EU Energy Crunch Spurs Record Amount of Clean-Power Supply Deals

(Bloomberg) -- Stung by soaring energy costs this year, some of the world’s biggest companies are piling into long-term deals for renewable power to lock in cheaper supplies.

Corporate agreements to buy solar and wind energy in Europe have risen about 70% to a record in 2021 as rocketing gas and coal costs drive up power bills, according to RE-Source, an industry-led group promoting such deals. The promise of price stability amid a volatile market -- plus the need to meet green targets -- has given renewables a competitive edge over fossil fuels.

Europe is facing an energy crunch as economies reopen, boosting demand at a time supply just can’t keep up. Gas and power prices have surged this year, prompting industrial giants from chemicals maker BASF SE to fertilizer producer CF Industries Holdings Inc. to slow down or even halt production. And the crunch is set to last -- just this week German and French electricity prices for next year reached fresh records.

“I’ve had a huge uptick in inquiries from corporates in various stages of panic,” said Phil Dominy, director of power and utilities at Ernst & Young LLP, who helps companies negotiate the agreements. “Once you factor in all the costs, you’ve got free wind and solar. It’s ultimately cheaper.”

This year companies have signed deals to buy 6.1 gigawatts of clean energy in Europe, up from 3.6 gigawatts in 2020, data compiled by RE-Source show. 

Read more: Europe Energy Crunch to Linger as Power Prices Hit Records

Rising demand helped push up the cost of such power purchase agreements. Prices for wind and solar deals were up about 7% in the third quarter of 2021 from a year earlier, according to LevelTen Energy, which analyzed data on 204 price offers from 91 renewable energy projects across Europe.

“There’s pent-up demand and companies are just plowing ahead regardless,” said Helen Dewhurst, an analyst at researcher BloombergNEF.

Sharp Swings

The increase in costs is still way below what companies buying in the spot market have experienced. Power prices have more than tripled in Germany this year and quadrupled in France. Traders expect the sharp swings in markets to continue.

“For all customers – big or small – that want to ensure that they have a stable price, they can sign contracts,” Christian Rynning-Tonnesen, chief executive officer of Norwegian electricity producer Statkraft AS, said in an interview last month. “For those who want to buy in the spot market, they are likely to experience volatility in the time to come.”

The plunging cost of wind turbines and solar panels in recent years has helped to make renewables the cheapest form of power in much of the world. 

While an upswing in materials prices this year -- plus higher shipping rates -- have roiled the market, that cost inflation remains far below the growth in European wholesale electricity prices. 

Tech Giants

Demand for corporate power purchase deals has long been driven by tech giants such as Amazon.com Inc. and Alphabet Inc.’s Google, which need vast amounts of renewable electricity to keep their data centers running while meeting green goals. This year, such agreements have attracted more companies, particularly in Europe, as businesses seek a long-term hedge against fluctuating energy prices in an increasingly electrified world. 

Among them, BASF has struck a series of clean-power deals across Europe, while agricultural giant Cargill Inc. agreed to buy electricity from a Dutch wind farm. Kimberly-Clark Corp., maker of Kleenex tissues and Huggies diapers, agreed to purchase power from a U.K. wind farm to cover 80% of its electricity needs in the country. 

Corporate PPAs take months to negotiate, and the persistence of high energy prices in Europe this winter could help drive a flurry of such agreements next year as well. Demand is now accelerating, reflecting in part a higher environmental awareness, but also the need to avoid electricity price spikes, according to Paulo Almirante, head of renewables at French energy giant Engie SA.

“Companies are now coming in full-force to the green power market,” he said.

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