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Power market update: energy industry and PPAs

September 14 2022

Over the last couple of weeks the energy industry has taken another shake up.

Between the beginning of August and the peak (looking at S23 contracts) the price of the wholesale power has increased by £298.40/MWh. It then dropped over the weekend by £121.40/MWh and lost a following £88/MWh on the last day of August. A small increase was then registered in the second week of September, following a decrease again bringing us back to early-August price levels.

This rollercoaster journey was caused by multiple announcements and proposals issued across the EU and the UK which have had a significant impact on the liquidity and volatility of the power markets.

We’ve recapped here the main events of the last two weeks and a summary of how your PPAs may be affected.

The European Union measures

Gas and power

Gas is one of the main sources for power generation in Europe. In the current electricity market, generators can sell their power at a price set by the last power plant needed to meet demand. With extremely high gas prices, these are now the power plants setting that price very high for all power generators.

We’ve now reached a point where prices are so high that they impact the sustainable development of the economy, and of course all end consumers.

The electricity market

The UK and EU power and gas markets are closely related and so any changes to the power and gas prices observed in the European exchanges have an immediate impact on the UK’s power, too.

On the 29th August, the European Commission announced plans of emergency market intervention. This announcement was the first significant blow to the power market – it introduced a concern among traders about the future and so power prices immediately dropped.

The EC proposed changes to alleviate some of the pressures on the electricity market, such as an introduction of a cap on the price of gas for power generation. The Commission also indicated they would consider decoupling the gas and power markets early in 2023. Additional measures specific to renewables have also been proposed.

The plans have not been firmed up yet. At a meeting on Friday, 9th September, the EU’s energy ministers discussed various scenarios and unveiled a package of proposed measures which included a windfall profit levy on energy firms, too. The proposals are aimed at lowering the ultimate cost of electricity on consumers. We’re yet to understand the final results of these discussions.

Further reading:

The UK-specific measures

The new Prime Minister Liz Truss was called to the office in the midst of the energy crisis. On taking the office, she promised to firstly look at how to support the country and respond to the soaring energy prices.

On the 8th of September, the following measures were proposed or announced:

  • Energy Price Guarantee which includes a temporary suspension of green levies resulting in a reduced cost of electricity to consumers
  • Launching of new licencing round for oil and gas assets in the North Sea
  • A government loan to energy retailers to support wholesale energy market liquidity and prevent further supplier failures
  • A move of renewable and nuclear generators onto a Contracts for Difference scheme. The UK Government’s consultation (Review of Electricity Market Arrangements (REMA)) which includes a review of the scheme is ongoing and open until October 10th.

Additionally, reviews of the energy regulation and the path to 2050 plans were also announced.

Read the full opening speech of the PM Liz Truss on the energy policy debate.

We publish a weekly power market update on our LinkedIn channel every Monday. Follow Renewable Exchange on LinkedIn to stay up-to-date.

What this means for PPAs

Any contracts that have been executed and locked prior to the 8th September announcement won’t be impacted.

If you are yet to renew a PPA for the upcoming period (particularly in the next 1-12 months), your PPA price forecast will change, reflecting the changes in the power market and the increased concern of the offtakers over the expected market shifts.

Offtakers are also unsure on what will happen in the future – therefore, they have to price in increased risk premiums and additional costs associated with higher guarantees they might take to cover counterparty risks. This means the prices for PPAs have already dropped quite significantly.

As we await the final confirmation of the proposed new changes – specifically relating to the move of existing renewable energy generation assets onto the Contracts for Difference scheme – offtakers may withdraw from pricing and/or increase the discounts in their bids (translating to lower bids coming through).

Go to the Renewable Exchange platform to see your site-specific PPA price forecast.

If you want to try and capture the current price level, click the ‘Create Tender’ button under the ‘Tenders’ tab to launch your PPA tender.

Get in touch with [email protected] if you have any questions about the market or would like to understand the implications of the latest regulatory changes on your PPA.

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