Can market driven subsidy-free PPAs deliver deeper, wider decarbonisation?

In a week in which the prospect of legislating for net-zero is again in the headlines, a solid prospectus for delivering deeper and wider power sector decarbonisation has never been more critical.

A positive outcome of the closure of subsidy schemes has been the way in which resilient and adaptable onshore renewables developers and investors have looked to innovate and establish ‘subsidy-free’ Utility and Corporate Power Purchase Agreements (PPAs) and new project funding models.

There are factors outside of their control, which will shape the viability and sustainability of these new approaches. Even though technology costs are falling, the bankability of subsidy-free PPAs hinges heavily on an offtaker’s long-term projections of wholesale prices. In a world of buoyant expectations of future power prices, the offtaker’s resulting PPA price fix or a floor offer may be enough to raise an amount of project finance debt which generates a decent return for some equity investors. However, in a world of less optimistic expectations, then the opposite will be true, meaning projects risk becoming unviable, even for those investors prepared to live with relatively low returns.

Forecasts from Cornwall Insight’s Benchmark Power Curve suggests that captured prices for onshore wind will generally be lower than wholesale prices observed today and will likely last until the mid-2030s. The graph shows power price shape under our Community Renewables scenario (which sees rising demand due to heat and transport electrification and high commodity costs), captured by onshore wind out to 2039. However, like all forecasts, as circumstances and input drivers change, so will projections, fuelling a possible “peak and trough” profile to investment, depending on whether wholesale power price forecasts are bullish or bearish at the time of striking firm PPA terms.

Graph showing quarterly price and onshore wind capture price

Gareth Miller CEO at Cornwall Insight, said:

“Subsidy-free PPAs are expected to play a pivotal role in GB’s zero emissions goal, and current conditions show that certain utility floor-price PPAs and Corporate PPAs can enable some investment in onshore renewables, even in the absence of traditional government support mechanisms. This will no doubt, continue and should be welcomed.

“However, when commodity market conditions become bearish, and floor and fixed prices fall, there could well be periods in which there is investment hiatus. This gets to the heart of the challenge for the sector. Does an investable and sustainable subsidy-free renewable market become a hostage to long-term and ever-changing expectations of future power prices?

“For the market, noting there is a lot of capital already raised and ready to deploy in low-carbon sources, getting on with investing is paramount, but money will still only flow if the risk/return balance is right. So, the question is how PPAs and projects can be innovated to generate value from a range of system services and market sources, reducing risk and excessive sensitivity to movements in power price?

“We expect to see this being a key focus of investors and project developers. However, even then, the model won’t work for all investors, and specifically, the traditional project finance debt model may be less widely adopted in future. If that’s true, then it will mean a narrower spectrum of investors funding projects, and it probably means the scale of capacity that can be delivered will be constrained.

“The question then for policymakers – outside of Contract for Difference (CfD) backed offshore wind – is whether this kind of commodity-driven famine or feast and narrower investor appeal, is the basis on which further deep decarbonisation of the power sector can be delivered?

“In our view, the risk of this being a burning platform is high. Some form of policy-driven low-cost revenue stabilisation mechanism is necessary to leverage the scale of investment needed in renewables to meet policy goals. Hence previously making the case to BEIS for a CfD floor structure for onshore renewables on the grounds of its wide investor and low consumer costs.”

Benchmark Power Curve

The Benchmark Power Curve is a comprehensive market and asset-level power price modelling service that delivers long-term price forecasts, informed by industry-leading regulatory, market and policy expertise, and supplemented with direct access to trusted practitioners.