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Onshore renewables players hope CfD re-entry will complement, not slow, merchant & corporate PPA growth

Energy Rev gathered together some of the most active players in the UK’s post-subsidy onshore renewables market for a breakfast briefing on November 18 at Gowling WLG’s London offices. On the agenda, the evolution of the UK’s merchant and PPA market in the light of recent power price spikes, and a look at how the re-introduction of onshore wind and solar PV to the UK’s CfD auctions could impact accelerating activity in the space 

The UK’s onshore wind and solar PV sectors have been waiting since 2015 to be readmitted to the UK’s CfD auctions. In the meantime, the two technologies have strained to operate on a post-subsidy basis, although a growing number of projects have reached a final investment decision and proceeded on a merchant or PPA-backed footing in recent quarters. This activity has been spurred further by the wholesale power price spike of the last few months, with wholesale rates now coming in at two to three times their GBP 40/MWh – GBP 50/MWh historical average. 

Against this backdrop, onshore wind and solar PV’s readmittance to CfD Allocation Round 4, which is set to take place over H1 2022, presents a fascinating variable in terms of how sponsors will look to monetise their projects. 

Panelists consulted on November 18 gave a range of estimates as to where they believe winning onshore wind and solar PV CfD prices will come in, with projections ranging from the mid-GBP 30s/MWh to the low GBP 40s/MWh (in 2021 money). In contrast, 10-15 year pay-as-produced corporate PPAs have in recent months risen from the low to mid GBP 40s/MWh to the high GBP 40s/MWh and into the GBP 50s/MWh. 

“The general consensus is that corporate PPA prices will still be at a premium to what will be a highly competitive and hard-fought CfD, so most developers are seeking [the former] at the moment,” said EY director Phil Dominy, who most recently advised Kimberly Clark on PPA negotiations with Octopus Renewables for the 50MW Cumberhead onshore wind farm in Scotland. 

“The re-introduction of a CfD for onshore wind and solar is a welcome addition to the mix as it gives other options, but I’m not sure it’s necessarily a game changer as the [GBP 10m solar and wind budget] pot is relatively small – everyone has a view that the CfD price is going to be relatively low, therefore it will work for certain projects with certain investment criteria, whereas many others would still prefer a corporate PPA,” added Gowling WLG partner Gus Wood.

Nevertheless, the fact that developers now have the additional option of bidding for CfDs could soon start to complicate the picture.

“There was some nervousness early on that [the reintroduction of the CfD] could impact the corporate PPA market although actually at the moment it’s bringing them forward and leading to a very busy time – but post-CfD it could be quite challenging in terms of finding a good supply of projects because the auction may well have swept out quite a few good ones,” Dominy added.

Merchant mayhem 
Yet while higher long-term PPA prices are now available, both in the UK and across certain European markets, wholesale prices have risen so high that this has even had an impact on developers’ willingness to enter into long term offtake agreements.  

“The steep rise in wholesale prices in September did wobble the corporate PPA market, not just in the UK, but in the Nordics and Spain – several deals wobbled, some fell over completely, because developers decided to go fully merchant, or just to pull out and wait until everything settled down,” Dominy said.

This volatility has in turn helped accelerate the evolution of corporate PPA contracts, as a way of dealing with current sky-high prices. Offtake structures can now include a step-down from a high level early on in the contract, for example. 

However, while agreements and compromises can sometimes be reached, this added complexity has meant negotiations in many instances have just got harder. 

“It’s a mixed picture really, for some [the price rises] have been the impetus to get the deal done. If as a corporate you are doing only one or two of these corporate PPAs and you’ve had buy-in from the energy purchasing director, but you didn’t previously have full board approval, then energy has crept up the agenda and is a significant issue in any business at the moment,” said Wood.

But while this volatility can help get PPAs over the line it has also created uncertainty. 

“Are these long-term high prices or just a current phenomenon. So, on both sides of the equation people are worrying, is this the right price? As a developer am I selling myself short and as a corporate am I overpaying? That’s a big decision,” Wood explained. 

Complementary strategies
Against this backdrop, and with a mooted 10GW-plus pipeline of consented and grid-secured onshore wind and solar PV now ready-to-build in the UK, many sponsors will be working to factor in how the CfD could prove beneficial to their investment cases. 

“It’s probably delayed some investor decisions as maybe previously they’d been thinking they’d push ahead with projects on a merchant basis or go for a fixed price at the front-end [of a project’s operating life] and then keep it on a rolling hedge basis – now they may decide to wait a little bit longer to see how the CfD looks,” said Statkraft business development manager John Puddephatt. 

Certainly, there is a strong possibility that sponsors will adopt a strategy whereby they bid a portion of a project’s capex into the CfD, “and then build the remaining revenue on a merchant or PPA basis where there is more potential for upside,” he added. 

SSE adopted this approach with its 1.075GW Seagreen offshore wind farm in CfD Round 3 in 2019, and the strategy has been implemented by sponsors in multiple other renewables auctions across the globe in recent years, from Mexico to Spain. 

Nevertheless, the re-admittance of onshore wind and solar PV to the CfD auction is in no way being seen as a watershed moment for the ongoing development of the UK’s onshore renewables market. Foresight Group had opted to back development pipelines being brought forward by the likes of Belltown Power, Elgin Energy and Island Green Power well before the CfD decision was confirmed, for example.

“We waited years to get into unsubsidised, merchant onshore wind and solar, and since we started developing UK projects power prices have gone to both their lowest and highest ever levels, which shows you all you need to know about this market – but we still think they all work without the CfD,” said Foresight partner Matt Hammond. 

He added: “We will do in the UK what we’ve done in Spain, Sweden and Australia – every time a project is ready to build you just look at what your options are, what is the merchant power price forecast and how is it valued in this fund or another, what corporate or utility PPAs are available? Depending on the prices you just have to assess on a project-by-project basis.”

In terms of the upcoming CfD round, sponsors with smaller 20MW-30MW projects may well opt to stay away from the tender and build their developments on a merchant, full-equity basis, especially given current wholesale prices are coming in at around 2.5-3 times where successful Cfd prices are likely to land. 

But for larger projects, the economics of bidding for a competitively priced CfD, and then raising cheap bank debt to cover capex, arguably still stacks up. 

“A lot of onshore projects being developed now in the UK are much bigger than they used to be. They will necessarily involve banks more, and that pushes you back to PPA terms and CfDs,” Hammond went on to say. Larger solar PV parks, of 100MW-200MW or more in size, would also fall into this category. 

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