The Government has articulated its commitment to achieving net zero emissions by the year 2050. This ambitious goal necessitates a transformative shift across various sectors, particularly through the electrification of industries which currently rely on fossil fuel generation. The anticipated economic growth will inevitably amplify the demand for electricity, thereby requiring substantial new investments in renewable electricity generation.

Price volatility

One of the primary challenges facing New Zealand’s renewable energy sector is the inherent variability and volatility of wholesale prices for electricity in the spot market. In the last month we have seen wholesale prices range from almost zero to almost $2,500 per MWh, and Transpower has recently said “North Island and South Island reference prices are about three times higher than they were this time last year.” While high average prices signal that new generation is necessary, this volatility poses a significant risk to developers of intermittent renewable energy projects, who are particularly vulnerable to fluctuations in the spot market. The key risk is that spot prices may be low during periods of peak generation and high when generation is low. This risk is especially acute for independent developers of renewable energy projects who seek financing on a limited recourse basis. To accelerate the development of new renewable electricity generation projects, it is crucial to mitigate this pricing risk.

Futures prices are presently high too, meaning it is presently difficult to hedge anywhere near the historical average prices.

PPAs to counteract pricing risk

One effective strategy to counteract pricing risk is the use of PPAs. Fundamentally, a PPA is a long-term risk-sharing agreement between a generation project developer and a buyer of electricity (or offtaker). 

Under a PPA, some or all of the electricity generated by a renewable energy project is sold at fixed prices, providing developers with revenue certainty. As well as benefitting the project itself, this certainty helps underwrite equity investors’ investment risk, and where limited recourse finance is employed, reduces finance costs. This de-risking facilitates the funding and construction of renewable electricity generation projects. For offtakers, PPAs offer the advantage of securing long-term price certainty, potentially at a discount, while also addressing sustainability metrics. In this manner, PPAs serve as a financial instrument to support the rapid development of new renewable electricity generation investments.

The New Zealand PPA landscape

Internationally, long-term PPAs have been established as proven and effective mechanisms to promote new renewable energy investments and afford greater price certainty. Unfortunately, the New Zealand market lags by comparison. Limited recourse financiers have highlighted the lack of long-term price certainty as a critical concern affecting the bankability of projects. Notable recent agreements include Ryman Healthcare’s 10-year deal with Solar Bay, The Warehouse Group’s 20-year deal with Lodestone Energy, and Prime Energy’s PPA with Lightyears Solar. These deals represent significant strides toward creating a robust and liquid PPA market in New Zealand.

PPAs are an enabler of new generation and electrification

Nevertheless, there are challenges that need to be addressed. Potential offtakers may be reluctant to purchase electricity from new intermittent renewable projects at a fixed price if such purchases do not address a significant proportion of their electricity needs (as they may be left exposed to residual spot price fluctuations). This creates a classic chicken-and-egg scenario: developers may need PPAs to secure equity and debt financing and to demonstrate the viability of their projects, while offtakers need assurance of consistent, reliable, and cost-effective energy supply before committing to long-term PPAs. 

Additional barriers include the lack of transparency in private market pricing, potential timing mismatches between developer generation and offtaker demand, concerns regarding counterparty creditworthiness, uncertainty regarding the project development timeframe and the existing scarcity of a deep base of energy-intensive potential offtakers.

We are already seeing increasing numbers of renewable energy projects being undertaken by independent developers. Many of these are looking to raise finance on a limited recourse basis. As New Zealand endeavours to meet its net zero emissions target by 2050, fostering a conducive environment for renewable energy investments is paramount. To support the growth of renewable electricity generation and the broader electrification agenda, innovative PPA and supply-side structures will be essential. It is imperative to address the barriers faced by both new renewable generators and corporate buyers. Successfully overcoming these challenges is likely to significantly increase the number of market participants (both supply and demand-side) and expedite new investments in renewable electricity generation.

The New Zealand PPA market is developing, albeit slower than in overseas jurisdictions. We have seen from our work in this space that parties on both sides continue to explore finding the right match between generator and offtaker needs.