Merchant is the way the market should be
Dr Alexandra von Bernstorff
With headwinds from political, regulatory, social and lifecycle risks spelling the end to support schemes for renewable projects in Europe, a renewables merchant risk ecosystem is beginning to take shape, notes a McKinsey report.5
Several subsidy-free projects, such as solar photovoltaic (PV) and onshore projects in Spain and multiple offshore projects in Germany, have been announced and are under development (see box out). While these projects have benefited from favourable site conditions and economies of scale, this change in the renewables marketplace indicates that the industry is transitioning into the next phase of market integration. Governments will phase out schemes – such as the UK’s Feed-in Tariff subsidy that followed the Energy Act 2008 – which were brought in to promote green technologies. Auction systems are taking their place, driving tariffs down, while asset owners will be fully exposed to wholesale prices.
With the progressive reduction of subsidies and introduction of auction systems driving guaranteed tariffs down, private PPAs, which offer a fixed long-term price for some or all of the energy produced by a project, are becoming more important for managing merchant risk exposure and financing renewable energy in Europe.
According to von Bernstorff, embracing merchant risk will be important for the long-term success and independence of the renewables sector. “Subsidies should have been abolished a few years ago,” she asserts. “By reaching grid parity some time ago, renewable energy has proven to be competitive to traditional energy sources in all aspects, including costs. Merchant is the way the market should be. Fully merchant projects will not depend on auction schemes, and markets where prices are not tied to subsidies are also healthier.”