Amazon splurge aids record European offshore wind PPA year
Decarbonization targets propelled Amazon to sign a 250-MW power purchase agreement (PPA) with Ørsted's Borkum Riffgrund 3 offshore wind farm in December, adding to a year of record offshore wind PPA volume as facilities were developed on the free market in Europe.
The deal represents 28% of the planned capacity of the 900-MW Borkum Riffgrund 3 wind farm awaiting final investment decision this year. The German project has been developed on what is known as the free market, so without subsidies. The contract will last 10 years following the start of operations, expected in 2025.
A December 2020 IHS Markit report revealed a booming market for renewable PPAs in Europe, particularly in the UK, Norway, and Spain, coinciding with low wholesale power prices during the COVID-19 pandemic lockdowns. PPAs for 2.8 GW were signed for solar and 2.5 GW for onshore wind in Europe in 2020. This marks a departure from the prior two years, when purchasers preferred signing PPAs with onshore wind and solar projects.
Utilities and corporations were the main purchasers last year, signing offshore wind PPAs totaling 3.6 GW - more than all renewable PPAs combined in 2018.
Corporate carbon targets
Amazon signed the PPA with Ørsted in Germany amid a global PPA shopping spree after it pledged to run its infrastructure with 100% renewable energy by 2030, on the path to net-zero carbon by 2040.
The e-commerce company said it would buy from 26 utility-scale wind and solar projects in France, Italy, Sweden, the UK, the US, South Africa, and Australia in December— proclaiming itself the largest corporate renewable energy purchaser.
BP said Amazon agreed to procure more of the energy major's renewable energy in exchange for cloud services, securing an extra 275 MW from an onshore wind project being built in Västernorrland, Sweden and 129 MW from two wind projects in Scotland under a 2019 deal. Amazon and French utility Engie also agreed PPAs involving solar farms in Southern Europe: 66 MW in Italy and another 15 MW in France, according to the utility.
The world's largest online retailer is a major corporate user of solar power, including in the US, with 369 MW of installed solar capacity at the end of the third quarter of 2020, according to trade association data.
The corporate PPA trend could further improve prospects for the UK's thriving offshore wind industry, say observers. "Large corporates are helping to grow the European offshore wind market as a means to meeting ambitious carbon reduction targets," said Rhianna Wilsher, senior associate, energy and utilities, with law firm Bird & Bird.
"They are using offshore wind corporate PPAs, which can provide significant volume when compared to onshore wind and solar and at a competitive tariff, to realize such commitments. Offshore wind is also gaining more confidence from energy-intensive industries who have high demand, but which have traditionally regarded it as too unreliable," she added.
Corporate climate targets have carried on widening the PPA market beyond big tech companies and utilities, according to IHS Markit. Nestlé's UK arm signed a 31 MW deal with Ørsted's Race Bank offshore wind farm in 2020.
And it's not just the UK. "The number of PPAs signed reached a new record in 2020, and more and more sectors are interested," said Christoph Zipf, press and communications manager of wind power association WindEurope.
Zipf said hurdles for the accelerating offshore wind PPA sector include "a lack of corporate energy procurement and risk experience, as well as a need for large and longer-term investments."
Markets for PPAs have also risen out of a need for electricity price stability among developers who have started selling electricity on the open market amid competition for negligible subsidies.
Both Germany and the Netherlands are considered mature markets for offshore wind, as developers are planning zero-subsidy offshore wind farms there, IHS analysts said.
German offshore wind projects reached a subsidy-free phase in 2017 when government auctions tendered for a combined 1,490 MW of capacity - specifically EnBW's 900-MW He Dreiht, Ørsted's Borkum Riffgrund 2 West, Gode Wind 3, and OWP West - at prices ranging from 0 to 6 euro cents per kWh, according to a statement from Germany's electricity regulator Federal Network Agency.
Likewise, Swedish utility Vattenfall said it won a tender for the first and second phase of construction of its subsidy-free offshore wind farm supplying the Netherlands, the 1,500 MW Hollandse Kust Zuid facility, starting in 2018.
As European developers of offshore wind farms reach the end of periods of subsidized operations won following government auctions, they will be seeking to sell their capacity under long-term PPA corporate contracts that will likewise reduce exposure to wholesale electricity market prices. Ørsted's 10-year contract with Amazon is an example of a longer-term contract with a subsidy-free project.
Today's offshore wind PPAs represent win-wins for corporations and developers. "First, long-term PPAs provide developers with stable revenues for 10-15 years, which is enough to make a project bankable and to take a final investment decision. For an offtaker, it's also a good deal, because they secure large volumes of clean, renewable and almost baseload energy (capacity factors of offshore wind in Europe are above 50%) at a contracted price for a long time," said IHS Markit's Paris-based Senior Research Analyst Andrei Utkin.
Developers realize this, and it means Europe will see more PPAs in the future, Utkin predicted. "It's always a competition between governments and companies. Companies are willing to get more from governments, but governments are not willing to pay at all. They are in a battle for subsidies or support, and once support is not in place, PPAs will be one of the tools," he said.
"Five years before the expiration of subsidies, companies will start to look to sign these PPAs just to be secure," said Utkin.
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