Ongoing supply chain constraints, rising commodities costs, regulatory uncertainty, and congested interconnection queues, all against the backdrop of exponentially increasing demand for new renewable energy projects, combined to put upward pressure on power purchase agreement (PPA) prices during the fourth quarter of 2021 and across the entire year, according to LevelTen Energy, a provider of renewable energy transaction infrastructure.
According to LevelTen’s Q4 2021 PPA Price Index, a quarterly analysis of actual PPA price offers on LevelTen’s Energy Marketplace, the prices for wind and solar combined rose by 5.9% from Q3 to Q4 2021, up to $36.30/MWh, and 15.7% year-over-year. For solar specifically, PPA offers increased 5.7% to $34.25/MWh
These numbers are representative of the P25 Index for PPA price offers, with that index representing the most competitive 25th percentile offer prices.
This trend, which has existed steadily since the beginning of 2020, is expected to continue well into 2022, with LevelTen estimating that inflation will continue to drive commodities prices higher, which may increase the cost of project development, ultimately driving up PPA prices as companies look to recover costs.
Despite these inhibitors, PPAs are still getting done and customers are still procuring renewable energy projects, as corporate policy and environmental, social, and governance (ESG) concerns are both driving demand.
That being said, LevelTen also saw PPA offer volume decrease in all independent system operator regions (ISOs) except for ERCOT, where the number of offers increased by more than 20% quarter over quarter, and where PPA prices remain among the most competitive in all of North America.
As for the why, that’s a little more unclear.
“ERCOT solar’s growth in offer volume during Q4 is anomalous in the context of decreases in all other markets,” said VP of Developer Solutions at LevelTen, Rob Collier. “It’s possible that after a year of battling significant regulatory uncertainty after a tense, anti-renewables political response to last February’s Winter Storm Uri, developers in the region are feeling more comfortable putting forth new offers and/or re-marketing offers they had previously withdrawn.”
Looking across all ISO’s, the average P25 solar price in NYISO for Q4 was $75.7/MWh, by far the highest in the nation, followed by PJM at $43.1/MWh, SPP at $36.7/MWh, MISO at $36.1/MWh, and ERCOT and CAISO tied for the lowest price at $28.3/MWh.
Looking forward
As the industry enters a new and unpredictable year, Senior Director of Developer Services at LevelTen Energy, Gia Clark, offered five predictions for how the renewable energy landscape will continue to evolve in 2022.
1. Global and regional Headwinds will continue narrowing the renewable project pipeline, reducing available supply.
Potentially the least bold of Clark’s predictions, the same struggles that the industry has faced since early-2020 are still present, and are still contributing to lower overall project supply. Supply chain disruptions, spiking commodities costs, land use permitting uncertainties, and overwhelmed interconnection queues are pushing back projects’ commercial operation dates and are making project financial models much harder to predict. Until these avenues clear up, the PPA market is expected to continue operating in a considerable supply shortage.
2. 2022 will be a seller’s market for renewable PPAs
Considering the first prediction, this is a pretty natural assumption that, when supply is tight and demand is high, those who can sell will be able to do so at a premium, even as commodity prices increase. According to Clark, the current environment favors experienced buyers and load-serving entities, which, she explains, can offer sellers the decisiveness and credit-worthiness needed to quickly secure deals. Clark also outlines that buyers will need to be flexible in order to achieve success.
3. Novel solutions will emerge
With no clear-cut end to the supply shortage, developers and buyers will both look to test the status quo, in order to make deals happen, with Clark predicting innovation in PPA contracting structure, insurance, and credit solutions. This will be expedited as new entrants from a broad variety of sectors look to procure renewable supply contracts. She outlines that this could look like new PPA contract structures that mitigate risk, financial institutions acting as credit intermediaries, or technology companies delivering new analytics and software.
4. More retail electricity providers will create or expand green power programs
With their procurement expertise, often extensive renewable project pipelines, and sound credit, Clark has identified electricity retailers as an ideal intermediary party that can readily enter into PPAs and then pass on the renewable energy certificates from those PPAs to multiple offtakers through green retail power agreements. she supplements this prediction by looking to Constellation’s “CORe” program, which has already allowed buyers to help bring new renewable energy projects online by entering into PPAs through Constellation. Similar offerings will likely emerge from other retailers during 2022.
5. More buyers will take a holistic approach to project selection
ESG considerations are driving buyers to consider projects that do more than deliver clean energy, including hiring diverse local workforces and providing community benefits, and siting practices that minimize damages to nearby ecosystems and wildlife. Clark also expects offtakers to procure with an eye for building a PPA portfolio that can power their operations 24/7, and predicts that these buyers will likely be willing to pay more for the right offers that advance their ESG commitments or round-the-clock clean energy goals.
