From niche to mass market

How long before renewable energy Power Purchase Agreements (PPAs) move from niche to mass market in Germany? Janosch Abegg, Senior Originator at Axpo Germany, took a closer look at this question in a talk at the virtual "Handelsblatt Energiegipfel" (Handelsblatt Energy Summit) last week. Conclusion: in coming years, PPAs will rapidly gain importance in Germany and change the energy market.

PPAs are all the rage: the long-term agreements to purchase power from renewable energies have developed into a mega-trend in many European countries. A few markets are still lagging behind, though, including Germany. In the region between the Elbe and Isar rivers, this can primarily be attributed to the German Renewable Energies Act (EEG) which provides lavish feed-in tariffs. Over the past 20 years, this has made it relatively unattractive for investors to look for a market-based instrument such as PPAs. However, all that is about to change as the first solar plants and wind farms no longer fall under EEG support.

The most important questions are how quickly will the PPA business grow in the largest power market on the European continent, what is its growth potential and how many providers will compete for its lucrative contracts?

At the starting blocks for an abundance of PPA deals

Janosch Abegg, Senior Originator at Axpo Germany, has been marketing green electricity for more than15 years. As a member of Axpo's origination team in Düsseldorf, he knows the German market like the back of his hand. When necessary, he can also call upon the many experienced Axpo PPA experts in more than 30 countries where the company is present and has a leading role in the PPA business.

"At Axpo Germany we are in a good position and ready to take advantage of our group-wide know-how in the PPA area. When the time is right, we will be among the most important market players for power purchase agreements in Germany," says Janosch Abegg. That might not be so far off as the PPA business in Germany has positive growth opportunities across the board.

Analogy to certificates of origin market

In his talk at the German energy industry’s most important summit, Janosch Abegg analysed the current situation in detail. He compared a PPA mass market to the German market for certificates of origin, which is worth about 100 TWh per year, almost 90% coming from abroad. The number of companies involved is substantial, with more than 1,200 energy providers registered for certificates of origin in Germany.

PPAs in the range of 20 to 40 TWh per year

"The PPA market will quickly catch up with certificates of origin in the upcoming years,” he continued. “The best-case estimate is a potential of more than 40 TWh in just four years."

By the year 2025, this means that the PPA market would gain 16 TWh from no longer subsidised wind power plants, 13 TWh from non-subsidised photovoltaic areas, and up to 15 TWh from offshore wind power plants and other direct marketing sources. Janosch added that an important prerequisite for this would be high and stable prices.

"We might only see 20 TWh in the end,” Janosch cautioned. “But long-term power purchase agreements will drastically change the renewable energy landscape in Germany in the area of generation and financing, even if the market for certificates of origin is not fully replaced by PPAs in the next five years."

Total credit risk of up to 16 billion Euros

Whether 20 or 40 TWh, to handle all these PPAs and manage power volumes, numerous players will be needed, he explained. "If we assume it's 40 TWh per year that are purchased in a PPA, with a term of ten years at a price of 40 Euros per MWh, the total credit risk amounts to 16 billion Euros. This enormous volume cannot be handled by just a few companies. A broad spectrum of market players are needed on both the supplier and buyer side."

This includes energy trading companies as well as industrial customers and energy suppliers: Whilst the former take over energy balancing and structuring, they can hedge the PPA volume together with industry to meet banking requirements. In addition, the energy then has to be organised in time periods and structures so that smaller companies can also purchase power – a traditional task of energy suppliers.