L R AS Published on Tuesday 14 April 2020 - n° 317 - Categories:PV Watch
A look at the threats to PV development
The average market price per kWh has become lower than the production price of RE
The drop in electricity prices is due to the collapse of oil prices.
Purchase contracts can no longer be concluded
Electricity prices on the international market are on the decline
Two actors can alleviate this situation of restricted purchases
The horizon is not so black
Even if a very large majority of solar professionals are confident about the future of photovoltaics, some are still worried about the sharp fall in electricity prices in Europe and the near future.
The average market price per kWh has become lower than the production price of renewable energy.
In Spain, the average price of electricity had fallen in recent weeks to €20 per MWh compared to €40 to €50 a year or two ago. More generally, on 14 April, the price of electricity on the European energy market (Epex Spot) is less than €25 per MWh.
At this price, it is very difficult to conclude energy supply contracts with a user. Bloomberg indicates that in 2019 the lowest price in Europe for these solar power purchase agreements (PPAs) was in Spain, with an average of €35 per MWh. How can new contracts be concluded under these conditions? Spain is the most advanced country in the conclusion of such contracts, and benefits from excellent sunshine and the best cost price for solar electricity. Bloomberg reports that the cheapest wind energy MWh in Europe is in Sweden (at €30.50) and in the UK it is twice as expensive.
The drop in electricity prices is due to the collapse in oil prices.
From a level of $60 a barrel two months ago, it returned to around $22 this Tuesday, April 14. This drop is the result of a drastic reduction in consumption by households, industries, and road and air carriers. They are either at a standstill or at minimum consumption. At this price, gas or coal-fired power stations are regaining their competitiveness, which was attacked for a while by renewable energies.
There is no indication that the price of oil will rise significantly as a result of the reduction in consumption. This is the consequence of containment. This will persist for several more weeks or months. At present, more than half of the world's population is subject to containment. This quarantine is far from over because the pandemic is spreading in many countries such as India, Africa and South America. In the United States and Europe, the epidemic is still alive; it is far from being eradicated.
For solar professionals, the uncertainty is great because nothing says that this abundance of oil is going to disappear soon, or even that the future lies with renewable energies. The energy purchase contracts that had emerged in 2019, especially in Spain, can no longer be concluded. Which supplier or buyer would take the bet on the evolution of the price of electricity for five or ten years?
Purchase contracts can no longer be concluded or are seeking to be terminated
Even if an agreement were reached, the banker would be reluctant to provide 80% of the capital needed for construction. Therefore, until the health and economic situation has normalised and stabilised, purchase contracts can no longer be concluded. This takes a large part of the activity out of the sector in the different regions of the world. All that is left are strong national tenders, as international contracts in some countries depend on oil revenues.
Similarly, contracts recently signed but whose sites have not yet been completed or are already in operation are beginning to make the grade.The buyer has an interest in terminating the contract rather than purchasing energy contractually at a higher price than the market price. The difference can be considerable, since in Spain (the only country for which we have data) contracts have been concluded on average at around €35 per MWh, whereas the same MWh can be purchased on the market at €20. Who would resist the interest in suspending or seeking to terminate the contract?
Electricity prices on the international market are on the decline.
In addition, there is a downward trend in electricity prices on the market: many power plant owners have bet in 2019 on selling their energy production on the market. It is true that last year there was a favourable gap between the grid price and the cost of production.
This anticipation is turning against power plant owners who have signed supply contracts. The production of solar and wind power plants benefits from a priority of injection into the network at a guaranteed price. It is therefore in the interest of plant owners to produce as much as possible to make their installations profitable. Only in periods of confinement and reduced electricity demand, which is between 15% and 25% in countries such as Spain, Italy and France, the priority of RE injection forces fossil fuel generators to make way for RE. Because these plants are heavy to start and stop, they produce even in the event of overproduction. For example, in France, during the last four Sundays, the market price of MWh became negative between 13:00 and 16:30. Energy producers thus had to pay to inject energy into the grid.
This phenomenon, which has been linked to a lot of sunshine over the past month, will develop with the new RE installations that are gradually being commissioned. The result will be pressure on market prices, which could keep the price per MWh low. If this happens, it will be in the interest of industrialists to go to the market rather than concluding purchase contracts. Can we be optimistic?
Here too, another factor will work against the developers and construction sites of renewable energies. Just as serious: financing
An unprecedented economic crisis will emerge from the containment and shutdown of many activities: there are businesses banned from opening which have their charges still running, loans to be repaid, employees to be paid or compensated. There are the manufacturers at a standstill who will not be able to deliver their production to the distributors and who lose their outlets. There are intermediaries unable to pay for their stocks or orders. Bankruptcies and redundancies are going to multiply both in France and in the confined countries: the countries have put themselves at an economic standstill to fight against the pandemic. Consumption and the standard of living of the population will fall considerably, reducing household spending. This will have repercussions on distributors and manufacturers.
Two actors can alleviate this situation of restricted purchases
On the one hand, the State, which, as in France, has planned to flood the economic circuits by distributing cash. Only all the economic agents do not fit into the boxes provided by the government. A large number of them will remain without resources or in great difficulty. On the other hand, the banks are responsible for distributing credit to those who need it. They will have the greatest difficulty in finding liquidity for new projects because their cash flow will be tied up by their current clients who are having difficulty repaying their debts.
As a result, the banks will be forced to select their clients and thus increase interest rates or conditions. They will give preference to borrowers who appear to them to be the most solid and therefore the most capable of repaying their debts. Some developers are already aware of this fact. For example, the American company Avangrid considers that it will have to bring in more than 20% equity capital to encourage the bank to follow it. The American professional body SEIA estimates that the $20 billion in equity financing planned for 2020 is threatened by the pandemic. The consequence will be that the financially strongest developers will fare best. On the other hand, the less financially strong or smaller developers will find it difficult to finance themselves and will be forced to sell their projects to the bigger ones! A concentration of the profession is to be expected.
The horizon is not so black
While these two obstacles or constraints (the difficulty of concluding purchase contracts and bank financing) will emerge in the course of 2020 and will probably spill over into 2021, the horizon is not so black, as financial resources will be directed towards renewable energies for both ecological and economic reasons. The autonomy obtained by the States with RE is a great and valuable conquest. It is also a precaution against the variability of oil prices. It is also an ecological instrument. This should encourage governments to pay for investments directly instead of banks to help boost the economy. The United States did so in 2009. This has allowed them to rapidly recover their economy through the American Recovery and Reinvestment Tax. It was quicker than Europe's which had bet on banks!
Another reason for confidence, rightly pointed out by T. Breton, European Commissioner, this pandemic constitutes a break between the old and the new world. It will accelerate previous trends by accelerating the evolution towards a greener and more digital world. Greener means more renewable energies!