Solar buyer ‘lucky streak’ must not influence UK PPAs, warns LCP Delta

Spring 2025 power purchase agreement (PPA) negotiations should take greater account of risk, according to a new report from LCP Delta’s Power Insights service. The research firm has warned that setting strike prices too high could leave offtakers out of pocket, risking future agreements that are key to supporting solar deployment.

High strike prices could stall the UK solar PPA market, LCP Delta has warned. It follows new analysis which found an unlikely alignment of market price with favorable weather conditions has driven a run of profitability.

In a report covering solar PPAs from LCP Delta’s Power Insights service, the analyst found pay-as-produce solar PPAs have performed better than expected, with an average seasonal profit for offtakers of GBP 3.15 ($3.97)/MWh from 2019 to 2024. LCP Delta’s analysis claims the probability of achieving this level of average profits, or higher, was less than 25% over the period.

Bertalan Gyenes, report author and a consultant at LCP Delta, told pv magazine the analysis focused on utility PPAs, the kind that energy companies buy “as part of their hedging strategy”. These PPAs are bought up to one year in advance, unlike the longer-term 10- and 15-year PPAs favored by corporate offtakers.

The risk for utilities buying solar PPAs is found in two places, Gyenes said. Offtakers must consider the longer-term seasonal forecast for solar generation, as well as the shaping costs the utility will pay to balance generation in the day-ahead wholesale electricity market, when considering the PPA strike price.

Utilities have profited from the gaps between PPA strike price and day-ahead electricity prices, which have lined up with solar generation in a complementary way, according to LCP Delta’s analysis.

Titled “The true cost of risk”, the report uses the baseload market reference price (BMRP) for Great Britain to represent the solar PPA strike for each season, which it claims is broadly representative. In 2019 and 2020, the gap between BMRP and day-ahead pricing were closely aligned.

However, Russia’s decision to withhold gas from markets in summer 2021 led to a spike in electricity prices which corresponded with surplus generation. PPA offtakers could sell the surplus at a profit, as day-ahead market pricing was higher than the PPA strike price. The gap between long-run seasonal strike prices and short-run day-ahead prices continued, increasing between 2021 and 2023, driven by the evolution of gas prices.

By analyzing the gap between day-ahead pricing and PPA strike prices alongside the difference in seasonal average generation and the volume of solar generation hedged in PPAs, LCP Delta found a run of seven consecutive profitable seasons. It was an outcome with 0.8% probability, according to the analyst.

Profitable periods included four half-year seasons when the average day-ahead market price for electricity was below the strike price during a shortfall of generation, meaning utilities could buy power at a lower cost; and three periods when surplus generation lined up with market prices higher than PPA strike prices.

There are signs the lucky streak is over, and Gyenes told pv magazine early data suggest that in winter 2024, the long-term seasonal hedge will not have been profitable for solar PPA offtakers. LCP Delta is now recommending British utilities do not take long-term seasonal profits for granted in the next round of PPA negotiations, set for spring 2025.

The analyst has suggested negotiators consider the seasonal baseload price as the starting point for negotiating a strike price, currently in the range of GBP 80-100/ MWh, to “account for risks and maintain market stability.” This would be a step down from the average seasonal baseload price of GBP 118/MWh between 2019 and 2024.

Gyenes told pv magazine that missing the mark on strike prices could have consequences for solar deployment.

“If you end up setting the price too high the offtakers are going to lose money on it, essentially, which means they’re not going to be interested in it anymore,” he said. “The solar generators would have to then try and sell on the day-ahead market or they would have to go to various exchanges, which increases their risk.”