Solar and wind supply imbalance jacks-up US power purchase deals in ‘astounding’ quarter

The US is experiencing a rapidly growing solar and wind supply-demand imbalance that combined with skyrocketing development costs has caused the sectors’ combined power purchase agreement (PPA) prices last quarter to surge an “astounding” 28.5% versus a year earlier, according to online renewables trading hub operator LevelTen Energy.

First quarter renewable PPA prices rose 9.7% to $39.91/MWh compared to fourth quarter 2021, according to the outfit’s Q1 2022 PPA Price Index Report.

Individually, PPA prices for solar increased 6% quarter-on-quarter and 15.8% versus a year earlier while those for wind went up 13.5% and 41.5%, respectively.

For the first time since LevelTen began producing the reports in 2018, renewable PPA prices increased across all major US electricity markets for both solar and wind quarter-over-quarter.

“This uniform rise in prices is a reflection of the pervasive and unabating headwinds renewable developers are encountering on nearly every front of project development,” said the report.

Those headwinds include Covid-induced supply chain turmoil, spiking prices for commodities, labour, and project components, interconnection challenges, and market uncertainties as regulators enact and repeal a variety of pricing mechanisms.

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The US solar industry faces potential new tariffs of 50%-250% on products from Southeast Asia in response to a new Department of Commerce investigation into allegations of circumvention of anti-dumping/countervailing orders on the part of PV component manufacturers there.

The war in Ukraine is also driving up natural gas prices, “which creates a domino effect on wholesale electricity and PPA prices”, according to the report. Yet, when gas prices rise, “the value of locking in renewable energy at a specific price, increases, driving more demand to the market”.

All these hurdles are converging to add substantial costs and lack of clarity for developers as they look to set PPA prices years in advance of project construction. As a result, the cost models used to price PPAs are becoming increasingly unwieldy, it added.

LevelTen Energy’s Gia Clark Photo: LevelTen Energy

“Every aspect of project development has risks to evaluate and balance. These days, these risks feel particularly high-stakes,” said Gia Clark, senior director of developer services at LevelTen. “As long as these myriad headwinds persist, we can expect elevated PPA prices across North America.”

The report, in addition to a 57-respondent developer survey by LevelTen, shows substantial demand for solar and wind from corporations and other large consumers including utilities, which is necessary to help drive the country’s transition to cleaner energy resources.

President Joe Biden wants the US to reach net-zero by 2050, which is consistent with the Paris Agreement. To get there, he set several interim climate targets including a 50-52% reduction in economy-wide greenhouse gas pollution by 2030 from 2005 levels and a carbon-free national electricity grid by 2035.

For the moment, buyers aren’t deterred by rising PPA prices. “Eager to meet their clean energy targets, energy buyers continue to pursue PPAs, which are delivering higher value as wholesale electricity prices also rise,” the report noted.

LevelTen analysts expect corporate demand for renewable energy to continue to expand, with the Securities and Exchange Commission (SEC) seeking to increase accountability around emissions of individual businesses adding support.

The SEC is an independent federal regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.

The report noted that buyers will need to be flexible with developers as they look to mitigate for contracting risk and should be prepared to execute deals rapidly.

“As developers battle through a wide number of headwinds to satisfy growing demand, available project capacity is shrinking, and many of the best renewable PPAs are going fast,” it said.

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