L R AS Published on Monday 21 February 2022 - n° 394 - Categories:electricity companies

Rising energy prices have had a negative impact on electricity companies

The price of electricity on the European market has risen from €20-30/MWh a year ago to €50 in November-December and now to over €100/MWh. This price increase is the result of the economic downturn related to the covid and the subsequent strong economic recovery,

which has led to a sharp rise in demand. In addition, the commissioning of the North Stream 2 pipeline, which was to bring Russian gas to Europe, has been delayed by the Russian-Ukrainian crisis.

In this context, electricity supply contracts are subject to these unprecedented increases. The future of electricity prices is now uncertain

Electricity suppliers who hedge their contracts have been subject to margin calls (to cover the difference between the contracted price and the market price). This has cost European companies hundreds of millions of euros. "Several European energy companies had to take out short-term loans of several billion dollars to cope with this situation, which put a strain on their cash flow.This has put a strain on the cash flow of these companies. "As a result, electricity supply companies are reviewing their business model to avoid having to take out such loans to cover supply contracts.

These contracts were usually for ten years. Price fluctuations intervened. This is new: "how you price the power purchase agreement, and in particular how you price it defensively, depends on what you expect from future volatility"

Utilities have been forced to react

Utilities need to take a new approach to contracts. They do not perceive how the market will develop and what the effects will be on profit margins. If volatility were to remain high for long periods, this would be negative for PPA prices, with fewer offtakers active in active solar development. Utilities could even stop taking risk altogether

Ten-year contracts therefore play a role in the balance sheet of the utilities (since they have to cover their already concluded contracts in forward sales). Suppliers could be satisfied with two to five year contracts, in order to reduce the magnitude of the risk, as three year hedging contracts are readily available. Thus, the buyer can easily hedge his risk over most of the contract period.

Shorter contracts mean less risk to balance sheets, allowing companies to price more competitively

However, the use of short contracts poses problems for project financing: a ten-year contract provides significant leverage for a project. Shortening it puts the project owner at risk (because when the short contract expires, what will happen to the project owner?) Unless the banks feel that solar energy has proven to be competitive and the idea of a very low electricity price would be considered unlikely.


PV Tech of 17 February 2022

Editor's note: The price increase has impacted the utilities. They were surprised and suffered losses in some cases. They will react. Probably not by shortening the duration of the contracts, but by adjusting them. For example, by sharing the extra cost of high prices and the benefits of low prices, or some other formula. Financiers are used to limiting risks. They will know how to innovate in order to maintain a bank guarantee of ten years or more. Indeed, what the companies might gain on the energy buyers' side, they might lose on the banks' side. If they limit the risk by sharing it with the buyer, the problem is mitigated!

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