Renewable energy prices across Europe took a substantial hit at the beginning of March, falling between 15-30% across key markets compared to average prices in February. However, according to price indices and analysis from Pexapark, a provider of software and advisory services for clean energy Power Purchase Agreements (PPAs), prices have largely recovered from March lows. While this is good news, the episode has pointed to the importance of risk management for the renewable energy sector.
Pexapark’s price indices show that the severity of price shock from Covid-19 exceeds what was experienced during previous crises, such as that around the 2011 Fukushima Daiichi nuclear disaster. According to Pexapark’s composite European index, renewable energy prices have recovered from €32.88 per MWh on March 23rd to €36.36 per MWh as of April 9th, however they remain below levels seen late last year. As such, many developers and investors are placing PPAs on hold, as the market conditions make any deal financially unviable.
In addition to this short-term fall in price, Covid-19 has also led to very high levels of volatility in the market. According to Pexapark’s analysis, market-traded volatility for monthly contracts is near 90%, substantially above historically observed levels, reflecting uncertainty over the end of lockdowns and the associated power demand increase.
However, the disruption in the market is unlikely to persist for long. Implied volatility for the 2021 calendar year contract stands at around 30%, whereas the 2022 contract trades at a more moderate 25%.
Despite this, Pexapark does not expect that the pipeline of PPAs are abandoned until prices and volatility return to normal, as this would do more harm than good in the long term.
Luca Pedretti, COO of Pexapark, said: “Sourcing, structuring, pricing, negotiating and finally closing (long-term) PPAs are complex processes that require time. When prices recover, the industry cannot afford to restart these deals from scratch. For this reason, most investors continue to advance and prepare, albeit at a slower pace than when prices are higher”
“PPAs can act as a strategic prerequisite to be successful in non-subsidy renewable investment and especially in times of price volatility. To successfully navigate turmoil as we experience it currently, renewable energy players will need to adopt more robust risk management techniques used by trading companies, such as maintaining the ability to quickly sell large energy positions and act flexibly upon price movements.”