ENERGY TRANSITION: Assessing the Impact of Negative Prices on PPAs

Following several years of record-breaking solar installations in Europe, alongside stellar growth in wind, renewable energy delivered a landmark share of 48% of Europe’s power generation in 2024. While the increasing penetration of renewables in the electricity mix is good news for decarbonisation, the intermittent nature of solar and wind has contributed to increased volatility in power prices. Most notably, 2024 saw a significant surge in the number of hours with negative wholesale electricity prices. These are hours during which supply exceeds demand, resulting in electricity producers paying to feed their energy into the system.

Why would a producer pay to feed power into the grid, rather than curtailing generation? This happens for a number of reasons, including:

• Technology: The cost of shutting down certain types of generation (such as nuclear) can be more expensive than operating at a loss.  The generation is designed for baseload production and does not typically respond to price signals, thus continuing to produce even when prices are low or negative.
• Regulatory structures: Many legacy renewable support schemes were designed to support the economic viability of project developments, therefore paying fixed compensation to producers which does not respond to market signals. For example, feed-in-tariffs in certain countries compensate producers at a fixed rate for every kWh produced, irrespective of the market price.
• Pay-as-produced Power Purchase Agreements (PPAs): These are long-term offtake agreements whereby a buyer agrees to purchase a percentage of the actual production of a plant at a fixed rate per kWh. As with the regulatory structures mentioned above, this type of agreement could disincentivise the producer to curtail production even when market prices are low or negative.

For a detailed explanation of why negative power prices occur, see this insightful note published by Eurelectric in December 2024.

LINK: Eurelectric Explainer on Negative Prices

EVOLVING IMPACT OF NEGATIVE PRICES ON PPAs

With soaring negative hours across Europe, offtakers in new PPA contracts are less willing to accept the risk of buying the ‘as produced’ volumes of a plant irrespective of market prices. This means that we are increasingly seeing the risk allocation of negative prices addressed in PPAs. This can take the form of non-settlement clauses, whereby electricity is not delivered or settled when market prices fall below a certain level (e.g. when prices turn negative) or the risk is shared between buyer and seller (e.g. negative hours are settled up to a point).

Pexapark recently published two excellent blogs on this topic – see the links here:

LINK: Pexapark Negative Prices in PPAs Part One

LINK: Pexapark Negative Prices in PPAs Part Two

KEY VARIABLES AFFECTING PPA CURTAILMENT

Clearly non-settled, curtailed volumes reduce the effective value of the PPA, impacting the project’s ability to repay lenders and affecting the returns earned by investors. The extent of the financial impact of a non-settlement or risk-sharing clause in a PPA agreement will be affected by the following key variables:

• Number of negative hours in the relevant market
  While we are optimistic that negative hours will become less prevalent in the medium- to long-term due to factors including regulatory changes (such as feed-in-tariff structures not settling during negative hours), stationary storage, interconnection and intelligent demand response, in the short-term it is likely that increasing cannibalisation could lead to similar or higher levels of negative hours compared to recent trends. The below graph reproduced from Nat Bullard’s annual presentation  on the state of decarbonisation shows how negative prices have soared in 2023 and 2024.
  
  The below table from Pexapark powerfully illustrates the extent and monthly spread of negative hours in selected European markets in 2024.
  
  
  
• Correlation between production profile and negative hour distribution
  In 2024, negative hours were more likely to occur during the spring and summer months due to increasing solar cannibalisation. This means that for solar farms, a larger percentage (up to 25% in certain markets) of total generation fell within negative hours. While the impact for wind farms was less pronounced overall, in markets with higher wind penetration such as Finland, wind assets saw similar challenges.

ASSESSING THE IMPACT ON PROJECT ECONOMICS

It is clear that for the foreseeable future at least, negative prices cannot be ignored and will need to be addressed during PPA negotiations. In order to help assess the impact on the investment case, we have created the attached calculation which can be used to evaluate the impact of different levels of negative hours and production levels during those hours on the PPA price. This can be used either on a standalone basis or by incorporating the mechanics into a financial model.

Our calculation includes illustrative inputs, which can be updated with actual market data and project economics. Key inputs to the calculation include:

• Project technical assumptions: gross capacity, loss factors, gross generation per hour (12 x 24 profile)
• PPA arrangement: tenor, % of production under PPA, price per MWh
• Negative hours: 12 x 24 profile of expected negative hours

Our workbook includes a sensitivity table showing the impact of different levels of negative hours and higher or lower production within those negative hours on the effective PPA price.

DOWNLOAD: NF Negative PPA Price Assessment Tool v1.0

Contact us if you have any questions or require help incorporating a negative price settlement clause into your financial model.