Shifting regulatory goalposts creates revenue uncertainty for renewables portfolio owners

Mixed signals from proposed changes to Europe’s energy market design, combined with a challenging market environment, are causing widespread revenue uncertainty for renewable energy portfolio owners seeking to close Power Purchase Agreements (PPAs), according to Pexapark.
Shifting regulatory goalposts creates revenue uncertainty for renewables portfolio owners
Courtesy of NREL.

While all market and price signals indicate strong opportunity to re-invest profits into new projects and drive forward the energy transition, the rules of the game for renewable energy trading are now changing on a daily basis, according to Pexapark, a provider of pricing data, software and services for renewable energy trading.

This is placing pressure on Independent Power Producers (IPPs) and funds to monitor and protect their revenues – as well as build the trading infrastructure to adapt quickly to changes in the market and regulatory environment.

Pexapark is now calling on renewables firms to boost their risk management and hedging capabilities to ensure they can act fast in closing short-term PPAs.

In recent years, renewable energy portfolio owners have enjoyed abundant revenue and good profitability. This has been driven by Europe’s commitment to accelerate its energy transition and the recent political momentum for stronger, bloc-wide energy security. Gains across the sector can be seen in asset value development trends.

However, faced with the growing impact of the energy price crisis on consumers, governments across the EU are now proposing widespread regulatory measures that will significantly affect renewable energy IPPs and funds looking to drive new renewable energy investment. Proposed changes include a windfall tax on revenues, a windfall tax on profits, and deep changes to market design.

Although these proposals are being driven by the need to dampen volatility – and PPA deals are being actively encouraged – this constantly evolving regulatory picture is sending mixed signals to the renewable energy market, where both buyers and sellers are taking a ‘wait and see’ stance.

Nonetheless, faced with the same market volatility, asset values are changing on a daily basis, requiring new levels of energy trading sophistication from investors. Short-term PPAs are being used with increasing frequency to hedge renewable energy revenues, but many IPPs and funds still lack the trading teams and capabilities needed to close these deals efficiently at fair terms and prices.

In particular, Pexapark stresses that renewables players looking to protect profits amid current market conditions must rapidly increase their understanding of their revenues at risk and baseload equivalent exposures.

“The short-term PPA has been emerging for some time as the product of choice for more agile renewables hedging and risk management” said Jonas Nihoj, Head of Portfolio & Trading services, Pexapark. “But even this model could be threatened by the shifting goalposts of the current regulatory environment unless portfolio owners take action to develop their ability to monitor and protect their revenues. “We work with many renewable energy IPPs and funds on strengthening their risk management and hedging strategies, helping them to rapidly upgrade their capabilities, execute short-term trades and level the playing field with utilities and professional traders.”

Pexapark recently launched a Trading-as-a-Service offering, designed to plug a gap in the capabilities needed to structure and manage short-term PPAs, providing IPPs and funds with accurate actual and forecasted production data, as well as reliable historical and forward capture prices that help with calculating risks.

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