Latest Greek auction points to future market realities

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Written by Jon McNair | ENERGY REV

First published here • JUNE 28, 2021

Latest Greek auction points to future market realities

The steady reduction in the price of winning tariffs in successive rounds of Greek renewables auctions, capped by the most recent edition in May, has the potential to realign the market in the country.

Over successive auctions held over recent years, Greece has followed most other countries in registering incremental drops in the tariffs awarded to successful projects.

And May’s (2021) latest 350MW edition of the Greek programme was no exception as successful bid prices dipped down to an average of EUR 37.60/MWh, although falling as far as EUR 32.97 in the case of one project: a 19.3MW solar farm developed by local group Egnatia.

Other successful bidders included Lightsource bp, in a collaboration with another local developer Kiefer TEK, which secured 20-year contracts for 140MW of solar PV capacity at an average price of EUR 38.50/MWh. Meanwhile, Mytilineos also bagged tariffs for 140MW of solar, at a slightly lower average rate of EUR 37/MWh.

These prices represent a sizeable chunk knocked off the winning bids registered in previous rounds, with the contracts handed out in 2020 achieving an average closer to EUR 50/MWh for successful projects. Earlier editions nudged even higher.

That level of price evolution in a relatively short space of time now results in a market seeking to adapt to new realities.

But adapt it very likely will as the increasing maturity of the renewables sector in the country combines with ever more favourable general economic conditions, political stability, and a strengthening financial sector.

Market in transition
According to practitioners contacted for this article, the market expected auction prices to have fallen in this fashion, although some are now forecasting that the current level represents an equilibrium beyond which they should not fall much further. However, others assert that there is an additional squeeze to come.

Nevertheless, what could now be incoming is a realignment of business plans towards something that resembles what has occurred in recent years in markets like Spain, where project investors often favour PPAs combined with some merchant upside over low-priced government-backed tariffs.

“This is a market in transition, but of course it is a promising market where the government has a robust system in place and banks are keen to finance projects,” says Dimitris Assimakis, partner at law firm Reed Smith.

“It is probably where the Spanish market was two to three years ago and we are heading towards where the Spanish market is now,” he adds.

Like in Spain, the contracted element of project revenues will likely be used, and indeed more or less entirely eaten up, to secure project finance to build the projects. Then the equity side of the equation would rely almost exclusively on merchant tails to drive returns.

“The name of the game moving forward will be PPAs,” says Ypatios Moysiadis, managing partner at developer Wattcrop. “If you have the capability and balance sheet as a company, I would look to hedge through a PPA, and even get a trading licence.”

Those PPAs would likely pay out at a marginally higher rate than the latest generation of auction tariffs, with developers able to potentially secure contracts up to mid-EUR 40s/MWh, according to sources, although the precise level would depend on the type of PPA signed (baseload, pay-as-produced, etc.).

Downward pressure
However, the lower auction tariffs will undoubtedly create downward pressure on PPA prices, as has occurred in recent months in Spain. With less lucrative PPAs there is the possibility that the market in the future changes from one where smaller developers can thrive and raise project finance to one dominated by larger, vertically-integrated players who can finance on balance sheet and hedge between their production and supply divisions. These groups would be best placed to manage costs in supply chains to also make the new market realities stack up in their business plans.

“When you have the buying capability, and projects and pipeline, you can squeeze suppliers. You make money when you buy, not when you sell,” says Moysiadis, whose company Wattcrop is shortly to release a white paper on the Greek market.

Nevertheless, with total capacities offered in auctions set to be relatively constrained for the foreseeable future, ever increasing numbers of developers will plump for the PPA-and-merchant mix. The recent edition marked the end of the auction regime established in 2018, with a new programme set to come in offering six auctions of 350MW apiece over the coming years, with the European Commission set to approve the new plans in mid-July.

But, as demonstrated in other countries with similar conditions, the PPA and merchant hybrid model can be financed and ultimately work for all parties involved.

According to sources in the market, this approach could yield project IRRs in the high single digits, reminiscent of more mature markets across Europe. Meanwhile, project finance can typically be sewn up with debt pricing around the 250bps plus Euribor mark, although that can depend on the identity of the borrower and structure of the transaction.

Removing barriers
However, as is so often the case, a bottleneck could be found over coming years with regards to the volume of viable corporate offtakers for the power produced by renewables projects.

“PPAs are the other route for subsidy-free projects [as an alternative to auctions], although developers should not expect much higher prices. There is not a liquid market for PPAs in Greece yet,” says Assimakis.

This is a known risk in the market and one which the Greek energy ministry is seeking to address. One approach, floated with the European Commission during a meeting in May, is to create a mechanism to subsidise industrial offtake contracts from renewables generators to encourage growth in this area.

And on the financing side, there is always the option of the participation of European institutions such as the EIB, from which PPC Renewables raised EUR 40m in March 2021 for the 230MW Kozani PV portfolio it is building.

More recently, just last week (June 17), the EU Commission threw its weight behind Greece’s Covid recovery plan, with loans and grants to be provided from the EU’s EUR 800bn recovery fund to support a programme that will focus on sustainable infrastructure projects and seek to encourage greater private investment.

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