PPA costs are up yet demand remains strong
The price for power purchase agreements (PPAs) in the United States increased in Q1 or 2023, marking two years of rising prices, according to two separate analyses from LevelTen Energy and Edison Energy.
Edison found the median PPA price increased in almost every market and technology, rising almost 11 percent across U.S. power markets, ERCOT, MISO, PJM and SPP. However, there is wide variability between markets and bids.
For example, in MISO, the average difference between the minimum and maximum bid prices has been about $5 per MWh since 2019. In Q1, the range was almost $40 per MWh. Edison says the broad ranges are likely driven by varying assumptions around interconnection costs and solar tariffs.
LevelTen’s report, which looked at the six U.S. markets (the four mentioned above, as well as CAISO and NYISO), found an overall 6.6 percent increase in PPAs, a calculation based on projects in the LevelTen Energy Marketplace. Solar cost increases ranged from 4.4 percent (in PJM) to 13.6 percent (in MISO). Wind costs ranged from a drop of 10.3 percent in ERCOT (the only decrease this quarter), to a 20.7 percent increase in SPP.
Contributing factors to the higher costs include high equipment costs, prolonged supply chain constraints, interconnection costs and higher interest rates.
Corporate procurements continue to drive the market
Despite these rising prices, corporate buyers are still a driving force behind PPAs. While a tally isn’t yet available for Q1, 2022 saw a record 16.9 GW of PPAs inked, according to the Clean Energy Buyers Alliance. This reflects that corporations understand the importance of driving forward sustainability goals even with adverse market conditions, says Edison. Buyers are continuing to set ambitious renewable energy goals, as the report illustrated with the below graphic.
With these challenging market conditions, corporations will play an increasingly important role in getting projects built, according to Rob Collier, vice president of energy marketplace at LevelTen.
“Many corporations have 2025 or 2030 sustainability deadlines,” said Collier in a press release. “While global energy markets have stabilized somewhat compared to a year ago, the coming decade of electricity markets is uncertain. Locking in energy prices now will continue to be a winning financial strategy for buyers.”
The Inflation Reduction Act (IRA) impacts are coming
The IRA will be a game changer for clean energy deployments — experts just aren’t yet sure exactly how.
Uncertainty around the IRA implementation has made it challenging for developers to determine PPA prices, according to Edison’s report. At a recent summit for developers and the renewable finance community, “frustration around lack of direction from the IRS was a pervasive theme,” according to the report.
Guidance is expected to trickle out throughout the year, and Edison predicts there will be better price certainty in the summer.
LevelTen’s analysis states that developers and buyers are eager to take advantage of the incentives. Among the guidance issued is the energy community incentive, a provision that offers an additional tax credit for projects located in communities with historic connections to fossil fuels to aid the clean energy transition.
“This support from the IRA and its energy community incentives also present an opportunity for buyers,” said Collier. “PPAs with high social and environmental impact are the most desirable, and these new tax credits could create opportunities for those projects to be accessible to a broader list of energy buyers.