June 6 (Renewables Now) - Renewables could be going 100% merchant in northern Europe and banks will become increasingly comfortable with market price risk and shorter PPA tenors. The electricity market design will have to change though, Miguel Marroquin, head of energy services and consulting firm Our New Energy, tells Renewables Now.
Last month, Spain awarded 2,979 MW to wind farms in a tender. At EUR 43 (USD 48.4) MWh, the contracts reached the lowest level ever for an onshore wind tender in Europe, according to wind energy association WindEurope. Miguel Marroquin believes the current situation in Spain is a prelude of the future of Europe’s renewable industry, a scenario with no investment/generation incentives given their maturity and market parity.
Q: In your opinion which markets in Europe will be the first to achieve the transition to merchant operation? What will change in the next few years to support that process?
Miguel: I believe this transition will result from the factor of two components: challenge and opportunity.
Challenge stands for the regulatory framework. In the EU, some Member States are progressively using auctions to provide visibility to their support schemes. In scarce situations, where the only way to get a project built is to be cheaper than the competition, we already see bids requiring no investment nor generation incentive.
Opportunity is represented by the decreasing technological and operational costs, as well as the development of longer tenor derivatives and power purchase agreements (PPAs); also, in a lower degree, the advances in renewable and storage technologies’ efficiency and participation in some markets for ancillary services. This factor impacts evenly all European markets.
We already see in Spain how all newly built plants rely almost exclusively on pure market mechanisms. Retained projects in the last two auctions went for the minimum discount. We also believe that we will see here shortly the first projects announced based on corporate arrangements (PPAs).
Then, I guess, seeing other markets joining will be mostly a matter of regulatory will. In a similar direction, we also imagine Scandinavian countries and Germany following a similar path perhaps a notch earlier than neighbouring countries.
Q: What about the future of incentives and subsidies?
Miguel: In our analysis we believe that early in the decade of the 20’s most Central West European (CWE) countries will not provide any generation or investment incentive to most of their newly built renewable energy technologies.
Electricity market prices will only continue their route of integration and convergence, delivering on the promise of an internal electricity market and limiting the pricing differentiation among European countries.
In our conversations with sponsors across Europe our understanding is that most efficient wind and PV projects are feasible nowadays at a cutting price of EUR 40 per MWh. Such threshold is the result of a rapid dive in the past months and keeps going lower and lower.
Still that level is only witnessed in few markets only as of today; Spain is one of them, but Germany is not.
The problem resides in market design - marginal generation pricing participation from renewables dumped market prices across Europe, but obliged to offset these with additional taxes or new artificial components into the bill to consumers. Such a process could be defined as a delocalised re-regulation of the power market. According to studies, renewables cost about 6% to 8% on top of households’ and large industries’ energy bills.
So, electricity market design needs to be adapted to this new reality. In our view the forthcoming EU Commission winter package and future legislation and market design to follow should ensure that the formation of market prices takes place in a more efficient way so all technologies compete in equal circumstances.
Where ETS (Emission Trading Scheme) and RED (Renewable Energy Directive) set the direction, we need to see additional reforms that cope with the new dynamics from the electricity market we aim for. The question should be which sort of price level does ensure that the EU can implement a fully renewable-powered electric system by 2030 along with a consideration of the competitiveness of the European industry, and from our point of view EUR 40/MWh is an appropriate level provided that it will not require additional add-ons in the electricity bills of end-consumers.
Q: You recently said “[..] we expect to see a reduction in PPAs bankability requirements, where banks will become increasingly comfortable with shorter hedged periods.” What are the signals here? From the lender's’ point of view, can something replace the security provided by long-term power purchase deals?
Miguel: As the renewable development market welcomes the entry of investors who do not require financing anymore and are willing to sponsor their projects with 100% equity, financing institutions will compete more fiercely to gain market shares in this market valued at around EUR 380 billion per year, and that is only for Europe.
As a result, we start seeing lending on 15 years payback but requesting less than eight years of PPA coverage just as an example. Think that the banking industry is having a challenging time restructuring itself and coping with a scenario of sustained low interest rates. The result is that we see banks getting increasingly specialised in niche markets, developing their expertise and understanding better and better the market, hence becoming increasingly comfortable with market price risk and shorter PPAs tenors, also developing new products.
So why are they doing this? Or, what can replace the security provided by a LT PPA? We see three main answers:
-- A long-term view on sustainable European prices
-- Considerations from additional revenue sources such as ancillary services. With the share of renewables increasing in the mix, so will the ‘soft’ value of a privileged information from renewables’ portfolios and access to ancillary services.
-- Synergies from operations, exposure or investments on the consumption side: a hedge against price volatility, a secured route to current or future certificates, a sound sustainable footprint strategy, etc.
(EUR 1 = USD 1.13)