LevelTen Energy’s third quarter power purchase agreement report has found wind and solar project developers continue to face rising costs and may take greater advantage of new federal tax credits.
P25 power purchase agreement (PPA) offer prices continued the trend of stabilization, according to the report. P25 prices, defined in the report as the most competitive 25th percentile PPA offer prices, saw an increase of 2% in the third quarter for wind and solar combined. The third quarter price increases were reportedly milder than in some previous quarters, but aggregate price increases across quarters are making it more difficult for buyers to secure CFO approval for wind and solar, according to LevelTen Energy.
“Developers are looking to find ways to provide buyers with some pricing relief, but this is exceedingly difficult amid a wide array of development and financing challenges,” said Gia Clark, senior director of strategic accounts at LevelTen Energy. “Expectations of a prolonged high-interest rate environment are pushing developers’ costs up across the board, with energy players of all sizes feeling the heat.”
LevelTen’s report includes seven North American independent system operator (ISO) markets, for which pricing trends appeared to vary considerably.
For example, solar prices in ERCOT, the Texas grid, decreased by 4% in the quarter after regulatory, anti-renewables bills began to require risk premiums in prices during the second quarter of 2023. The SPP grid in the Southwest U.S. also saw a wind PPA price drop of 13%. Meanwhile, the PJM, which includes a number of midwest and eastern U.S. states, experienced permitting challenges and high construction costs, causing P25 solar prices to increase by 12% in the third quarter.
The IRS and Treasury provided guidance for achieving bonus tax credits for qualifying clean energy projects, which may help reduce financing costs for developers. Further, tax credit transferability, introduced in the Inflation Reduction Act, could open up billions in investment toward clean energy projects.
However, the LevelTen report explains that corporations are just beginning the process of taking advantage of these opportunities, so their benefits have not yet been fully realized. Firms also are looking for better clarity on how to best leverage tax credits.
Despite price challenges explained in the report, recent research has revealed that solar power and storage projects may allow for an affordable energy transition. Wind power technologies have also improved in recent years, allowing for more consistent energy supplies.
Clark explains that corporations should look into purchasing tax credits now in order to begin supporting clean energy development and to find a wider range of PPA options to choose from. Further, she claims that buyer demand for PPAs remains high as corporations face pressure to decarbonize.
“Buyers and sellers will need to continue embracing a partnership approach and meet in the middle to continue getting deals done," Clark said. "The energy transition is here. Being creative in how both buyers and sellers work together is going to be critical as we navigate through the next few years. Buyers know the cost of not decarbonizing will, in the long run, cost far more than procuring now.”