Data and analytics company GlobalData states that, with a decline in power consumption and a drop in electricity prices resulting from offices and manufacturing plants being temporarily shut in line the Covid-19 restrictions, existing power purchase agreements (PPA) may be negatively impacted.

The situation is expected to impact existing PPAs, as suppliers may have to either face a liquidity crunch to honour their PPA commitments or delay payments, which may lead to legal issues in the future.

For upcoming PPAs, the current uncertainties and reduced electricity prices will hinder negotiations, says GlobalData.

GlobalData senior power analyst Somik Das says PPAs are a vital instrument for the bankability of renewables projects, especially during a time when government subsidies are fading out. “The Covid-19 outbreak is damaging some existing PPAs and delaying new PPA negotiations.”

In addition, supply chain disruptions and a lack of personnel are expected to significantly hamper under-construction projects with already negotiated PPAs, notes GlobalData. This will lead to increased project costs and diminished developer margins.

The situation will consequently lead to most developers being cautious in negotiating new PPAs, with power prices at “unreasonably low levels”, states GlobalData.

He adds that PPAs are typically negotiated at discounts to the wholesale electricity price and therefore drops in wholesale prices impact the PPA pricing structure and consequently the viability of projects in the short term. “PPA negotiations have particularly slowed down owing to the drop in electricity prices.”

With the extent of the ongoing Covid-19 restrictions being unknown, Das says it is difficult to estimate a correct pricing structure that would offer good terms for developers in the current environment.

“At the buyers’ end, companies bearing significant debt could defer from making new investments and take up a more cautious approach, as their demand for energy and other goods as well as revenues will decrease.”

This is expected to be a temporary phenomenon as major nations across the world are starting to ensure that essential industries and facilities become operational. He says this will lead to slightly increased demand and electricity prices will slowly and steadily rise in the future.