RaboResearch - Economic Research

Growing European PPA markets adapt to new power markets reality


  • Developers of renewable assets, offtakers, financiers, governments and scientists can all find value in PPAs (Power Purchase Agreements)
  • Fuelled by decreasing subsidy levels and growing demand for renewable energy sources, PPAs are on the rise
  • Yet, recent years demonstrated that high power price uncertainty can hinder PPA market development. Such markets thrive best in a less uncertain environment
  • Highly volatile power markets push players to rethink their strategies: developers become more cautious about hourly baseload PPAs, fully merchant models can become an option in the short run, and corporates offtake more PPA volumes than utilities

PPAs are an increasingly popular way of financing the deployment of renewable energy sources (RES)

From 2000 onwards, the deployment of RES around the world was propelled predominantly by governmental-backed subsidies like feed-in tariffs or contracts for difference (CfD[1]). As subsidies are gradually being lowered or eliminated, power price risk becomes increasingly important for RES developers. Power Purchase Agreements (PPAs), long-term contracts to sell power (typically 5-15 years) [2],  can to a certain extent replace the cashflow stability that subsidies have so far provided to RES projects. For RES developers, PPAs represent a way to lock in a steady stream of cashflows, which can then be used to get access to financing.

Besides RES developers, offtaking companies, financing institutions, governments and scientists also welcome the use of PPAs. For corporate buyers, predominantly big IT corporations or, more recently, industrial energy intensive companies, signing a PPA translates into reducing their exposure to power price volatility. The ambition to decarbonise the EU economy (Fit for 55 and REPowerEU) requires a deeper integration of RES capacities. For financial institutions, PPAs represent a way to make unsubsidised RES projects bankable. The more RES are being deployed through PPAs, the less governments have to earmark subsidies to enable the growth in RES capacity. Furthermore, scientists specifically mentioned in the sixth and latest IPCC Report that PPAs have a role to play in fighting climate change as they are an enabler for wind and solar PV, currently seen as the technologies with the highest greenhouse gas (GHG) abatement potential.

Global PPA volumes are on the rise

Figure 1: Annual contracted corporate PPA volumes by region
Figure 1: Annual contracted corporate PPA volumes by regionSource: BloombergNEF, 2022

With increasing interest from the aforementioned players, PPA markets grew exponentially across the world over the past decade. Figure 1 depicts this growth in publicly announced corporate PPA volumes. Yet, this picture presents only part of the story, as onsite PPAs or volumes offtaken by utilities are not included in Figure 1, for example. Almost all of the volumes displayed in Figure 1 represent PPAs involving wind or solar PV projects[3]. The US, the pioneer of the PPA markets, is still leading the way. Around 17GW of corporate PPA volumes signed in 2021 were in the US, while the rest of the Americas only signed up contracts for 3GW. Europe is the second-biggest PPA market[4]. The Asian market is still rather nascent. The US and the European PPA markets have developed differently over the years. In the US it is more common to see Virtual PPAs[5] being signed as opposed to Physical Delivery PPAs[6] that still dominate the European market. Today the global corporate PPA market is close to 120GW of accumulated contract volume. While these volumes keep growing, they still only cover a fraction of the global annual deployed RES capacity. To put this in perspective, during 2021 alone, more than 250GW of new RES capacity was installed. One of the main reasons for this is that in various markets subsidised RES volumes still remain high, often providing the most advantageous way to finance RES projects.

Spain and the Nordics are the leading European PPA markets

Figure 2: Cumulative corporate PPA volumes since 2009 in selected European markets
Figure 2: Cumulative corporate PPA volumes since 2009 in selected European marketsSource : BloombergNEF, RaboResearch, 2022

Zooming in on Europe, most of the corporate PPA volumes showed in Figure 2 have been contracted very recently. Spain, for example, just became the leading PPA market in Europe, with over 6GW of contracted corporate PPA RES capacity in only the last two years. The main drivers behind the Spanish PPA growth revolve around the combination of a high solar PV project pipeline and increasingly lower and less attractive subsidy levels.   

Other leading European PPA markets can be found in the Nordic countries, with over 8GW combined corporate PPA deals signed in the last decade. While the Spanish PPA market correlates more with solar PV deployment, in the Nordics, wind power is in the spotlight, as many locations in these countries benefit from strong winds. Moreover, the vast hydropower capacity installed in some of these countries acts as a powerful balancing tool. This has generally translated into low power price volatility in the Nordics. To a certain extent this has also enabled easier pricing of PPAs. But the Nordics are not one monolith within which all power markets move in the same direction and with the same speed. On the one extreme, Sweden saw strong PPA demand from IT companies in 2021 (over 1GW contracted power). On the other extreme, the PPA market in hydropower-dominated Norway is stalling in the last few years after the record year of 2018 with more than 1GW of PPA deal volume.

Outside of Spain and the Nordic countries, Germany, the Netherlands and the UK are other European markets showing a high degree of PPA activity over the past few years. Demand in these countries is sustained by the increasing number of corporations which set high sustainability goals for themselves. Moreover, the growing concerns over electricity price cannibalization[7] in Germany and the UK increase the PPA appeal to RES developers too. In the Netherlands, PPA activity is boosted by the firm offshore wind ambitions which are expected to be realized to a certain extent without subsidies. In countries such as France, Italy or in Eastern Europe, PPA activity to date is still modest. Yet this might change in the future.

While Figure 2 provides a good snapshot of corporate PPAs signed in Europe since 2009, it is important to mention that utilities also offtake substantial volumes of the available European RES capacity through PPAs. In the period 2018 to 2021, utilities contracted more than 15GW capacity through PPAs, according to Pexapark. This amount is comparable with the over 21GW of corporate PPAs signed in the same period of time.

The growing European PPA markets are not hurdle free

Figure 3: Dutch day-ahead power prices (EUR/MWh)
Figure 3: Dutch day-ahead power prices (EUR/MWh) Source: Entso-e, RaboResearch, 2022

If we only look at aggregated volume growth, it can be tempting to conclude that PPA activity was not affected by the recent major shocks through which power markets were and are still going through (e.g. Covid-19 or the extraordinarily high energy prices). Yet, this idea is short-sighted. To make sense of the numbers above we need to look both at what drove the PPA market expansion and what held it back in recent times. In a regulatory environment which pushes for a faster integration of RES, the increasing cost competitiveness of wind and solar PV, even without subsidies, has definitely given a boost to the attractiveness of PPAs. Furthermore, ever more companies looking to source (ideally newly built[8]) RES power also speeded up the adoption of PPAs. However, the PPA growth story in Europe is not a hurdle free one. For example, the lack of standardisation in this market leads to lengthy contract negotiations. Given the highly volatile fast-changing environment in which European power markets have been operating in recent years, the prolonged negotiation process makes it harder to establish a reasonable price for new PPAs.

The typical high price volatility in short-term power markets, was exacerbated in the last year. The Dutch day-ahead power market (see Figure 3) can serve as example of how volatile short-term power markets are. Beyond the hourly price volatility with which power market players are broadly used to, the last few years also brought important swings in the average power price levels. The spring of 2020 presented us with extraordinarily low power prices due to Covid-19 related restrictions. More recently, power prices have been very high from late 2021 into 2022, among others, exacerbated by the impact from the war in Ukraine. The Dutch power market is not a unique example as the majority of other European power markets experienced similar market developments.

For PPAs, considering their long-term nature, such extreme market swings can drive down appetite. Extreme low and high power prices make both buyers and sellers become more cautious about entering PPA deals, which usually have a long-term nature. For example, PPA activity in October and November 2021 was low, as market participants postponed decisions with regards to new PPAs due to increasing power price uncertainty. PPAs thrive best in a less uncertain environment, where players have a good degree of visibility related to the future of power markets.

In the highly volatile power market environment, players rethink their strategies

Power markets today present players with the memory of low power prices of only a few years ago, the reality of current high power prices, and the possibility of lower power prices in the long run due to a widespread adoption of RES. This fast-changing environment within a matter of just two years is pushing players to rethink their PPA strategies.  

RES asset owners become increasingly cautious about hourly baseload PPAs

One prominent lesson that the recent hike in power prices provides is that captured price risk[9], related to the shape risk[10], can become high, even in regions where it was historically low. These risks directly and significantly affect the value embedded into PPAs. Under baseload PPAs[11], usually preferred by offtakers, shape risk lies primarily with the RES asset owners. Under such PPAs, shape risk works against owners of RES facilities. When RES production is high, and as a consequence part of the production needs to be sold in the spot markets, power prices are low and the other way around. Thus, the more volatile a power market is, which often correlates with a higher integration of RES into a power market, the higher the captured price risk for the owner of the shape risk.

Until recently, hourly baseload PPAs were predominantly signed in the Nordics, where power prices were historically less volatile than in other European power markets. This implied that the lower captured price risks led to the perception that (even hourly) baseload PPA in these geographies were to a high degree shielded from extreme power price movements. However, around two years ago the situation started to change in certain Nordic areas. With increasing interconnectivity between power markets, and with the closure of two nuclear reactors in Sweden, power prices in the southern part of Sweden became increasingly volatile. As a result, the price that RES generators operating in Southern Sweden captured decreased significantly in the past few months. This market development might put a break into hourly baseload PPAs as players take into account the higher capture price risks and recalibrate their asking price. Yet, less granular baseload PPAs still have traction in other geographies (e.g. Spain), as their pricing is higher than the one for Pay-as-Produced PPA[12] products.

Fully merchant model for a limited timeframe can now be an option

The recent market developments, which led to high power prices, open discussions that go beyond the exact choice of PPAs that RES developers would like to enter into. If risks are sufficiently taken into consideration, PPAs, the same as subsidies, are generally a blessing for RES developers. Such instruments provide foreseeable streams of cashflow and, through them, access to financing. But is this still the case in the current high power price environment? When power prices are so high, it is tempting to explore, at least temporarily, fully merchant models, under which one would sell all its produced power directly through power markets or through a very short-term PPA. This is exactly what certain RES developers in UK are currently venturing into. The owners of two offshore wind projects that have been commissioned in 2022 have made use of the flexibility embedded in the CfD they have been granted from the British government[13], and postponed the commencement of their subsidy allocation to 2023. In the meantime, these projects can benefit from the higher average power prices either by signing a very short-term PPA or by following a fully merchant model. Naturally, if power prices would suddenly drop, these players run a substantial price risk.

Similar strategies could be replicated in other geographies. For example, under Polish CfD schemes, developers receive a fixed volume of subsidised RES production. Subsequently, they can spread this volume across the subsidized period as they deem optimal. This allows developers to choose the years when they would like to be exposed more to power price risks and the years when they would like to be covered more extensively by the CfD scheme.

It’s worth noting that while such decisions are optimal from a financial point of view, they could eventually backfire on project developers from a corporate image point of view as they can lead to windfall profits and higher subsidy costs for governments[14].

Increasing spread between the offtaking bids of corporates and utilities  

With the higher uncertainty surrounding power markets, noteworthy strategy changes also occur on the demand side of the PPA markets. For example, in the past few months we saw an increasing spread between how much utilities and corporates are willing to offer for entering into new PPAs. In some cases, Pexapark suggests that the bids offered by utility players in recent times were as high as 40% compared to the estimated fair value. The main reason for this is that the risks for the two types of PPA offtakers are different. On one hand, corporates usually sign PPAs to cover their own power consumption. Once the contract is signed, corporations do not usually need to manage their PPA position daily. On the other hand, utilities need to pass the power purchased through PPAs on to the final consumer. Thus, even if technically there is no need for daily management of PPA positions, hedges on the power markets entail margin calls and position managing. As these hedges require liquidity, they can become increasingly costly in an environment of high power prices and potentially increasing interest rates.

The higher risks and hedging costs have pushed certain utilities to apply sizeable bid discounts (compared to estimated fair value) for new PPAs or to temporarily suspend offtaking PPAs in late 2021. As a result, even if utilities typically offer higher credit risk protection than corporate offtakers, corporates are increasingly signing more PPAs than utilities. In 2019, the majority of the European PPA volumes signed was offtaken by utilities. In 2020 and 2021, we saw corporates sourcing more RES power through PPAs than utilities.

PPAs to play a growing role in the energy transition

Even if PPAs are still far from being the dominant way of financing renewable power, it is clear that PPA markets are in strong development. A wide range of stakeholders see value in them which translates into a growing role for PPAs to play in the energy transition. While the US has traditionally been and still is the biggest market for PPAs, European players are increasingly moving towards PPAs as subsidies are dwindling and market risks increase due to higher price volatility. These changes also drive market players to revise their strategies and adapt them to new realities.


[1] Contract for Difference (CfD) is a financial agreement in which parties pay the difference to each other between a market price and an agreed, typically fixed, settlement price. Current RES subsidy schemes in various European countries are organized as CfD with the day-ahead price being the reference market price.

[2] A more detailed introduction to PPAs can be found in this article.

[3] Of all PPAs signed in Americas until the end of 2021, nearly two thirds are linked with solar PV projects and more than one third with wind power assets. In Europe, the majority of signed PPAs until the end of 2021 involved wind projects and more than one third solar PV projects.

[4] Most of the volumes presented in Figure 1 under the category Europe & Middle East were signed in Western Europe.

[5] Virtual PPAs are contracts where no direct physical transfer of electrons between the seller and buyer takes place. The contract is only settled financially and it usually works as a contract for difference (CfD) where a fixed strike price is agreed upon and both the seller and offtaker sell/buy the volumes agreed on spot markets.

[6] Physical delivery PPAs stipulate a physical transfer of electrons between the contracted RES asset and the offtaker. In case the offtaker is not able to directly buy the power from the developer, it can also use a sleeved structure, where a utility acts as an intermediary.

[7] Price cannibalization in power markets occurs with a higher penetration of weather-dependent power generation technologies, such as wind or solar PV. Both academic studies and practise teach us that, as power prices are set based on the marginal cost of the marginal producer, a higher share of low marginal cost RES will, on average, decrease power prices.

[8] An increasing number of companies are looking to source RES power that has an element of additionality. Such companies prefer to source power from projects which add new RES capacity to a power market rather than from already existing RES assets. PPA can be used for sourcing power from projects yet to be developed.

[9] Captured price refers to the average price that a RES facility is able to sell its power for. Captured price is not represented by the average power price on a specific market, but by power prices averaged on the production profile of the RES facility.

[10] Shape risk refers to the risk associated with the production profile of a weather-dependent RES facility.

[11] Baseload PPAs represent contracts where a fixed power volume is agreed to be sold within each specified time unit.

[12] Pay-as-Produced PPAs represent contracts where the offtaker commits to consume a fixed percentage of the actual production of a certain RES production facility.

[13] UKs Contracts for Difference (CfD) are relatively flexible as they allow developers to delay the start date of the contracts for up to three years.

[14] Under a CfD subsidy scheme, when power prices are high, RES owners would have to pay to the government the difference between the power market price and the agreed subsidy level. Thus, if in such moments a RES asset goes fully merchant, it will result in higher profitability for them and lower cash inflow for the government.

Cristian Stet
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 615 303 053

naar boven