Renewables

RE-Source Croatia conference: PPAs are tool for securing long term fixed electricity prices for firms

re source croatia conference ppa contract

Photo: OIEH

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March 23, 2023

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Published:

March 23, 2023

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Power purchase agreements (PPAs) have become a tool worldwide for consumers to secure green energy and shield themselves from high and volatile prices, and for producers to obtain a stable income as well as financing. Of course, it is also a way to increase the use of renewables. In Southeastern Europe, the number of such deals is increasing and they became very popular, so it is necessary for consumers to get acquainted with them as a solution for direct purchases from producers. Along with the call to governments to create conditions for boosting PPAs, it was the main takeaway from RE-Source Croatia, the first regional conference on the development of PPA contracts.

RE-Source Croatia was organized by the Renewable Energy Sources of Croatia association (OIEH) in cooperation with the European RE-Source Platform. The conference in Zagreb hosted about 350 participants from Croatia, the region and the European Union.

The conference was opened by Maja Pokrovac, managing director of OIEH, who said the energy crisis showed renewables are the way toward the country’s energy self-sufficiency, an idea recently confirmed by the European Commission with the proposal for the electricity market design reform.

The European Commission said PPA contracts need support from governments

It said PPA contracts have to receive support from member states, in a move to demonstrate the importance of the energy security of citizens and industry, she added.

In his opening speech, Stefano Miriello, policy advisor at the RE-Source Platform, emphasized that corporate PPA contracts would play a key role in Europe’s transition towards climate neutrality.

State subsidies needed to speed up the financing of new projects

In November, telecommunications company Hrvatski Telekom or HT, part of Deutsche Telekom, said it agreed a term sheet for the first corporate PPA contract in Croatia. The partner is Liburana, a subsidiary of Professio Energia, with its Mazin Gračac wind farm project. The preparations for signing are in the final stage.

Croatia got another PPA deal on March 17, when the event was held. It was signed by Swiss company Axpo and Kunovac, a joint venture of Taaleri Energia from Finland and Encro, the local developer. It is for a wind farm under construction with a capacity of 111 MW.

Radojković: HT was motivated by ESG goals and financial savings

Igor Radojković, director of procurement, logistics and real estate management sector at HT, said it has ambitious environmental, social, and corporate governance (ESG) goals.

The Deutsche Telekom group plans to achieve climate neutrality by the end of 2025, while all suppliers would have to comply by 2040. It is planned that 50% of consumption must be provided through PPAs by 2025.

On the other hand, HT also had financial motives like ensuring a stable price sustainable for its operations, predictability, and a long-term solution, because now the market offers price fixing contracts for only three to five years.

Tomislav Ćurković, managing director of Encro, said the 111 MW wind farm is planned to go online by the beginning of next year.

Ćurković: PPA helped us secure financing

The PPA helped the firm get financing, as creditors demand long-term contracts. Banks insist that part of the production of a future power plant, usually 70%, has an agreed fixed price, but in the case of Encro, the percentage was lower. The rest is used for balancing and sold on day-ahead markets.

Encro has projects of more than 1,000 MW in the pipeline in Croatia, and the plan is to build 250 MW by 2025. As they reach the financing phase, banks will reveal the conditions.

The European Commission recently said the dependence of investors on pre-negotiations, before a power plant starts producing electricity,  should be reduced to facilitate and speed up financing, Ćurković explained.

Ćurković: Governments should come forward and provide financing before facilities come online

The current financing models make projects more expensive, which more expensive electricity for the consumer, so it is necessary to do something. Before production begins, the risks are high, but when it starts they are almost zero, and then it is much easier to negotiate with both banks and buyers.

The administration in Brussels now says governments should step in and ensure financing or some guarantees before the start of production, Ćurković said and added it could be a new model for subsidizing renewables.

Blatančić: Corporate PPAs are completely acceptable to banks if they comply with certain criteria

Encro’s project was financially backed by several banks including Zagrebačka banka, part of UniCredit Group. Željka Blatančić, a project financing specialist at Zagrebačka banka, said the creditors previously worked out project financing models for the subsidy regime with feed-in tariffs, premiums, and long-term electricity purchase contracts between producers and the state.

But with the energy crisis, prices skyrocketed, and volatility increased, so consumers turned to direct contracts with green energy producers. Banks are now getting more and more requests to finance green energy projects through PPA contracts.

In such a situation, banks do not see corporate PPAs as problematic, but only as riskier than long-term contracts with the government, she stressed.

Blatančić expressed belief that PPAs would scale up in Croatia when large projects come out of the current regulation and permitting bottleneck, with many more companies interested in buying energy directly from producers.

“A corporate PPA is completely acceptable to banks if it complies with our criteria. It means that at least 70% of the production and at least 70% of the loan repayment period is covered by the PPA,” she said.

There is lack of power exchanges while too few companies are prepared to change the way they procure electricity

re source croatia conference ppa beljan danske lejla mesic baywa
Branimir Beljan (first from the left), and Lejla Mešić Suljić (photo: OIEH)

Experienced European developers and traders, such as BayWa and Danske Commodities, could help the region to speed up the PPAs development.

Mešić Suljić: Companies must understand what it means to buy electricity in a completely different way

Lejla Mešić Suljić, PPA manager at BayWa, said there are several conditions that must be met for the broader introduction of PPAs.

First, the legislation offers no certainty. For example, it is not certain whether the company, if it signs a PPA contract as a developer with a firm in Croatia, will have to obtain additional licenses. If so, its model will not be profitable, she added.

Another thing is the absence of a functional liquid market in the country and the region. Everyone would like to hedge the risk at the power exchange in addition to a PPA, but there is no possibility.

The third condition is that energy buyers, corporations, understand what it means to buy electricity in a different way. Currently, in her words, they do not have a strategy for the procurement of electricity and they are not ready to deal with it, because they do not have the know-how.

That’s why companies need to learn new methods, to get trained to procure electricity in new ways, and then they will be more open to PPA contracts, she added.

Beljan: Just apply EU regulation

Danske Commodities is very active in the region, especially in Croatia. Branimir Beljan, Regional Relationship Manager, suggested that EU regulations need to be followed.

Croatia has done a lot in transposing them, above all regarding balancing rules. In BiH and Serbia, the biggest issue is balancing, because developers cannot arrange the physical part of the purchase, there is no market, and the rules are not good enough for them to take it upon themselves.

When it comes to the financial part, it is not a problem, because all countries in the region take HUPX power exchange as a benchmark.

Beljan commended the imminent start of the intraday market in Serbia, as well as the start of the operation of power exchanges in Albania, Kosovo*, Montenegro, and North Macedonia, as the basis.

The regulations need to follow and, afterwards, supply and demand will do the rest, Beljan explained.

Lasić: Aggregators have a solution for the complexity of PPA contracts

re source croatia conference ppa lasic koer
Marko Lasić, manager of KOER (photo: OIEH)

The complexity of PPA contracts was highlighted by all the speakers at the conference. The solution could come from aggregators. Marko Lasić, manager of KOER, the first aggregator in Croatia, said it has consumers in the portfolio who are interested in buying green energy, but they do not meet the conditions.

The main obstacle is their low consumption, but KOER can pool several of them and connect them to a producer.

According to Lasić, KOER would take energy from producers and transfer it to consumers. In the first step, it will be a virtual PPA, and in the second step, aggregators can also develop supply to simplify all such models and accelerate the energy transition.

Aggregators understand what PPAs are

“Here we have fundamentally complementary things: those who want a fixed price and green energy on the consumption side, and companies looking for long-term fixed contracts on the basis of which they can get bankability on the production side. Someone needs to reconcile those two sides, and this is where KOER sees his role, Lasić stressed.

The first obstacle is understanding what PPA is on the consumer’s side. KOER, as a virtual power plant, is familiar with the complexity of PPAs, because it already negotiates with consumers and producers.

“KOER’s model sends a message to producers and consumers that they don’t have to thoroughly understand what PPAs are, so we will provide them with all necessary info,” Lasić noted.

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