A growing imbalance between power purchase agreement supply and demand, along with “skyrocketing” development costs, lifted PPA prices 9.7% during the first quarter of 2022 to nearly $40 per MWh, according to LevelTen’s Q1 PPA Price Index report.
The firm said that year-over-year, that represents a 28.5% increase, which it called “astounding.”
The firm said, however, that large energy buyers don’t appear to be deterred by the rising prices and continue to pursue PPAs, which it said are delivering higher value as wholesale electricity prices also rise.
In January, Level10 reported that PPA prices rose by 5.9% from 2021 Q3 to 2021 Q4, continuing a year-long upward trend. The market average for solar PPA offers rose 5.7% in the fourth quarter to $34.25 per MWh, while wind was up 6.1% to $38.36 per MWh.
In releasing its most recent quarterly report, the firm said that North American renewable energy developers “are struggling” to build solar and wind projects fast enough to keep up with demand because of the “extremely difficult development landscape” this quarter. Market conditions are leading to a shortage of power purchase agreements for corporations and other large energy buyers.
Many developers rely on PPAs with corporations and other large-scale energy buyers to secure the financing required to construct solar and wind projects. Cost models used to price PPAs are becoming increasingly unwieldy as regulatory, interconnection, and supply chain challenges make it difficult to pin down costs and construction timelines, the firm said.
Gia Clark, senior director of Developer Services at LevelTen Energy, said in a statement, “as long as these myriad headwinds persist, we can expect elevated PPA prices across North America.”
Supply chain issues have also taken a toll on developers in terms of rising costs and shipment delays. A LevelTen survey of 57 developers found that 40% said they were able to find new suppliers that can more reliably deliver components. However, 28% were unable to make changes to supply chain operations despite wanting to do so.
Renewable energy project developers are also facing hurdles to development as a result of regional and federal regulatory activities that have generated uncertainty in places where PPAs are in high demand, including ERCOT and PJM.
Level10 said that ERCOT has some of the highest settlement values for energy buyers, which makes it a popular region to procure. However, changes to regulations that place a cap on the maximum price that power producers can earn could lead to uncertainty on returns in the future. Since last quarter, ERCOT’s solar PPA prices rose by 13.3% to $32 per MWh, while wind prices stayed nearly flat at $26.70 per MWh.
In the PJM ISO, regulators are working through a backlog of thousands of interconnection applications that represent nearly 300 gigawatts of new sources of renewable energy awaiting assessment to be added to the grid. Level10 said that slow progress to clear this jam has contributed to a spike in the region’s PPA prices and a lack of selection in an area that has a high demand for PPAs. Since last quarter, PJM’s wind PPA prices rose 15.6% to $55.10 per MWh. Solar prices rose 2% to $44 per MWh.
The firm also said that U.S. Department of Commerce’s recent announcement of potential new tariffs on solar cells imported from four southeast Asian countries could set developers back on the supply chain improvements they’ve been able to make.
“We are disappointed by the Department of Commerce’s decision to investigate the Auxin petition, which is already creating significant – potentially long-term – negative impacts on the renewable energy industry,” said Rob Collier, VP of Energy Marketplace at LevelTen Energy. He said that Auxin’s petition bottlenecks renewable development and slows momentum to add more carbon-free energy resources to the grid.
Natural gas prices have also contributed to rising PPA prices. When gas prices increase, the value of locking in renewable energy at a specific price increases, driving more demand to the market.
