Solar and wind power purchase agreement (PPA) prices are rising again according to two third quarter reports, due to robust demand and continuing supply chain challenges. Two big factors collided head on in the third quarter:
- The Inflation Reduction Act passed, significantly accelerating interest in renewable energy project development via a host of tax incentives and funding to build out the domestic supply chain.
- Renewable energy supply chains continue to face headwinds, however, due to a variety of factors, including the Department of Commerce’s delayed ruling on a solar tariff anti-circumvention investigation and the detainment of solar panels from China at the U.S. border due to a new forced labor prevention law. With demand for renewables at record highs, prospective buyers with near-term renewables goals can expect delays in online dates as well as premiums for projects with allocated panels.
The outcome of this collision? An imbalance between PPA supply and demand, and led to an increase in development costs, keeping prices high.
According Edison Energy’s Q3 Market Report: U.S. PPA prices saw an overall increase in Q3, particularly for solar, and across technologies, median PPA prices experienced an 18% net increase across ERCOT, MISO, PJM, and SPP, from Q2 to Q3. Edison also noted U.S. REC procurement saw a plateau in Q3, followed by a noticeable uptick in demand as we head into Q4.
In LevelTen Energy’s PPA Price Index: North American P25* solar and wind power purchase agreement (PPA) prices soared 9.6% to $45.93 per MWh. Solar P25 PPA prices in particular rose 7.5% to $42.21 per MWh. These long-term energy contract prices are now 34% higher than the same period last year, continuing the steady rise that began in 2020, when supply chain challenges worsened by the pandemic upended years of low PPA prices.
When will the IRA start to lower PPA prices?
Gia Clark, senior director, Developer Services, LevelTen Energy says it is too soon to for three reasons:
“The first involves supply constraints; while the IRA creates robust financial incentives that will bolster the development pipeline, it does not remove immediate, major roadblocks including interconnection queue congestion and supply chain challenges that are stalling buildout.
“The second involves development costs, which keep increasing as the price of labor, capital, commodities, and other project inputs continue rising alongside inflation. Finally, demand continues to grow from corporations and utilities, increasing competition for already limited renewable capacity.”
Nearly two-thirds of developers that LevelTen surveyed for its Q3 report said that it’s too soon to discern the IRA’s pricing impacts, and that for the time being, PPA prices are still rising because of cost increases in other pricing model inputs. More than one-third of respondents said that PPA prices have thus far not been impacted by the IRA.
More immediately, big solar buyers remain impacted by the prices/supply of PV panels.
Polysilicon prices are at a ten-year high due to high demand and low supply, driven in part by the U.S.’s ban on polysilicon from Xinjiang Province, where production has been tied to forced labor. In late June, the Biden Administration began enforcing the Uyghur Forced Labor Prevention Act (UFLPA), leading to more than 3 GW of solar panels being withheld by Customs and Border Protection as of mid-August.
According to the Solar Energy Industries Association, shipping and supply chain constraints have caused utility-scale solar photovoltaic installation costs to increase 12.7% over last year.
“The IRA will undoubtedly spur significant investment in renewables — as much as 94 GW of additional wind and solar by 2035 across ERCOT, PJM and CAISO,” said Martin Anderson, head of research, USA at Aurora Energy Research, an energy advisor within LevelTen Energy’s partner network. “While many in the industry expect the influx of low marginal cost generation to significantly depress power and PPA prices, Aurora’s analysis indicates a more muted market response because of supply bottlenecks, rising electricity and natural gas demand, pricing dynamics related to thermal generation, and basis risk.”
PPA prices are likely to remain elevated in the near term, but PPA value remains compelling, says LevelTen:
“The IRA will fuel investment in renewable energy and provide developers with additional revenue that could blunt the impact of rising costs, but it’s going to take time to see how that impacts PPA prices,” said Clark. “Energy buyers who are waiting for prices to drop should know that may not happen in time for them to meet their emissions reduction goals, if it happens at all. Taking a wait-and-see approach could result in experiencing more competition for PPAs when you’re ready to enter the market. It’s important to remember that PPA prices are only half of the story. As wholesale energy prices continue to rise, so too does PPA value. And the brand value of bringing new clean energy onto the grid has never been higher, as investors, consumers and employees demand climate leadership”
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