On 20 May, we published our sixth edition of our Flexible Asset PPA Market report. This is our biannual survey and analysis of the Power Purchase Agreement (PPA) market for flexible assets in GB, seeking to understand the market size, active offtakers and optimisers in the space, latest market trends, PPA capacity and competition levels. For this report, we generally define flexible assets as dispatchable, front of meter assets from battery storage, diesel, and gas engine (including OCGT and CHP) technology types.
As part of our reporting, we surveyed a number of different offtake, optimiser, and developer parties active in this market, whilst also drawing on research from our consultancy projects. This gives us unique insight into PPA capacity levels, structures and service offerings, pricing levels, and key market trends.
In this blog we will outline five of the key trends from our latest report, to provide you with a flavour of the latest developments for flexible asset PPAs.
1. The flexible asset market is growing consistently and is expected to expand significantly in the coming years.
At present, we calculate that there is 12.4GW of flexible capacity operational for the 2021-22 delivery year, as identified from Capacity Market registers. This is expected to show significant growth over the coming years, with our latest assessment anticipating flexible capacity to rise to approximately 20.0GW by the 2024-25 delivery year, predominantly driven by the commissioning of battery storage and gas reciprocating engine projects.
However, it should be noted that not all the 12.4GW of operational flexible assets are under a PPA, as some companies will trade and optimise the asset themselves. Therefore, the contestable market for offtakers and optimisers is significantly smaller at present, though we have noted since our previous report that the flexible asset capacity currently under a third-party PPA has increased in the past six months.
2. The number of active offtakers in the flexible PPA market has fallen since our previous report.
Based upon our research we have identified that there are currently 20 offtakers active in the market. This number has fallen from 25, with five parties removed from our assessment of active providers due to a lack of observed activity, or an absence of any marketing of such optimisation services. However, we did note in our report that it is possible some of these parties may re-emerge in future reports as activity levels and strategies develop over time.
No new providers were identified as being active in the past six months; however, some parties continue to scope the market and may emerge in the future. Instead, we saw multiple survey respondents note a degree of consolidation present in the market.
3. Increased interest in co-located deals.
Our survey of active market participants found that, in addition to traditional PPAs for either flexibility or renewables assets, offtakers continue to report a rising interest in PPAs for co-located assets. Responses highlighted that lengthy grid connection queues have meant developers are looking at utilising existing grid infrastructure to co-locate storage assets with renewables. Additional commercial benefits can also arise from reduced capital expenditure by sharing a connection.
Furthermore, renewable asset owners are seeking ways to diversify their portfolios and mitigate market-based risks of operating single technologies. As a result, many are exploring battery storage, sometimes co-located. However, respondents noted difficulties in offering PPAs to co-located assets where the total grid connection constrains an asset’s export capabilities, as it may impact an asset’s ability to access ancillary service revenue.
4. A slight fall in the popularity of floor price arrangements.
Despite the higher revenues being achieved given the current bullish market conditions, our report identified that the profit share levels have undergone a modest increase compared to six months ago amid a competitive offtake market, while reported floor prices in the market are little changed. However, survey respondents noted a reduction in the popularity of floor price arrangements for short-term (1-3 years) PPAs. This remains dependent on underlying investor requirements and financing arrangements.
5. Investor appetite and confidence in flexible assets have risen.
This trend is most pertinent when talking about battery storage, with funders becoming more comfortable with such technologies, the flexibility landscape, and the value of flexibility market. After a prolonged period of high returns over the past six to twelve months, due to elevated wholesale power and ancillary service prices, this has heightened investor appetite for such projects. This is somewhat demonstrated in the results of the latest T-4 Capacity Market auction, which saw over 3.0GW of nameplate battery storage capacity awarded agreements. However, there are concerns this will lead to saturated balancing services and that inflated revenues in the near term are not reflective of future market prices.
The market for flexible asset PPAs continues to develop and remain dynamic as the overall flexible capacity on the system grows. For more information about our Flexible Asset PPA Market report or are wider routes to market services for flexible or renewables assets, please contact Tom Ross (t.ross@cornwall-insight.com).
If you are active in the flexible asset PPA market and would like to be surveyed for our next report later this year, then please do contact Joe Camish (j.camish@cornwall-insight.com).
