Solar power contract prices are falling to record lows, but also gathering some risk

Energize Weekly, August 21, 2019

Portugal’s first photovoltaic (PV) solar auction has led to a record low-cost contract of $16.54 a megawatt-hour (MWh), narrowly besting the previous record, a recent Brazilian power purchase agreement (PPA) for $16.95 a MWh.

“With the levelized cost of utility-scale PV in Southern Europe now well below current wholesale power prices, investors have flocked to the region to try and secure grid connection capacity and PPAs,” Tom Heggarty, Wood Mackenzie senior research analyst, said in a statement. “Portugal, like Spain, has seen a project development rush and new connection licenses for 938 MW of utility-scale solar PV projects were issued up until mid-2018.”

While the falling PPA prices are spurring more solar development, some analysts caution that the low prices and short contract life could lead to risks for developers recouping their investments.

The gap will have to be filled by selling power into wholesale markets after the PPAs end.

“We believe that bidders are planning to sell into the wholesale power market at the end of the 15-year contracts on offer, and as such they’re making a bet on merchant pricing from years 16 to 30 of the asset’s lifetime,” Heggarty said.

In the case of the Portuguese contract, Wood Mackenzie estimates the bidders would need a wholesale power price averaging at $34 a MWh to reach a positive equity internal rate of return, according to GTM News.

The same holds true of the U.S. domestic market. At a California energy conference in June, Himanshu Saxena, CEO of the Starwood Energy Group, said that at the end of the 10-year PPA, his company would have made back 20 percent to 30 percent of its invested capital.

“We would have to rely on the merchant cash flows after year 10 to get back the rest of our investment and earn a return,” Saxena said. “We would have to take a view on merchant cash flow starting sometime in 2029, for example, running for another 30 years.”

Still Portugal’s July auction set a low-cost standard for Europe and “gives a measure of solar PVs increasing competitiveness in the region,” Heggarty said.

The auction offered an allocation 1.4 gigawatts (GW) and awarded 1.15 GW. French developer Akuo Energy acquired 370 megawatts (MW), Akura Power Developments received 168 MW and Iberdrola won 149 MW.

“What is clear, however, is that in liberalized power markets, solar PV investors are ascribing ever more value to revenue streams outside of those secured through competitive auctions,” Heggarty said. “Taking on merchant risk pre-, during or post-PPA is becoming the norm. This presents a range of new risks and opportunities.

A second Portuguese auction for 700 MW auction is planned for January 2020.

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