In Spain, long-term power purchase agreements, known as PPAs, have been signed that hybridise both technologies for a total of 1.3 GW in the first half of the year. Offshore wind power also promises a new era.
Spain is one of the countries with the lowest electricity prices in Europe during solar photovoltaic generation hours. Price cannibalisation has become a reality in the face of the avalanche of megawatts and, under this scenario, the Spanish market for long-term power purchase agreements, known as PPAs (Power Purchase Agreements), is changing course, opening up to hybrid modalities that combine two technologies.
Cannibalisation in the renewable sector occurs when there is too much generation of one type of technology, for example solar photovoltaic, and there is an excess of supply and prices fall. This reduces the revenues of this same type of generation and, therefore, it is said that there is a “price cannibalization”, because a technology contributes to reducing its own revenues. In this way, the signing of PPAs that include photovoltaic and wind power supply is skyrocketing. Data from Pexapark reflect that in Spain four contracts of this type have been signed in the first half of the year, exceeding 1.3 gigawatts (GW) together. It is curious that these four agreements alone exceed the 14 (only) solar contracts that have been signed in the same period for a total of 1.2 GW. The volume of total operations – all corporate – in the national territory during the first half of the year was thus around 2.5 GW, according to the provider of advisory services and price and market intelligence for renewable energies.
Mathieu Ville, ‘head of PPA Transactions’, points out to La Información Económica that Spain “urgently” needs a flexibility solution to accompany the rapid development of renewables. «In most European countries, this translates into regulatory support for batteries. An issue in which Spain, despite being an ‘energy island’ – due to the low interconnection with the rest of Europe – is surprisingly behind, and would need to accelerate with capacity markets, and other support that will make investment in batteries economically viable for investors,» they emphasize.
For his part, the director of L’Energètica, Daniel Pérez, indicates that the hybridization of PPAs, combining wind and solar photovoltaic energy, is a useful mechanism to mitigate the risk of solar targeting, increasingly feared by investors in renewables. However, he emphasizes that it is a “partial solution that cannot make us forget that the solution necessarily involves offering an alternative to the marginal market in its current operation.” In 2023, Spain managed for the fifth consecutive year to be the country with the highest volume of agreements, with 4.67 GW. Together with the 3.73 GW closed in Germany, they accounted for 51% of the operations in Europe.
Currently, most financial institutions require a PPA to lend the money to build the facility. In fact, there are very few banks, between three and six, according to Deloitte, that agree to finance ‘full merchant’ projects, that is, without any bilateral contract and exposed to income being conditioned by market volatility. The resources they allocate to this type of project only allow the financing of facilities of between 100 and 150 megawatts (MW) of power at most. What the banks seek is to reduce the risk of market prices – with hours at zero euros – through term contracts that allow them to ensure the sale of at least part of the energy at an agreed rate.
Types of PPA and price structure
For its part, the type of PPA and its price structure is what will determine the leverage of the operation and the amount of debt to be financed. According to AleaSoft Energy Forecasting, a firm that works with forecasts for all types of agents in the energy sector, the minimum duration required for PPAs to access the loan is around ten years. The most widespread structure of a PPA is the ‘swap’ type. With this modality, a fixed price is agreed at which the energy will be paid throughout the duration of the contract, although this price may be different or staggered for different years of the period.
However, the company considers that the ‘swap’ type “destroys” value by not being able to receive higher prices in the event of a rise in the market. This condition affects the internal rate of return (IRR) of the project shareholders, which is usually lower. On the other hand, there are other PPAs that are gaining attractiveness, such as those with a ‘floor’ type structure. In these there is a minimum price that will always be received for the price of the PPA.
Greater stability thanks to storage
Aleasoft also highlights that the hybridisation of a battery storage system with a renewable energy plant can have a significant impact when closing a PPA. Under the ‘pay-as-produced’ model, most of the supply risk is transferred to the energy buyer (‘offtaker’ in the jargon), however, by integrating batteries in renewable energy plants, greater stability in supply is achieved, allowing more fixed energy profiles to be offered and closer to a baseload profile, which is the one preferred by ‘offtakers’. “The integration of storage allows energy producers to improve the conditions of the PPAs and, ultimately, obtain better prices. Although hybridisation has a higher initial cost and ‘capex’, this is offset by the increase in benefits and a higher IRR, which makes it an attractive option for the sector,” argues the firm.
The new boom is the hybridisation of wind farms
The hybridisation of renewable plants has become the new boom in clean energy. Electricity companies are taking advantage of their wind farms to fill them with solar panels and get the most out of the land and infrastructure they already have. In fact, Spain is one of the pioneering countries in the hybridisation of renewable energy because it is a generation process that reduces costs, improves production and guarantees a more stable supply. It must be taken into account that one of the greatest impediments to the growth of renewable energies is the connection capacity. In this way, hybrid generation plants use the same connection point to the grid and share infrastructure, such as the substation and the evacuation line for the electricity produced. In addition, they are located on land that was already intended for renewable generation and allow for common roads and facilities for the operation of both technologies.
Hybridisation thus makes it possible to optimise the use of the grid and minimise the environmental impact of projects in the places where they are located. By using both photovoltaic and wind technology, the installation significantly reduces the dependence on changing environmental conditions and the limitations due to the possible lack of resources such as wind or sun. However, although hybridisation allows production with two complementary renewable technologies, it will never be possible to evacuate more production than has been granted. The processing of hybrid installations follows the same procedure as any other renewable installation, although compliance with the criteria established in the development milestones can sometimes be accelerated. For example, hybridisation makes it possible to avoid environmental impact by not having to build more power lines, since the existing ones are shared. Currently, there are two types of hybridisation permitted by the regulations: new plants built for hybrid development and hybridisation of new generation modules based on existing installations, provided that these are not dismantled.
