Change is the only constant. This is how we would sum up, in one sentence, the conclusions of our report “European Market Outlook 2022”. Essentially, this report documents a landmark year of major adaptation, the subplot of the much larger journey of energy transition.

The changes we have seen in the power purchase agreement (PPA) market have been forced by unprecedented turbulence and volatility. And yet, we have just had another record year, with the highest number of annual renewable PPA transactions completed in Europe, up more than 50% since 2018.

Nonetheless, the impact volatility has had on these deals is fundamental to the post-subsidy merchant market. Our report findings clearly indicate that new operating models for renewables are rapidly emerging, putting proactive energy sales and risk management at the heart.

Record year

The recovery in PPA deal flow after the pandemic, which saw prices fall, began in the fourth quarter of 2020. The first half of 2021 continued this growth trajectory, sending positive signals to the market that the recovery was here to stay. , and market participants had adapted to the “new normal”. But the second half of the year was characterized by an energy crisis that drove wholesale electricity prices and price volatility to unprecedented levels across Europe. In October, when the energy price crisis really hit the PPA market, PPA deals all but came to a halt as advanced negotiations were halted by the sudden price volatility.

The most favorable environment for PPAs is when price swings are moderate, but the situation did not normalize during the rest of the year and continued into 2022. Remarkably, given the In the current environment, most trades that were halted during price swings managed to close before the end of the year, making December 2021 the strongest PPP trade month ever in terms of volume.

The enterprise PPA market has maintained momentum thanks to both large buyers, such as Amazon, and a favorable environment that has driven more companies to explore PPAs as a proven, relatively fast and effective route. to decarbonize part of the supply chain or their operations. For the first time, the volume of enterprise PPAs significantly exceeded the volume of utility PPAs.

Most of the PPAs were again traded in Spain, with a total of almost 4 GW of contracted capacity disclosed, a third of the year’s cumulative capacity in Europe. In our latest outlook, we expected more PPAs to be concluded in Germany and anticipated that the potential of solar in Italy could be realized. But while Germany is on the rise, permit backlogs are still unresolved in Italy, which is stifling its growth.

Volatility and impacts

Prices are continually subject to fluctuations, measured by volatility, which is a central tool in how utilities and trading houses assess financial risk. In 2021, a series of increases in energy-related commodities such as gas, coal and carbon credits pushed electricity and therefore PPA prices to new highs. Many bullish events have led to such increases, such as multi-year low European gas storage levels and a shift in demand from gas to coal increasing the value of carbon credits.

Annualized first-year contract volatilities, a key driver of PPA pricing, reached volatility levels of up to 250% last year, five times the level of typical peaks.

Following the price spike in the fourth quarter, the primary approach used by utility buyers to manage risk in their PPA portfolio, known as stack and roll hedging, took a severe hit. The price correlation between hedges and PPPs has collapsed. These price movements resulted in significant market value losses and cash losses on margin payments.


Entering into PPA agreements involves risk transfers between counterparties. At Pexapark, we illustrate price adjustments made by utilities to cover hedging and storage risks as risk reductions from fair value pricing. Due to the current situation, utilities were increasing their rebates in an unprecedented way by up to 40%, or stopping risk-taking altogether.

Because utilities and businesses have different risk profiles, and businesses source electricity for their own use and do not have to manage price risks on a daily basis, businesses can outbid utilities for off-take agreements with quality projects. We define the difference in risk profiles as the cost of liquidity. The differential between the two types of buyers reached a high single digit €/MWh in key markets. Until 2021, for businesses, the gains from signing have outweighed their risks. They are willing to pay a higher PPP price.


Risk management

This triggered another market shift. Long-term pay-per-production (PAP) structures tend to become more expensive for sellers and are rarer in mature markets. The most notable observation of such a trend occurring in 2021 was in Spain, where project owners and investors had much more difficulty finding and closing a PAP volume structure. Whenever the option was available, it came with a significant discount for sellers compared to alternative PPA structures. This increase in PAP PPA discounts has led to an increase in interest and demand for basic type PPAs – where a fixed volume is agreed for each hour of a period, monthly or yearly.

The shorter term and baseline PPAs already mark a dramatic departure from the typical risk profile used for traditional renewable energy investments. Fluctuations in the daily catch price and lower than expected production volumes led to cash outflows and losses in markets such as Sweden. The continued high volatility of capture rates makes baseline PPAs more uncertain, requiring new energy risk management approaches.

Market tightening

We believe the total long-term PPA market will languish in absolute numbers. and the availability and pricing of long-term PPAs in many markets will be tested due to the maturity of some markets and the impact of recent turbulence. Even though companies have an advantage at the moment, many PPAs are structured for “sunny weather”, which puts sellers at greater risk.

One possible scenario, however, could extend the life of the PPA market to 10 years. As public services are born intermediaries, the two types of levy could complement each other, as they have already done. Suppose a utility can reduce the risk of its stack and rollover hedging program with a few long-term corporate compensation agreements. In this case, a multiple of offset volumes could be realized in long-term PPA volumes with investors to enable the construction of additional renewables.

Next Generation Utilities

We also expect a series of new renewable energy investment funds to pursue “next generation utility” style models. Short-term PPAs and core structures push investors to upgrade their operating models, with origination teams, portfolio management capabilities and risk management infrastructure. Step back and you will see that these investors are becoming the next generation utilities. Large funds, in particular, are beginning to turn the implicitly given diversification into quantifiable benefits by managing their assets on a portfolio basis.

We plan to launch new large funds in renewable investment capitals such as Hamburg, London and Copenhagen. These players will bring the risk management skills of a trading house to the table, aiming to achieve higher returns by investing and operating at the portfolio level. We think that in terms of volume, such investments could start to eclipse the classic PPA market in the long run.

Corporate buyer class

When the rules allow it, contracts for the offtake of offshore wind capacity could be concluded with companies outside the category of mega-buyers. Mega-buyers, such as global data center giants – like Amazon, large chemical companies, and consumers planning Power-to-X installations, have gargantuan and growing energy needs.

Their volume requirements alone lead to the only class of renewable assets capable of generating such volumes, namely offshore wind. Due to competition, equity may also be required to obtain such large volumes. Our basis for this prediction comes from a truly one-of-a-kind deal that took place in 2021, when BASF acquired a 49.5% stake in Vattenfall’s 1.5 GW Hollandse Kust Zuid offshore wind farm in the Netherlands. -Low.

The PPA boom is part of a much broader and far-reaching energy transition. While a few years ago PPAs were just a replacement for feed-in tariffs, the market has rapidly evolved and we are now seeing the outlines of a new model for investing and operating in renewables. emerge from frenetic commercial activity.

The market is maturing, and renewable energy investors and operators will become larger, more diversified across technologies and markets, and masters of energy risk management.