- Energy Industry
- Renewable Energy
- Policy and Regulation
Impact of EU Electricity Market Reforms on Renewable PPAs in Europe
Coauthored by Dave Scott
Electricity prices in Europe were on average more than twice as high in 2022 than in 2021. This surge was largely driven by the rising price of natural gas. The impacts of high and volatile electricity prices have placed an economic burden on European businesses and consumers, which the European Commission (EC) is looking to alleviate, in part through reforms to the electricity market design. The EC ran a public consultation to provide stakeholders the opportunity to influence the policy revisions.
In addition to lowering prices for consumers, the changes are seen by the EC as an opportunity to accelerate the transition to clean energy as outlined in the European Green Deal and the REPowerEU plan, thus reducing the dependence on natural gas.
The proposal plans to leverage EU-specific rules to grow the use of government-backed contracts for difference and power purchase agreements (PPAs). However, the role that the EC believes corporate PPAs have in the future of the electricity market remains unclear.
How Might the EC Support the Market for Corporate PPAs?
Various factors in recent years have led to increases in volumes contracted under corporate PPAs including:
- Increased ambition of corporate decarbonization targets
- Desire for cost stability through a long-term price hedge
- Decline in the levelized cost of renewable power
- Withdrawal of government subsidies and feed-in-tariffs (FiTs)
To prevent the reform from removing the important benefits of corporate PPAs in Europe, three market tools and measures could be endorsed to support the expansion of the corporate PPA market:
1. Aggregation of Consumer Demand into Multi-Offtaker PPAs
Historically, PPAs have been reserved for large, energy-intensive corporations (e.g., Big Tech, manufacturing). However, by aggregating demand in the form of buying groups, smaller companies can unlock the benefits of a long-term renewable hedge (e.g., achieve price stability, cost savings, and sustainability goals).
The market for multi-offtaker PPAs is growing, with businesses partnering with others in their supply chains, geography, and sector. For example, Guidehouse is currently advising The Fashion Pact, a collaboration of 12 fashion companies working together to achieve their environmental goals through a collective virtual power purchase agreement.
Similarly, companies such as Ripple are aggregating household consumers into a cooperative buying group. Members of the cooperative buy shares in a new wind farm asset to save on their electricity bill while supporting the development of new renewable generation.
2. Reducing Transaction Costs and Contracting Complexity
Corporate PPAs are typically highly complex arrangements involving various stakeholders. The transaction costs associated with these processes are prohibitively expensive to small and midsize enterprises. Supporting the creation standardized contracting documentation (e.g., the European Federation of Energy Traders draft term sheet) will help to promote the expansion of the PPA market.
3. Implementing a Framework that Promotes Regulatory Certainty
The corporate PPA market in Europe has grown on the back of a period of regulatory stability and relative harmonization. There is a risk that disparate approaches to energy market reform will hinder future investment into renewables, curtailing growth in the PPA market. History has shown that having a stable and homogenous regulatory framework is key to incentivizing market-driven investment; this should be remembered when the commission and member states are looking to introduce reforms.
So, What Next for Corporate PPAs in Europe?
Corporate PPAs can help shield consumers from high energy prices and accelerate the clean energy transition. For the corporate PPA market to continue to flourish, the EC and member states should ensure that the regulatory framework and market conditions:
- Promote market solutions that have driven historical growth in renewables
- Is developed collaboratively across member states to ensure consistency and stability
- Simplify PPA transactions by standardizing contracts and processes
- Improve accessibility to PPAs by incentivizing buyer groups and value chain/cross-sector collaboration
- Provide improved investment conditions to further aid the expansion of subsidy-free renewables