Companies looking to sign power purchase agreements (PPAs) in Portugal have been waiting for the government to release the terms of the country's first ever renewable capacity auctions before closing any contracts, Portuguese energy retailer Ecochoice chief executive Andre Marques told Argus.
Most PPA talks are "on standby" at the moment as both solar photovoltaic (PV) developers and the potential offtakers of their future electricity generation will want to see the auction rules and conditions before committing to long-term deals, Marques said.
"We have been negotiating PPAs with several companies that are developing solar PV projects in Portugal, but we all need to see how exactly the remuneration scheme will work before finalising any deal," Marques said.
The Portuguese government plans to auction 1.35GW of capacity in June to be allocated to solar PV projects under two different remuneration schemes that are yet to be detailed.
Part of the capacity would be awarded at a long-term fixed price that would be determined at the auction, with companies expected to submit bids based on the costs and expected return of investment of their projects, energy minister Joao Galamba said last month. The remaining volume would see firms receive some investment support but not a fixed tariff for their power output.
The auction conditions and requirements will be published by the end of the first quarter, Galamba said at the time. And a second auction allocating 700MW would be launched in January 2020, with the government planning to run two auctions each year for the next few years with a goal of awarding 6-7GW of new solar PV capacity by 2027, which would be essential for the country to meet its 2030 renewables and emissions targets.
Like many of the small and medium-sized energy retailers operating in Portugal, Lisbon-based Ecochoice does not have any PPAs in place but has been looking to incorporate them into its power purchase strategy as a third buying source in order to increase its supply volume needs and mitigate price fluctuation risks.
The company buys electricity in the spot markets managed by power exchange Omie and in the futures markets operated by energy derivatives exchange Omip — both part of the joint Mibel Iberian wholesale electricity market shared by Portugal and Spain. But asymmetries and distortions between the two countries cause a number of difficulties for market participants, Marques said.
For instance, even though they share the same longitude they are in different time zones, Spain using Central European Time (CET) and Portugal using Western European Time (WET), so Spanish hourly power contracts do not perfectly match the Portuguese demand curve.
And although there are futures contracts for the Portuguese zone at Omip, those suffer from very low liquidity, which means Portuguese companies resort to the corresponding Spanish products for their hedging needs, Marques said. "As far as we know, there was never a single deal in continuous trade for a Portuguese futures contract, either in the over-the-counter (OTC) market or in exchange platforms," he said.
Portuguese futures contracts are only traded every three months when Omip runs auctions for the sale of quarterly and annual contracts for power from the country's special-regime production (PRE). Generation from renewable plants that benefit from any kind of remuneration or compensation schemes — the majority of renewables output in Portugal — falls under that regime.
Only around 100-120MW out of the more than 7.5GW of existing Portuguese renewables plants operate in the merchant market, Portuguese renewables association Apren president Antonio Sa da Costa told Argus. The annual share of PRE energy in Portugal's mix has ranged between 46pc and 72pc in 2013-17.
By law, the main last-resort supplier in continental Portugal — utility EDP subsidiary EDP Servico Universal (SU) — needs to buy all the country's PRE renewable generation and sell it in the wholesale market through the Omip auctions. Retailers can then buy that energy in the auctions for their own customers, but currently cannot sell their positions, Marques said.
Portuguese energy regulator ERSE said late last year that EDP SU acts as a "regulated and monopolistic aggregator", so it would propose opening up this market to third-party companies. While no specific proposals have been put forward yet for the PRE auctions, ERSE has recently started a public consultation for the creation of a new auction system in Portugal, in which EDP SU would buy futures contracts for its own regulated customers in the last-resort market.
ERSE is proposing that at least four such auctions could be held every year, and contracts could have monthly, quarterly and annual maturities. Any company registered as a trading member with Omip would be able to participate in the auctions, either as a buyer or a seller, and would have the option to choose between financial settlement and physical delivery in either the Portuguese or the Spanish zones.
Even though the volumes at stake would not be very high — EDP SU's annual needs for 2019 were estimated at 2.55TWh and the auctioned volumes would be just above half of the total, which would mean approximately 3pc of Portugal's annual power consumption of around 50TWh — the auctions, if implemented, could help drive liquidity in the Portuguese futures market, Marques said.
"If they create this new scheme, retailers holding positions would be able to sell them in the auctions, and that would really be a significant and important change," he said.
Apart from plans to close PPAs, Ecochoice is considering moving into power generation in Portugal, which would open up a fourth buying front for the company, Marques said. "We already have generation licences in some of the other countries where we operate, so replicating that same model to Portugal would be easy."
The company manages a combined 10MW of small solar PV assets owned by some of its customers in Portugal, but cannot sell their power directly as all of them fall under the PRE regime. Around 60pc of Ecochoice's electricity sales in Portugal go to industrial customers and the rest is destined for small businesses.
Another area of growing interest is electric mobility, Marques said. There are more than 20 registered power retailers in Portugal but only Ecochoice and Portuguese utilities EDP and Galp have specific licences to sell power in public charging points for electric vehicles (EV), Marques said.
