Reduced electricity demand and price drop hinders PPA negotiations in short term

In the wake of the pandemic, offices and manufacturing plants are temporarily closed resulting in a decline in power consumption and a drop in electricity prices. This is expected to impact existing power purchase agreements (PPA) as suppliers may have to either face a liquidity crunch to honor their PPA commitments or delay payments, which may lead to legal issues in the future. For upcoming PPAs the current uncertainties and reduced electricity prices will hinder negotiations, says GlobalData, a leading data and analytics company.

Somik Das, Senior Power Analyst at GlobalData, comments: “PPAs are a vital instrument for bankability of a renewable projects, mainly during the times when government subsidies are fading out. The COVID-19 outbreak is damaging some existing PPAs and delaying new PPA negotiations”

Supply chain disruptions and lack of personnel are expected to significantly hamper under-construction projects with already negotiated PPAs, leading to increased project costs and diminished developer margins. With power prices at unreasonably low levels, most developers would remain cautious in negotiating new PPAs.

Somik continues: “PPAs are typically negotiated at discounts to the wholesale electricity price and therefore drops in the wholesale prices impact the PPA pricing structure and consequently the viability of projects in the short term. PPA negotiations have particularly slowed down due to the drop in electricity prices. With the extent of the ongoing COVID-19 restrictions unknown, it is difficult to estimate a correct pricing structure that would offer good terms for developers in the current environment.

“At the buyers’ end, companies bearing significant debt could defer from making new investments and take up a more cautious approach, as their demand for energy and other goods as well as revenues will decrease.

“This is expected to be a temporary phenomenon as major nations across the globe are starting to ensure that essential industries and facilities become operational, this will lead slightly increased demand and electricity prices will slowly and steadily rise in the future.”

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