The European PPA market has been dominated by many of the largest energy companies, with 30 sellers signing more than half of PPAs in 2020. But is bigger always better when it comes to managing risk in renewable energy trading?
Our COO and co-Founder, Luca Pedretti, sat down with Olivier Bardet, Head of Global Pricing & Structuring at Enel Green Power, for an open discussion around the challenges that even the largest energy companies must face when it comes to renewable energy sales.
LP: Could you describe in your own words your role, and Enel Green Power’s “big picture” activity in the international PPA market?
OB: I’ve been working in the renewables business for five years now. I was previously a trader for 20 years, mainly in power. My previous role was Head of Global Gas Trading at Enel. Five years ago, I moved departments and started working within the commercial office of the company. I am responsible for our Global Structuring and Pricing unit – basically, we help our local hubs in the negotiation of PPAs from the pricing and contractual side.
We’ve signed PPAs all over the globe, and within a short while, we realised that no two contracts looked alike – so we’ve started to standardise processes on the contractual and pricing side, while making sure that we still have enough flexibility with new offers and structures that will suit the client and ultimately negotiate it down to a tailor-made solution.
At Enel Green Power, we are the “renewables super major”; that means we operate the world’s largest private renewable generation fleet. Generating clean energy with renewables is just the first step, as our business strategy embraces sustainability throughout every project phase. We on-board clients and suppliers to follow our lead in the quest for a greener future. We are also a company that focuses on the quality of services that we can guarantee in terms of availability and plant maintenance, all at a volume and price that best suits the client.
LP: Enel Green Power is a huge name in global energy. Geographically, where has the company mainly focused on for renewable energy and PPAs?
OB: Our main market has been the US – which is really the biggest PPA market in the world. We have a very strong presence there, and our American team has signed numerous PPAs with top names, such as Danone and Facebook, and other major businesses over the past year. It’s a very positive outlook for the market, which has been booming given the incoming administration is very open to renewables. The market is also very mature, with everything in place to do well, allowing you to leverage on your trading capabilities, via hedging or an active commercial and industrial (C&I) market.
In Europe, our focus is in the markets where we have a historical presence and where we have a lot more to leverage, including Spain, Italy, and Romania. We’re also increasing our presence in the German and French markets, which are a major part of our development plan for this year and the next one.
LP: Increasingly, renewable investments are all about non-subsidy investment, and exposure to price risk is increasing on all fronts – how is Enel Green Power dealing with this?
OB: Over the past year in particular, a lot of large companies have made sustainable pledges, and are starting to get really excited about renewable energy in particular. However, often these companies don’t have the departments that are accustomed specifically to buying renewable energy. They don’t know what a PPA is, or how to go about it. There’s a very strong need in the market for education and consulting, to guide these companies through the process. We’ve been very impressed with the work Pexapark is doing with not only their academies, but regular reports and quotes for renewable energy pricing, in order to give people real transparency throughout the market.
Getting back to Enel Green Power’s strategy – this influx of new players in the market has been really exciting for us. While auctions and tenders are regulated, we can now also talk with C&Is, opening up new channels for selling energy. While governments have been crucial in setting up the market, we see future momentum coming from the corporate world buying into renewables, rather than from new subsidies.
Of course, we’re seeing some challenges, particularly when it comes to the difference in prices of GOs across Europe created by C&I demand. For example we might have Dutch GOs that are worth a lot more than Spanish GOs, and although at a European level, it’s better to put the plant in Spain due to high solar resource, the client might have a better business case for the plant to be developed in Holland closer to operations – so that’s where it gets developed.
The period of very high price volatility over the past year has also been a challenge for market confidence, as more and more companies are wary when it comes to a long-term contract. We expect shorter- and shorter tenors, or as we’re seeing already, requests in PPAs to enable better exit terms or protection against credit risk. We’ve already seen cases in Mexico where companies signed PPAs 10-15 years ago which are double the current market price – and no one wants to end up in that situation.
LP: Of course, as we see more companies start off in the PPA market, there is so much more work that must be done to standardise pricing negotiations – and unlike even a few years ago, counterparties are faced not just with one option, but potentially thousands of RfQs to manage. Has this changed Enel Green Power’s approach?
OB: Absolutely – our team has had to grow, certainly, but we have also had a strong focus on skills and specialisation. We have set up a unit dedicated to PPAs, and now we’re looking to develop the trading aspect of this business. The traditional power business has already gone through these phases: it used to be a producers’ market. Then it became a marketer’s market, and now, it’s really become a financial market.
We’re seeing the same thing happen with renewable power. Now we’re seeing contracts standardised in Europe, and it’s becoming a more and more of an OTC traded market, although traditional power brokers are getting into it, which we expect to continue in the future. We also expect the market to become a lot easier to navigate in time, as there will be more and more standardisation of contracts and more liquidity, not just in terms of PPAs but in terms of hedging instruments.
LP: It sounds like you’re building up substantial trading portfolio management within Enel. I was wondering if you could tell us more about how Enel Green Power’s structure and approach to energy risk management and sales has changed over recent years?
OB: We’ve seen a lot of value in price references for the European market – we’ve used Pexapark to report internally to our business development team when looking for new projects. Traditionally, it used to be that our BD team would look for a project, and then we would try to sell off the electricity – now, it’s more of a two-way process, where we put together information around project cost and resource with the amount of revenue we can expect from those projects, based on current PPA prices. Before, getting these prices was very much a game of calling contacts and trying to pull out prices in the market – today, with an index, there is no longer the need to chase prices and quotes.
LP: So when it comes to decisions around PPA structure – such as tenor, whether to do an eight or ten year PPA, whether to go for a baseload or pay-as-produced structure – how does Enel Green Power work with counterparties to reach a final decision for each PPA?
OB: If we end up with the choice of say, baseload for 12 years versus pay-as-produced for a shorter tenor within the limits that keep a project bankable, my unit will calculate the revenue distribution of both structures and compare them in terms of the resulting ratings. We work closely with our financial unit to fully evaluate how each structure would alter the bankability of a project.
LP: How do you see this dynamic playing out in the long run? It seems to be a more sustainable decision, and one trend we’ve noticed with our clients is building new customer evaluation curves reflecting the liquid at the same elect part, which is probably closer to what you could get on the PPA market. When it comes to building in trading and portfolio management, is that a play to capture more of the utility, do-it-yourself margin?
OB: Really, we’ve been making sure to preside all the market segments and enhance our capabilities everywhere. As such, developing our channels for managing risk across our portfolio is a key priority. In Enel, there’s a huge risk management team, particularly given our company has a global portfolio management approach that’s quite centralised. This is particularly useful when it comes to netting and hedging some of the positions we have against other positions across the group.
LP: Looking forward to 2021, what do you see as the main changes or trends coming up for the renewables market?
OB: One thing we’re seeing across many countries, particularly in Europe, is the very high penetration of renewables on the grid, and as such, many more issues emerging in terms of price volatility and network management. We expect that changes at the regulatory level will have to be made, in terms of network operators and incentives for dispatchable generation, particularly in line with the mothballing or shutdown of thermal plants. As we see in Australia, this creates enormous issues when there’s peaks in demand for electricity and no generation to turn on.
Beyond this, we expect the market to continue to expand in the coming year. Everyone is all about renewable power now, and we’ve already seen plans from the UK, France, and other European countries to expand renewables development over the next year – and we can only expect the market to grow as a consequence.