images)

If generators are on subsidy schemes like feed-in tariffs – which guarantee a certain rate for normally small-scale generators – or contracts for difference – which may actually lead generators to pay money back to consumers when the wholesale price is high – they are quite likely insulated from high wholesale electricity prices. However, for renewables generators that are operating without subsidies – in a market such as the UK, which no longer provides feed-in tariffs to new-build assets – the opportunities from high power prices are immense. 

These generators will typically sell power via 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 rose “considerably” over Q4 of 2021, according to energy consultancy Cornwall Insight. Seasonal contracts up to the winter of 2026 rose on average by 25%, while seasonal contracts in the near term rose even more, up nearly 70% quarter-on-quarter to the summer of 2022. 

Cornwall Insight’s market price index for UK wind and solar generators shows a massive surge in income for wind and solar generators as the wholesale price has increased.  

Solar and wind generators saw massive returns at the end of 2021
Monthly £/MWh captured prices for solar and wind in the UK, assessed using the Market Index Price
Source: Cornwall Insight

Seizing the opportunity

One outlet that observes PPA developments up close is the Renewable Exchange, Europe’s largest PPA marketplace. The company provides 2,000 independently owned 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 owned by pension funds.  

Renewable Exchange’s founder, Robert Ogden, explains that when the feed-in tariff ended in the UK three years ago, having enabled some 28,000 businesses to generate solar power, “a lot of small-scale developers simply dropped away”. However, a few continued to develop pipelines of projects, seeking out new sites, planning permissions and power connections, even if the economics did not work out for the time being.

“Those guys are now in an amazing position, and they cannot get their projects off the ground quick enough,” Ogden says. “The returns they could get are enormous, akin to the very high prices guaranteed by the feed-in tariff when it was first introduced by the government in 2010.” 

Data from the UK government, which covers all UK renewables planning applications for sites under 5MW, shows an increase in planning applications towards the end of 2021, with 35 new applications in November alone. Renewable Exchange, for its part, says it has been working with a flurry of new renewables operators over the past year, some of which it is currently in negotiations with to find the best PPA terms possible. 

“We have seen a huge uptick in the number of customers coming to us with subsidy-free projects, and we are seeing contracts offered for five or even ten years [long after short-term increases in price are expected to subside] from some of the most competitive suppliers, meaning that it totally makes sense to build out these assets,” says Ogden. 

The story in Europe

Over in mainland Europe, many markets have more wide-ranging subsidy schemes for renewables generators, which will shield them from any short-term advantages resulting from the high wholesale prices. However, current market conditions are nonetheless encouraging businesses and individuals to generate their own renewable electricity in order to shield themselves from higher-than-usual consumer electricity prices.

“Right now, the key issues pushing solar development are climate change policies, high electricity prices, and energy security concerns following the war in Ukraine," says Christophe Lits, a market analyst at industry body SolarPower Europe. "Those are not ranked in any order and are somewhat linked one to another.

"Residential and commercial segments are both looking at ways to reduce their electricity bill,” he adds. 

Previously, it often wouldn't make sense to run an 'old' wind farm once the guaranteed payments from the susbidy scheme had run out. Today, with the high power prices, data shows that for European operators it makes sense to take on the risk and extend project lifetime.

Across Europe, 396MW of wind capacity was decommissioned in 2021, shows data from wind industry group WindEurope. WindEurope’s Christoph Zipf says this is “not the rise in decommissioning that we would have expected”, given that 4GW of onshore wind projects reached the end of their feed-in tariffs in Germany alone. 

Not all plain sailing 

The high prices remain, of course, a nightmare for consumers, and even for unsubsidised renewables generators that are making high profits, the abnormal conditions come with complicating factors. Volatility has made setting PPA prices more difficult in the UK. “It is such a volatile market that prices can move by 20 or 30% in a day, which is completely unheard of,” says Ogden. Agreeing fixed-price PPA contracts – as opposed to those pegged more to the wholesale market – can be “extremely challenging”, he adds.

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Tim Dixon, lead analyst at Cornwall Insight, adds that the “rise in wholesale power prices is not proportionately represented in the revenues for renewable assets”. This is partly down to price cannibalisation, which is the phenomenon of weather-dependent renewables depressing wholesale prices at times of high output. Cannibalisation means that captured prices achieved by wind technologies in Q4 of 2021 were 8% below baseload prices. 

Renewables generators will also not likely capture the full rise of wholesale prices in their contracts if advanced PPA terms were devised before the current price rise. 

The current market advantages for unsubsidised renewables is ultimately the result of an antiquated pricing system that favours utilities burning fossil fuels by pricing all power the same. But one day, as the energy transition progresses, generators will find themselves in a situation with long-term low electricity prices that may be harder for unsubsidised, small-scale generators to profit from. 

“Ultimately, in the long term, the more renewables come on the grid, the lower the power price is going to be”, says Ogden. “We will eventually reach a world where the current system of pricing just doesn’t make sense any more as the low operating cost of renewables will mean everything essentially runs for free.”

For the time being, however, there remains an opportunity for profit. “For developers building out assets at the moment, there is serious money to be made,” says Ogden.

“Even clients leaning towards longer-term contracts, which might mean they forgo excess profits in the first couple of years, are able to secure a very good rate at the moment,” he adds.  

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Free Report
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Wind Power Market seeing increased risk and disruption

The wind power market has grown at a CAGR of 14% between 2010 and 2021 to reach 830 GW by end of 2021. This has largely been possible due to favourable government policies that have provided incentives to the sector. This has led to an increase in the share of wind in the capacity mix, going from a miniscule 4% in 2010 to 10% in 2021. This is further set to rise to 15% by 2030. However, the recent commodity price increase has hit the sector hard, increasing risks for wind turbine manufacturers and project developers, and the Russia-Ukraine crisis has caused further price increase and supply chain disruption. In light of this, GlobalData has identified which countries are expected to add the majority of wind power capacity out to 2030. Get ahead and download this whitepaper for more details on the current state of the Wind Power Market.
by GlobalData
Enter your details here to receive your free Report.

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