Renewable energy firms have been increasingly considering delaying the start date or altogether turning down power purchase agreements (PPAs) to move to full merchant exposure for solar and wind projects in Iberia as they look to gain from high spot electricity prices in the short term, although there may be pitfalls, delegates heard at the Iber-REN conference in Madrid this week.
Companies with renewable power projects expected to come on line in the near term have been realising that it might be better to enjoy a "merchant nose" for one or a few years in a high-price environment before starting selling their output under PPAs at lower prices.
Day-ahead wholesale power prices have averaged €150.23/MWh so far this quarter in Spain, down from €213.17/MWh in January-May following the start of the Iberian gas cap on 15 June but still significantly higher than €117.81/MWh in the third quarter last year and only €37.55/MWh in the same period of 2020. Futures contracts for delivery until the second quarter of 2023 have ranged from €169.95-€313.30/MWh so far this quarter, according to Argus assessments, while the third quarter of next year has ranged higher, from €178.40-391.70/MWh, as the gas cap mechanism is scheduled to end on 31 May.
A more favourable and flexible finance environment for full merchant projects means developers do not necessarily need to sign PPAs to get loans, as had been the norm until recently.
"If you can do it, probably hedging less is the best strategy right now," German bank NORD/LB's senior director of structured finance Marco Wedemeier told delegates.
There has been more competition from banks and institutional investors for finance to merchant renewable projects, Spanish bank Sabadell's head of project finance and specialised lending Roger Font Garcia said at the conference. When finance for fully merchant projects started to take shape in Spain in 2019 Sabadell was just one of two banks offering that option.
That market slowed in 2021 after reaching a peak in 2020, in part because of the launch of new renewable power capacity auctions in Spain for the first time since 2017 and increased regulatory risk. But deals for merchant projects are picking up again, with Sabadell alone having financed around 10 projects so far this year and new transactions in the pipeline, Font Garcia told Argus on the sidelines of the conference.
"We will see the real depth of the merchant market in the next few months," Font Garcia said.
For UK-based Octopus Renewables senior investment manager in Iberia Joaquin Avila Gonzalez, a good strategy for developers now would be "going for a merchant nose" of two or three years before committing to short-term PPAs afterwards.
"Not hedging can be a good hedging [in the short term]," German bank Berenberg's head of infrastructure and energy Torsten Heidemann said. Berenberg has also been among banks that recently started to finance merchant renewable projects in Iberia.
And increased flexibility from EU-backed programmes means more support could also come from institutions such as the European Investment Bank (EIB), which recently agreed on a €400mn credit line for German investment firm Aquila Capital to develop and build 2.6GW of renewable power projects across the Iberian peninsula over the next three years, even though no PPAs have been signed yet.
"We'll also sign PPAs, but the EIB hasn't based its commitment on signing a PPA structure," Aquila Capital told Argus. "This is the first time that the EIB has approved such a fully merchant construction financing."
Swapping risks
Despite the increasing appetite for more merchant exposure, companies should be aware that there are still risks involved in that strategy, Zosia Riesner, director of European power markets at UK-based solar power developer Lightsource BP, said at the conference.
"A lot of companies are considering going merchant in the next few years and delaying PPAs, but they are swapping one risk for another," she said.
While power prices are historically high and look set to remain so in the near term, PPA values could change significantly — which means companies could profit in the short term but might end up with fixed-price agreements for the medium or long term at much lower prices than could be currently achieved, Riesner said.
Silvia Escudero, senior PPA originator in Southwest Europe at Norwegian state-controlled utility Statkraft, agreed. "There hasn't been a better time to sign a PPA — and nobody knows where PPA prices will be in a few years," she said.
Regulatory uncertainties and the depth of market intervention in the EU could also lead to renewable power generators seeing even a larger share of their revenues capped in the short or medium term, participants have said.
In Spain specifically, renewable generators' revenues are being limited by the cap on gas for power generation launched in mid-June and the gas price clawback mechanism, which started late last year originally until 31 March this year but has been extended twice.
But executives at renewable firms noted that renewable generators have been enjoying higher-than-expected revenues even when accounting for the effects of these mechanisms.
And if they want, developers can still secure price certainty by signing PPAs now and "playing with starting dates", manager of renewable energies and environmental technologies at Triodos Bank Miguel Angel Amores Gonzalez told delegates. In that case, PPA prices would tend to be lower if the starting date was 2024 or 2025 instead of 2023, he said.
The Spanish calendar 2023 power contract has ranged from €176.50-351.00/MWh so far this quarter, according to Argus assessments, while calendar 2024 ranged from €100.30-203.75/MWh. Calendar 2025 was seen to trade from €75.50-83.00/MWh over the same period, with calendar 2026 changing hands at €61-66/MWh.
