fundamentals vs. markets
TRANSCRIPT
Fundamentals vs. Markets
The German PPA Market
02 October 2020
Luca Pedretti - COO & Co-Founder, Pexapark
Matthew Jones - Senior Analyst, ICIS
▪ Managerial positions for 10 years at Axpo Trading
for front units in origination and trading
▪ Build renewable energy off-take agreements from
renewable energy sources of more than 3,000
MW
▪ M.A. in International Politics and Governance
from the University of St. Gallen
Luca Pedretti
COO & Co-Founder
+41 79 770 38 98
2
YOUR PRESENTERS
Matthew Jones
Senior Analyst – EU Power
▪ Qualitative and quantitative analysis of European
power markets
▪ Nine years’ experience in the energy industry as an
analyst and consultant
▪ M.A. in International Relations from King’s College
London
+44 77 43 572 458
Fundamentalsvs. MarketsThe German PPA Market
October 1, 2020 Joint Webinar ICIS & Pexapark
Luca Pedretti
Co-Founder Pexapark
www.pexapark.com
THE PPA PRICE IS A RATIONAL BEAST – WHICH FACTORS SET THE PPA PRICE?
Traded prices for standard power
products
Company-specificprice models &
assumptions on non-hedgable risks
1 2 3
Risk allocationbetweenparties
Pexapark | 4
Pexapark | 5
THE KEY DRIVER IS THE THEORETICAL BASELOAD CURVES DERIVED FROM TRADED PRICES
6
▪ Since autumn last year, prices for front years have been falling
▪ This decrease was partially compensated during February by raising prices on the long end
▪ Due to the COVID-19 pandemic, prices started to decrease significantly along the entire curves driven by falling gas and EUA prices and reduced electricity demand
▪ Prices have since got back to pre-COVID levels. Trading liquidity is lower («fear factor») which increases hedging cost and reduces PPA prices.
Source: PexaQuote
RECENT PRICE DEVELOPMENT AND VOLATILTIY FOR GERMANY FORWARD PRICES
ILLUSTRATIVE
Certain risks can only be modelled and not hedged. Difference in models, views and finally risk appetite lead to variance in PPA bids
Value components
xxx
Baseloadrevenue
Profile costs
Balancingcosts
Market revenue
Canniba-lization
risk
Pricerisk
Diversi-ficationeffect
Risk reduction by hedge
Risk adjustedrevenue
P90
Balancingrisk
P10
exp
PPA
Hedging losses
Sales Revenue
P90
P10
exp
xxx xxx
xxx
xxx
xxx
xxx
xxx xxx
xxx
xxxxxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Volume risk
xxx
Risk components
Credit losses
Pexapark | 7
THE SECOND DRIVER ARE RISK MODELS, ASSUMPTIONS AND APPETITE FOR NON-HEDGEABLE RISKS
Volume
Price
Producer Offtaker
Profile
Pay-as-Produced Pre-defined Profile All-day Peak Load Annual Baseload Monthly Baseload
Production Profile
Contract Profile
AprJan JunFeb Mar DecMay Jul Aug Sep Oct Nov
Jan Feb MayMar JulApr OctJun NovAug Sep Dec
SepJun AugJan Feb Mar MayApr Jul Oct Nov Dec
FebJan Jul DecAprMar AugMay Jun Sep Oct NovAugMayJan MarFeb NovApr OctJun Jul Sep Dec
MarJan Feb AugApr May Jun DecJul Sep Oct Nov
MarFebJan Apr NovJunMay Jul Aug Sep Oct Dec
Volume
Price
Profile
Volume
Price
Producer Offtaker
Profile
Volume
Price
Producer Offtaker
Profile
Volume
Price
Producer Offtaker
Profile
Volume
Price
Producer Offtaker
Profile
Pexapark | 8
A FINALLY WE HAVE DIFFERING RISK ALLOCATION BETWEEN PARTIES AS PRICE DRIVER
9
EUR/MWh
Profile & Volume Risk
Annual Baseload PPA
GoOLiquidity CostPrice CurveAnnual
Baseload
Balancing CostPay-as-produced PPA
Net PPA
A SUMMARIC VIEW ON THE PPA PRICING CASCADE IN GERMANY – 10 Y PPA, COD 1.1.2022
On basis of an average German Solar respectively Wind profileSource: PexaQuote, last update per September 29, 2020
49.6Wind 38.3Solar 42.1
2.1-3.1
Wind 9.2Solar 5.4
Power price levels are beyond control, but quantification and structuring can unlock significant additional value
Pexapark | 10
PRICE EVOLUTION SHOWS LARGE VOLATILTIY ON FOR PPA BID PRICES
▪ Based on a standardized, average solar profile
▪ Start date per 1.1.2020, tenor of 10 year
▪ Pay-as-Produced PPA (excl. GoO, credit and ancillary service costs)
UNLOCK FULL PPA PRICE TRANSPARENCY AND ACCESS STATE OF THE PPA PRICING TOOLS
✓ THE price reference for renewable PPAs
✓ Used in PPA negotiations and for asset sales as price reference
✓ Daily updated PPA prices leave no room for last-moment surprises
✓ Fair value of corporate and utility PPAs
✓ Solar, onshore wind, offshore wind
✓ Source PPAs from corporate and utility offtakers
✓ Connect with leading offtakers
https://pexapark.com/wind-solar-ppa-prices/
Pexapark | 11
Offices
Zurich, London, Lviv
# of employees
30+August 2017
Company founded PPAs supported
8+ GW
PEXAPARK AT A GLANCE
Pexapark | 12
Assets monitored
3+ GW
SOME CUSTOMERS
SOME PARTNERS
German Power Market Fundamentals
02 October 2020
Matthew Jones, Senior Analyst - EU Power
ICIS is a world leading price reporting agency and analytics powerhouse for commodity markets
Prices News Analytics Data
Petro-Chemical
Energy Fertilizers
Forecasting carbon and power
15
Matrix approachCarbon modellingPower modelling
• Fundamental model
matching supply and
demand
• All EU power markets,
plus NO, CH, UK
• Hourly granularity until
2030 (2050 expansion in
November)
• Detailed assumptions on
efficiency, must-run,
decommissioning etc.
• Modelled on a plant-by-
plant approach
• Up-to-date fuel prices
• Bottom-up research per
sector
• Price induced and
planned abatement
• Incorporates trading
behaviour of compliance
players
• Balancing the market
with fuel switch in the
power sector and
industry abatement
• Emissions to hedge
dynamically based on
EUA prices
• Emissions output from
the power model is an
input to the carbon model
• The carbon price output
is an input to the power
model
• Feedback loops to
optimise
Fuel/carbon price outlook
Capacity developments
Renewable growth expectations
Power Price outlook
Agenda
28/11/19
01
02
03
04
16The renewable investment dilemma
Fuel/carbon price outlook
EUA price developments: Key drivers
18
• The MSR introduces a rule-based supply side adjustment mechanism (2019)
• Linear reduction factor increases to 2.2% (2021)
• More stringent rules for industrial free allocation (2021)
• Fuel switch and industrial abatement required in the early 2020s to balance the market
Source: ICIS
0
500
1,000
1,500
mill
ion
to
nn
es
Final auction volume and reduction via MSR
Final auction volume MSR
0
500
1,000
1,500
2,000
mill
ion
to
nn
es
EU ETS supply and demand balance
Allocation Auctions Other supply Emissions
EUA price forecast
19
• Under our base case assumptions, the EUA prices are expected to rise to the mid-2020s before falling back
• However, the EU ETS is a policy-driven market. The two main decisions that will influence prices are:
• The decision on the MSR intake rate and thresholds
• The 2030 GHG reduction target
Source: ICIS
0
10
20
30
40
50
60
70
80
90
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
€/t
on
ne
EU ETS base case forecast
Base case Current legislation Green deal
Coal and natural gas price expectations
20
• We interpolate between the end of the forward curve and the IEA WEO coal and gas prices for 2030
• Both coal and gas prices are expected to recover from their current lows gradually over the coming decade
Source: ICIS, IEA
0
5
10
15
20
25
30
35
0
20
40
60
80
100
120
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
€/M
Wh
(n
om
inal
)
$/t
on
ne
(no
min
al)
German coal and gas price forecast
Coal price ($/tonne) Gas price (€/MWh)
Capacity developments
Nuclear phase-out by 2022
22
• Germany has six reactors remaining, with a combined capacity of 8.1GW
• They produced 14% of German electricity in 2019
• All six will be phased-out by the end of 2022
Source: ICIS
0
5
10
15
20
25
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Cap
acit
y (G
W)
German nuclear phase-out 2011-2023
Coal phase-out plans
23
• Targets:
• 2022: 30GW (15GW coal, 15GW lignite)
• 2030: 17GW (8GW coal, 9GW lignite)
• 2038: Full phase-out
• Compensation agreements for lignite operators, tenders for coal closures (through to 2027)
• Potential for phase-out to be sped up by either politics or the market
Source: ICIS
0
5
10
15
20
25
30
35
40
45
Cap
acit
y (G
W)
German coal/lignite phase-out
Coal Lignite
New build gas required
24
• Cumulatively, 18GW of coal, lignite and nuclear capacity expected to close in the next three years
• By 2030, 29.5GW is anticipated to be retired, based on current plans
• More gas is required in the mid-term to ensure security of supply
• We assume a 14GW increase to 40GW
Source: ICIS
-35
-30
-25
-20
-15
-10
-5
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
GW
Cumulative coal, lignite and nuclear closures 2020-2030
Coal Lignite Nuclear
New build gas required
25
• Cumulatively, 18GW of coal, lignite and nuclear capacity expected to close in the next three years
• By 2030, 29.5GW is anticipated to be retired, based on current plans
• More gas is required in the mid-term to ensure security of supply
• We assume a 14GW increase to 40GW
• After factoring in gas capacity growth, net capacity will decline by 16GW by 2030
Source: ICIS
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
GW
Cumulative thermal and nuclear capacity change 2020-2030
Coal Lignite Nuclear Gas Cumulative
Renewable growth expectations
Germany has a 65% renewable electricity target for 2030
27
• To reach the target the government suggests that 377TWh of renewable generation will be required in 2030
• Renewable capacity expectations in 2030 (% increase from 2020):
• Solar: 100GW (+94%)
• Onshore wind: 71GW (+29%)
• Offshore wind: 20GW (+160%)
• Biomass: 8GW (11%)
• Hydropower: 6GW (+0%)
• Expansion to be driven primarily by the continuation of competitive tenders
Source: German NECP
0.00.51.01.52.02.53.03.54.04.55.05.5
Solar Onshore wind Offshore windG
W
Annual net capacity additions 2020-2030
020406080
100120
GW
Renewable capacity expectations in 2020/2030
2020 2030
~44GW of onshore wind and solar to drop out of EEG by 2030
28
• ~41% of existing solar and onshore wind to drop out of EEG by 2030 (35% solar, 47% wind)
• Onshore wind drop-out is relatively steady; solar picks up from 2028
• Uncertain how much of this capacity will decommission
• Options for remaining online
• Repowering
• Direct marketing
• PPAs
Source: ICIS
0
5
10
15
20
25
30
35
40
45
50
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
GW
Cumulative EEG drop-out to 2030
EEG drop-out Onshore wind EEG drop-out Solar
Solar
29
• Auction prices have fallen significantly over the past four years, leading to increased capacity awarded in auctions
• Solar winning all capacity in joint auctions with onshore wind and sol-only auctions over-subscribed
• The main challenge is the scale of the growth required to meet the 100GW target by 2030
• The government plans to auction 18.8GW 2021-2028, which suggests around 20-25GW will need to come from outside the auctions
Source: ICIS
0
10
20
30
40
50
60
Added 2010-2020 To add 2020-2030
GW
Solar capacity growth in Germany
0
20
40
60
80
100
0
100
200
300
400
500
600
€/M
Wh
MW
German solar auction results 2015-2020
Capacity (MW) Mean average successful bid (€/MWh)
Onshore wind
30
• Onshore wind facing challenges due to a low permitting process and NIMBYism
• Tenders are consistently undersubscribed and additions in 2019 were the lowest this century
• The government is introducing measure to streamline the permitting process
• Net additions of 16GW over the next decade is a modest target, though 26GW of existing wind will drop out of the EEG
• 31GW to be auctioned 2021-2028
Source: ICIS
0
5
10
15
20
25
30
Added 2010-2020 To add 2020-2030
GW
Onshore wind capacity growth in Germany
010203040506070
0200400600800
10001200
01
/05
/20
17
01
/08
/20
17
01
/11
/20
17
01
/02
/20
18
01
/05
/20
18
01
/08
/20
18
01
/11
/20
18
01
/02
/20
19
01
/05
/20
19
01
/08
/20
19
01
/11
/20
19
01
/02
/20
20
01
/05
/20
20
€/M
Wh
GW
German onshore wind auction results
Capacity (MW) Mean average successful bid (€/MWh)
Offshore wind
31
• The offshore wind target for 2030 was recently increased from 15GW to 20GW
• Several subsidy-free offshore wind projects have already been awarded in tenders
• However, the future tender regime for offshore wind remains unclear at present
Source: ICIS
0
2
4
6
8
10
12
14
Added 2010-2020 To add 2020-2030
GW
Offshore wind capacity growth in Germany
Power price outlook
German power price forecast 2021-2030
33
• We expect prices to increase significantly in the mid-term, reaching a peak of €58/MWh in 2025
• Bullish price trend driven by:
• Increase in carbon prices
• Recovery in gas and coal prices
• Phase-out of 20GW of coal, lignite and nuclear 2025
• Prices to decline in the second half of the 2020s as carbon prices soften and increased zero marginal cost renewables come online
Source: ICIS, Pexapark
0
10
20
30
40
50
60
70
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
€/M
Wh
(n
om
inal
)
German wholesale power price forecast
Base Traded forward curve (Pexapark)
German renewable capture price forecasts 2021-2030
34
• Average capture prices 2021-2030:
• Solar: €43.91/MWh
• Onshore wind: €44.61/MWh
• Both technologies will see cannibalisation over the coming decade as renewables increasingly influence price setting in the market
• We anticipate capture prices above the ten year PPA prices identified by Pexapark
Source: ICIS, Pexapark
20
30
40
50
60
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
€/M
Wh
Renewabe capture price forecasts 2021-2030
Wholesale Solar Onshore wind Offshore wind
20
25
30
35
40
45
50
Solar Onshore wind
€/M
Wh
Average annual wind and solar capture prices 2021-2030
ICIS forecast 10 year PPA (Pexapark)
Thank you
Matthew Jones
Senior Analyst EU Power, ICIS
Luca Pedretti
COO & Co-Founder, Pexapark