2022 was an unprecedented year for global energy markets, with levels of volatility and uncertainty that the world had never experienced. In the past year alone, the market experienced cascading impacts from supply chain constraints, resource shortages due to the Russia-Ukraine war, as well as tariff and regulatory uncertainty. Any one of these factors would test energy markets and make renewable energy procurement challenging; but the convergence of all three resulted in a year full of surprises for those looking to procure renewables in the U.S. and globally. As we reflect on 2022 and look ahead into 2023 and beyond, we offer a few insights related specifically to the power purchase agreement (PPA) market for corporate energy buyers.
U.S. Renewable Energy Market – 2022 in review
On one hand, 2022 was a banner year for operational PPA projects, as many local and global factors, such as those mentioned above, drove an increase in energy prices that resulted in large positive PPA settlements for offtakers. On the international stage, energy supply challenges caused by the Russia-Ukraine war drove up the demand for U.S. exports. Locally, increasingly hot summers and cold winters contributed to higher energy demand. These compounding factors led to the highest energy prices in recent history across nearly all U.S. wholesale electricity markets.
Most prior projections for 2022 already anticipated higher electricity prices due to increasing demand and lagging supply, however, the actual prices (and thus PPA revenues) in 2022 far exceeded those forecasts. For those buyers with an actively operating project, this lucrative year can serve as a buffer for future uncertainty around the later years of the PPA contract, and can enable them to invest its unanticipated earnings in other renewable energy and emissions reduction initiatives as part of a larger climate goal.
U.S. Renewable Energy Market – 2023 and beyond
Looking ahead, while energy prices are projected to stay elevated over the next 2-3 years, this mainly benefits companies whose PPA projects are already operating or will come online during this near-term period. For organizations seeking to enter the PPA market now, the landscape looks a bit different – PPA prices have risen drastically, supply of projects is low, and contract terms are less buyer-friendly than in the past. Additionally, its questionable whether or not projects that are currently in the contracting process will begin operations within this 2-3 year window in which electricity prices are forecasted to remain high.
The speed at which the PPA market shifted from being relatively buyer-friendly to being distinctly seller-friendly was a surprise for many in 2022. Given the continued high demand for projects from corporate buyers, it’s unlikely that these current market conditions will change anytime soon.
Power Purchase Agreements largely came about as a mechanism for companies to procure renewable energy when there are limited local options that result in new renewables being added to the grid. For organizations that signed deals during the period of low PPA prices, these contracts have likely generated revenue, as an added, if unexpected, benefit. However, with those days behind us, the conversation should now refocus on how these projects can help companies meet their climate goals in a way that is more impactful, and possibly financially on par with, purchasing unbundled renewable energy certificates (RECs).
In the longer-term (beyond 2-3 years), projections show that current high electricity prices will likely stabilize and eventually decline, as increasingly large quantities of low-cost renewables penetrate the electricity grid. This further validates the expectation that PPA contracts signed today are likely to be lower in projected value compared to contracts of the past. PPAs executed in 2023 or beyond will most likely result in a net cost to the buyer over the project term – and in most markets, this cost will likely be higher than the equivalent cost of purchasing unbundled RECs (see graphic below). In the recent past, ERCOT has been the most popular market for PPAs due to having the most attractive economics and relatively streamlined permitting and interconnection processes. However, other markets such as MISO and CAISO may start to regain traction as corporations look to diversify their portfolios away from the ERCOT market.
Figure 1: Projected Implied REC value ($/MWh) comparing forward purchases of unbundled RECs in 2025 compared to solar and wind PPAs across 5-6 ISO markets.
In this ever-evolving market, both future electricity prices and supply & demand for projects will ultimately determine and drive the value of PPAs going forward. While the Inflation Reduction Act (IRA) is expected to spur development of projects and therefore increase supply, increased demand from corporate buyers may continue to keep PPA prices high (thereby keeping expected financial values muted). Although we are hoping to see some increased stability in the PPA market this year, it is clear that PPA prices would not go back to pre-2022 levels. Overall, the only certainty is that the future is unpredictable, and, like trying to time the stock market, it is impossible to guess the “best time” to go to market for a PPA.
While PPAs are not the best-fit option for all organizations, they remain popular since they continue to offer a impactful (i.e. new, local) renewables solution to address large, distributed electricity load. We’re already seeing some buyers pursue PPAs not only for the financial benefits, but also as an important tool to address their scope 2 emissions and meet their increasingly ambitious climate targets. We expect to see this trend increase in the coming years.
If you have questions about whether a PPA is right for your organization or are interested in PPA monitoring services, please feel free to reach out. We’re happy to help. Get in touch today.
