Distributed Energy Resources

Renewable Incentives in Inflation Reduction Act Will Meet Headwinds of Higher PPA Prices: Report

The Inflation Reduction Act (IRA) will spur renewable development, but projects still face the headwinds of rising power purchase agreement (PPA) prices, according to a new report on the PPA market.

In the third quarter, North American P25 solar and wind PPA prices soared 9.6 percent to $45.93 per megawatt hour (MWh), pushing them to a level where they are now 34 percent higher than they were at the same time last year, according to a report from LevelTen Energy, an operator of one of the largest PPA marketplaces.

LevelTen’s P25 Price Index represents an average of the 25th percentile PPA price in seven North American wholesale electric power markets. The data is based on prices developers are offering for PPA contracts, not transacted PPA prices. 

PPA prices began rising in 2020, when the COVID-19 pandemic exacerbated supply chain challenges. Since then, other factors – including economics, regulations, and permitting challenges – have created an imbalance between PPA supply and demand and led to an increase in development costs, keeping prices high, LevelTen said in the report.

The IRA, which was signed into law in August, extends a variety of energy tax credits and makes them available for projects owned and operated by tax-exempt entities, including public power.

“The IRA will undoubtedly spur significant investment in renewables — as much as 94 gigawatts (GW) of additional wind and solar by 2035,” Martin Anderson, head of research, USA, at Aurora Energy Research, said in a statement.  “While many in the industry expect the influx of low marginal cost generation to significantly depress power and PPA prices, Aurora’s analysis indicates a more muted market response because of supply bottlenecks, rising electricity and natural gas demand, pricing dynamics related to thermal generation, and basis risk.”

“As the hard work of implementing the IRA begins, everyone wants to know when it will lower PPA prices,” Gia Clark, senior director, developer services at LevelTen Energy, said in a statement. “But it’s too soon to say if and when that will happen, for three reasons.”

First, the IRA does not remove immediate, major roadblocks including interconnection queue congestion and supply chain challenges that are stalling buildout, Clark said. Second, development input costs, such as labor, capital, commodities, continue to rise. And, third, demand continues to grow from corporations and utilities, increasing competition for already limited renewable capacity, Clark said.

Prices for both solar and wind projects rose “significantly,” according to the LevelTen report. More specifically, solar P25 PPA prices rose 7.5 percent to $42.21/MWh, while wind P25 PPA prices rose 11.4 percent to $49.66/MWh.

Solar supply chain challenges are one factor driving up solar PPA prices, LevelTen said, noting that polysilicon prices are at a ten-year high because of high demand and low supply, driven in part by a U.S. ban on polysilicon from Xinjiang Province, China, where production has been tied to forced labor. In June, the Biden administration began enforcing the Uyghur Forced Labor Prevention Act, leading to more than 3 GW of solar panels being held at the border.

Higher wind PPA prices are being fueled by “inflation, permitting issues, and transmission constraints” in regions like the Midcontinent ISO and the Southwest Power Pool, Jason Tundermann, chief operating officer at LevelTen Energy, said in a statement.

In July, MISO approved 18 new high-voltage transmission lines that will enable the addition of 53 GW of renewable energy capacity to the grid. Those lines will improve the region’s grid resilience, but they are expected to take between six to eight years before they are in service, “meaning that additional renewable capacity may remain limited until then,” Tundermann said.