2021 may have been a record year for green energy power purchase agreements (PPAs), but the surge in the basic price of energy last year will drive big changes in the sector, according to an analyst report.
Data centers have been at the forefront of 2021's 31GW spending spree on PPAs, in which large consumers led by Amazon and Google have invested in building renewable energy capacity. In the future, however, large consumers like cloud providers will buy up big offshore wind projects outright, while traditional long-term 10-year contracts will decline, according to the latest European PPA Market Outlook study by energy analytics firm Pexapark.
A change in PPAs
"The year 2021 will possibly remain in history as a living example of the challenges behind managing renewables exposed to price risk," says Pexapark, announcing the report, which concludes that in future PPAs will develop as the energy market makes the painful transition to renewables.
"We are now seeing the contours of a new renewables investment and operating model arising out of the noise of frenetic deal-making activity," says Pexapark. "The market is maturing and investors and operators of renewables will become bigger, more diversified across technologies and markets and masters of energy risk management."
As renewables replace old fossil fuels capacity, the volatility which has plagued the energy market in 2021 will continue and even increase, says the firm: "This phase needs strong, capable players that have the balance sheet and skills to take on these new challenges."
Traditional ten-year PPAs will decline, predicts Pexapark, as this year's abrupt changes in energy pricing meant that some providers have actually been losing out on these deals, having taken a low price upfront: "We expect that availability and pricing for long-term PPAs in many markets will be tested due to both the maturity of some markets as well as the pricing impact of the recent market turmoil".
Meanwhile, giant organizations still need to bulk-buy renewable power, and these will increasingly buy entire wind farms. Pexapark says"mega energy buyers", a group including global data center giants and traditional industries trying to decarbonize their electrical needs, will "not be able to procure PPAs as corporates did over the last years."
"First, procurement on a mere PPA basis is insufficient and equity investments in the underlying PPA assets may be required to secure volumes. Secondly, the sheer volumes requirement will make those buyers gravitate to the only renewable asset class that can produce equally gargantuan scale volumes of power: offshore wind parks."
Among the non-data center deals in 2021, Pexapark mentions that German chemicals firm BASF bought half of Vattenfall’s 1.5GW Hollandse Kust Zuid offshore wind farm in the Netherlands.
Offshore wind parks "tick all the boxes", says Pexapark. "They are big enough to support growing energy demand and they need financing partners making the equity participation not only impactful – therefore marking high on the ‘additionality’ element – but a great investment opportunity as well."
Energy prices in Europe, and especially the UK, have skyrocketed amid storage and supply issues. At the same time, Uptime's 2022 predictions report suggests data center operators may start to turn to nuclear energy, saying they may begin buying nuclear power, where available, as part of the mix in their PPAs as well as invest in small modular reactors (SMRs).