Are renewables eating themselves?

Electricity price volatility over the past few years has significantly impacted Europe’s power purchase agreement (PPA) market. Falling futures market prices and declining profile values are creating growing uncertainty for renewable energy projects. Prices for power futures surged during the energy crisis, but have since dropped sharply. The rapid expansion of renewables – particularly solar and wind – has further influenced profile values, posing new challenges for market participants.

Declining PPA prices

Futures contracts steadily declined from the 2022 energy crisis until early 2024. More recently, we have seen a period of stabilisation followed by a slight uptick, but prices remain well below 2022 levels. Since PPA pricing is directly linked to futures markets, this decline has had a significant impact on PPA attractiveness.

In simple terms: when futures prices are high, expected electricity revenue increases, prompting PPA providers to charge higher prices. Conversely, lower futures prices reduce expected revenue, leading to lower PPA prices. This downward trend in the forward market has made PPAs less appealing, resulting in fewer agreements being signed in 2023 and 2024 compared with the record-breaking PPA market of 2022, when forward prices were still sky-high.

Germany illustrates this trend clearly – as power futures have dropped, so have PPA prices, and vice versa.

PPA profile values falling

The perceived value, or profile value, of renewable energy projects is another critical factor in PPA pricing. As the share of renewables in the electricity mix grows, an increasing number of projects are feeding electricity into the grid simultaneously. This, in turn, pushes down market prices during peak hours, leading to the phenomenon called cannibalisation, where renewables essentially erode their own value. 

While market participants have long been aware of this dynamic, the decline in values, particularly in 2024, caught some by surprise. In Germany, for instance, solar values dropped significantly. It is well known that solar profile values are lower in summer than in winter, but last year, this seasonal dip was even more pronounced due to an oversupply of solar electricity during sunny hours. 

Wind energy, on the other hand, fared better. Wind generation often coincides with high-price periods, so its profile value has not fallen as sharply.

The same trend has played out in Spain and Italy, where the rapid expansion of solar capacity has also driven down profile values for solar projects, making long-term PPA structuring increasingly difficult. 

Short-term PPAs come to the fore  

In response to falling forward market prices and profile values, we are likely to see a shift towards shorter-term PPAs in the coming months. In Germany, post-EEG wind farms, those that have aged out of state subsidies, are expected to turn to PPAs to continue operations. Unlike newly developed solar projects, which rely on strong PPA prices to secure financing, these older wind farms are fully financed and can afford to sign PPAs even at today’s lower price levels. 

To mitigate the risks associated with low capture prices, many developers are turning to hybrid projects that combine solar or wind with storage technologies. Batteries in particular are becoming an essential tool for aligning electricity generation with high-price periods. The impact on PPA prices is tangible – Montel Analytics simulated a 10 MW solar project in Germany equipped with a 20 MWh storage system and found that profile value could increase by 12% with a south-facing orientation and by around 10% with an east-facing setup. This profile value boost directly translated into a higher PPA price.

PPA investment landscape

Instability is likely to continue in the PPA market. Capture prices are expected to remain under pressure as renewable energy capacity continues to expand. Market participants will need to adapt to this new reality – where shorter PPA terms, hybrid projects and strategic storage solutions become essential for navigating an increasingly complex energy landscape.