Solar power purchase agreement (PPA) prices in North America increased by 4% during the third quarter (Q3) of 2023, rebounding from a slight dip in Q2. The uptick was driven by price rises within specific Independent System Operators (ISOs).

Across the Atlantic, Europe’s solar and wind energy sectors also displayed upward pricing trends during Q3. This shift comes after a period of relative pricing relief in Q1 and Q2.

European solar PPA prices in Q3 rose by 2%, indicating that the market may be reaching a new pricing equilibrium.

The findings were unveiled in the LevelTen Energy study, which analyzes the North American and European markets, revealing dynamic pricing shifts and shedding light on the challenges buyers and developers face.

LevelTen’s P25 Price Index represents 25th percentile PPA prices. All PPA price data in LevelTen’s report are based on the prices developers offer for PPA contracts, not the transacted PPA prices.

North America

The solar and wind energy sectors in North America showcased distinct patterns, highlighting the industry’s resilience.

In the Pennsylvania-New Jersey-Maryland Interconnection (PJM region), solar P25 prices surged by 12% during Q3, reflecting a substantial 31% year-over-year (YoY) increase.

Several factors contributed to this surge, including permitting challenges in Virginia, a shortage of construction companies in the area resulting in higher construction costs, projected increases in future electricity prices in PJM over the next decade, and insufficient transmission infrastructure to meet the demand for clean energy.

Wind Energy Market

On the other hand, the North American P25 wind PPA prices remained relatively stable, with a marginal 1% decrease in Q3. The decline can be attributed to decreased Southwest Power Pool (SPP) prices. This quarter’s decrease contrasts with Q2, where prices saw a significant 13% rise due to low supply across ISOs.

The substantial increase in wind development in the SPP region, which outpaced projected energy demand, intensified competition and consequently led to lower prices.

The blended P25 prices, representing a mix of solar and wind PPAs, showed a 2% rise in Q3, resulting in an 18% increase YoY.

Challenges for Buyers and Developers

The report said that while Q3 price increases averaged lower than some previous quarters, the cumulative effect of years of rising prices has created challenges for both corporate buyers and developers.

Buyers are increasingly being asked to assume more commercial and financial risk, making it difficult to secure approval from their CFOs. Developers are also grappling with providing pricing relief in the face of various development and financing challenges. The expectation of a prolonged high-interest rate environment is pushing up costs for developers, affecting energy players of all sizes.

Pricing trends vary by ISO and are heavily influenced by regional considerations. The report covers seven North American Independent System Operator (ISO) markets, including AESO (Alberta Electric System Operator), California Independent System Operator (CAISO), Electric Reliability Council of Texas (ERCOT), ISO New England (ISO-NE), Midcontinent Independent System Operator (MISO), PJM, and SPP.

For instance, solar prices in ERCOT decreased by 4% in Q3 due to a decrease in regulatory threats and risk premiums. Meanwhile, SPP saw a significant 13% decrease in P25 wind PPA prices, possibly due to a surge in lower-priced wind offers entering the market.

Europe

LevelTen Energy’s report sheds light on the evolving European P25 PPA market, marking a possible shift towards a “new normal” for pricing following earlier surges triggered by the pandemic and geopolitical events.

Previously, steep price increases were driven by the pandemic and geopolitical factors such as the war in Ukraine.

 

The stabilization of the supply chain eased the upward price pressure witnessed in the first half of 2023.

However, a significant drop in French nuclear generation in recent months led to increased electricity prices across Central Europe, particularly affecting solar PPA prices in markets like France, Germany, and Poland.

Moreover, a looming labor shortage stresses project finance models, which, in turn, adds a premium to Engineering, Procurement, and Construction (EPC) costs for solar developers. Ongoing interest rate hikes also create substantial cost pressures in the European market.

European Wind Energy Market

In Q3, European wind PPA prices experienced a 2% increase in the Market-Averaged P25 prices. This upward trend can be partly attributed to price increases in Spain, where demand for wind PPAs is rising, mainly due to concerns about price cannibalization and solar project curtailment.

However, European wind developers continue to face several challenges that may prevent wind PPA prices from decreasing significantly. Permitting difficulties and community opposition in many markets are increasing costs and extending development timelines.

Additionally, the economics of wind development are influenced by stubborn inflation across project inputs and rising financing costs due to ongoing interest rate hikes.

Country-Level Ambitions and Legislation

European countries are diverging in their commitments to tackling the climate crisis. While the European Parliament recently approved legally binding targets to increase renewable energy buildout, some countries have varying levels of ambition.

For example, France introduced a plan to curb greenhouse gas emissions and support offshore wind, while the UK softened its net-zero plans and expanded oil drilling in the North Sea. European policymakers face the challenge of aligning on a bold path to decarbonization, especially in the wake of record-breaking temperatures.

The report noted that with rising corporate demand for European PPAs, and PPA prices are unlikely to experience substantial decreases soon, and buyers are encouraged to collaborate with advisors and identify projects that align with their sustainability goals.

Europe’s wholesale electricity markets are also witnessing a heightened occurrence of negative grid prices, a trend that is anticipated to become more frequent in the years ahead. These negative prices represent genuine hazards to PPA purchasers, whose contractual settlements are linked to the pricing dynamics of wholesale markets.

This surge in price volatility can be attributed to various factors, encompassing the increased prevalence of price cannibalization, the proliferation of distributed energy generation, the persistence of legacy subsidy schemes, and the inadequacies of grid infrastructure to accommodate renewable energy sources effectively.

According to a Lawrence Berkely National Laboratory report, LCOE for utility-scale solar projects decreased by about 85% in the U.S. since 2010 to $33/MWh in 2021.

A recent Legal and General Investment Management report said that Europe would experience high energy prices in the coming years if sufficient decarbonization funding is delayed by another decade.