American Taste for Green Power Deals Is About to Hit Germany

(Bloomberg) -- The American trend toward companies lining up supplies of green electricity directly from wind and solar farms is about to take off in Germany.

Encavis AG and Luxcara GmbH, which are two of the biggest developers of renewables in Europe's largest economy, said Germany is starting to catch up with Spain and Scandinavian nations in the trend toward so-called corporate power purchase agreements.

The deals benefit utilities including EnBW AG, Vattenfall AB and Norway's Statkraft AS, which have been early movers into the German PPA market. Companies led by Facebook Inc. are turning toward signing their own green deals as a way to cut greenhouse gas emissions and avoid protests from environmental groups seeking to shame those with growing carbon emissions.

“Add competitive clean power to pressure on corporates to acquire the cachet of green energy user, then you have a tidal wave in the making, in time a tsunami,” said Dierk Paskert, board chairman of green power producer Encavis in Hamburg. “A ‘Fridays for Future' sentiment is taking hold of corporate sustainable strategy.”

Germany is a latecomer to the PPA business, where deals covering 13.5 gigawatts of electricity were signed last year, according to data compiled by BloombergNEF. The U.S. accounted for the bulk of those deals, and growth in Europe slowed in the first half of the year.

That's changing as the continent, starting with Chancellor Angela Merkel's government in Germany, scales back generous subsidies that kept the renewables business growing for years. Now that business model is changing, pushing together green energy developers and the companies that need the most electricity.

Wind and solar developers are looking toward PPAs to underwrite new projects, while power consumers see reputational and cost advantages in lining up their own supplies of green power.

In Germany, demand to sign up for corporate green PPAs is outpacing the supply of suitable projects, he said. Contracted capacity remains about 1 gigawatt, or just 0.5% of total capacity. BNEF estimates 940 megawatts of deals were signed in Europe in the first half, down from 1.2 gigawatts at the same point last year.

The PPAs will look even more attractive if wholesale power prices rise after next year, when Germany accelerates plans to phase out coal.

Luxcara, also based in Hamburg, is being approached weekly by inquiries from companies keen to sign green PPAs, said Alexandra von Bernstorff, managing partner of the developer. Von Bernstorff predicts exponential growth for the investment vehicles.

Green PPAs are emerging as a “parallel world” outside Germany's subsidy regime, said von Bernstorff. About half of Luxcara's managed wind and solar assets valued at 3 billion euros are linked to PPAs, she said.

“There are no more projects in the pipeline that aren't PPAs,” she said.

The trend is good news for Merkel's coalition, which is looking for more ways to stimulate renewables without straining the public purse. It's seeking to cap the cost of green power, which is pushing up electricity bills to a record 29 euro cents a kilowatt-hour this year, the second-highest in Europe.

Subsidies remain a persuasive option for developers and to date have reduced the need for them to turn to PPAs.

Germany makes up the gap between the cost of generating clean power and the actual market price when it's lower with a so-called contract for difference. This year, that support is averaging 6.40 euro cents (7.14 U.S. cents) a kilowatt-hour. Since PPAs are subsidy-free, partners in a PPA contract haggle over assumptions of forward market rates for power.

“What we can say for certain is that demand for PPAs is definitely there,” said Lars Meckenstock, the director for asset commercialization at the renewables unit of the utility EON SE.

The growth of private deals may be slower for new projects and likely to be most marked from wind parks coming off subsidies after 2020, said Meckenstock. Support linked to 16.3 gigawatts of capacity, or 8% of the nation's total, will expire by 2025, according to the BWE wind federation.

Countries like Spain with its abundant sun and cheap solar tech will stay PPA front-runners for the time being.

In southern Europe, generation costs for large-scale solar farms have dropped markedly below next-year power contracts on the wholesale market.

That's supporting projects such as Encavis' 225 million-euro solar park in Talayuela, a 300-megawatt project that's about to sign a 10-year fixed-price PPA contract. As much as 10% of Encavis' assets are tied to PPAs, and the share is set to jump above 20% soon, said Paskert.

“PPAs' big bang may need a little more time, but surely the real news here is that we have a development that's pure market and not at the behest of government,” he said. “It's what we've been waiting for.”

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net;William Wilkes in Frankfurt at wwilkes1@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Andrew Reierson

©2019 Bloomberg L.P.