Analysis of CRE4 PV France calls for tenders and their impact – pv magazine International


CRE4 was to constitute a turning point for the French solar sector by giving developers medium-term visibility on the frequency and volumes called for by calls for tenders and by initiating an evolution towards a market-oriented economic model, via the bonus mechanism. redemption (known in France as “Complément de Rémunération”).

Looking back over the past four years, a significant drop in prices has been observed. Large ground-based projects fell from € 62.5 / MWh in March 2017 to € 53.4 / MWh in February 2021, i.e. a drop of around 15% over four years, or 3.9% per year (and in particular -5.1% / year for the “large roofs” category).

Figure 1: Main data from the CRE4 call for tenders (source: CRE)

Despite the general trend, tariffs for all categories have followed a sinusoidal curve: an initial drop, due to very large candidate volumes and increased competition as developers have amassed large project pipelines in anticipation of the launch of CRE4. . This was followed by an increase as project pipelines dried up somewhat (some bidding sessions were underwritten against initial target volumes, particularly for rooftops).

This increase was seen by some as a return to reason after the first period of decline which raised some concerns about the ability of the winners to finance and build the projects. A second period was then observed towards the last years of CRE4, for which the announcement of the IFER abatement for projects commissioned after January 1, 2021, seems to be the main explanation.

CRE4 has thus confirmed the capacity of solar energy to provide competitive energy, in particular from large ground-based power plants. The price competitiveness of CRE4 projects can be assessed by comparing them to the remuneration of Hinkley Point set at 92.50 GBP / MWh, or to the wholesale price of electricity observed on the French market in 2020, which is approximately 42 € / MWh on average.

A framework for trust and investment

The CRE4 program was marked by a strong wave of consolidation led by energy companies and the majors of public services – French and foreign – who played a crucial role in the dynamics described above. Foreign entrants will no doubt have been attracted by a French renewable energy market which has now reached a significant size in a larger context where renewables are increasingly difficult to ignore.

On the other hand, the visibility on future volumes has enabled many promoters to implement their development strategy over the medium to long term and to engage in a dynamic of investment and significant growth by making increases. of capital.

These deals were mainly underwritten by institutional investors or specialist investment funds, who were previously attracted to direct investments in infrastructure assets but are now seeking higher returns, by investing in developers / producers to move up in the value chain and thus improve their return prospects.

Finally, throughout these calls for tenders, new French and foreign developers have appeared after deciding to enter the market, no doubt attracted by the stable prospects of the support framework. The French market now seems more structured and undoubtedly better able to achieve the objectives of the PPE.

Figure 2: Main M&A operations over the CRE4 period.

CRE4 was also an opportunity to increase the deployment of capital in the green economy. Some asset managers have created dedicated investment vehicles to address the energy transition market, and those who were already there raised even larger funds that can address more complex markets.

In addition to the consolidation process described above, Finergreen has witnessed numerous transactions involving the partial sale of operational portfolios that have reached a critical size, to financial players seeking a stable and secure return on investment over the long term. For example, Caisse des Dépôts’ investment in the Tenergie vehicle in 2020, or Predica’s investment in Engie or Total Quadran vehicles in 2021.

Banks, for their part, have played a major role in accelerating the development of the sector by financing projects on increasingly attractive terms. The challenge of integrating solar energy into a market economy via Compensation Supplement was finally (and rightly) resolved without any real complexity, giving public services the possibility of playing the role of aggregators without impacting the conditions of bank financing.

These conditions even improved markedly during this period, with the structuring of financing tenors longer than the duration of the feed-in / premium tariff. This period saw the players become more and more financially sophisticated. The use of various debt products to finance their growth (senior project financing, junior debt, revolving credit, emergence of Green Bonds, etc.) has allowed developers to innovate and constantly find ways to improve their competitiveness. .

The robustness of the sector during a crisis like that of the Covid-19 is only likely to attract even more capital, and the stock market performance of listed French players seems to reflect the confidence and interest of investors in the economy. green more and more privileged. through institutional and political spheres.

A transition to market models is underway

The integration of renewable electricity in a market economy was one of the objectives of CRE4. From this point of view, the Compensation Supplement mechanism will have responded positively to the challenges it has been faced with. However, the transition is only just beginning and much remains to be done.

Today, through CRE’s calls for tenders, the players have a robust, proven and bankable business model. As long as these calls for tenders offer sufficient market depth – both in terms of volumes and constraints – the interest in turning to private PPA-type solutions will probably remain limited.

These projects require more complex structuring and therefore more constrained financing (ad hoc terms and conditions of the negotiated PPA, credit quality of the counterparty, direct exposure to the underlying electricity price, etc.) even if some of the transactions have been carried out in recent months, often justified by (i) the desire to secure a purchase price over a short period for assets falling outside the feed-in tariff (said Purchase obligation), or (ii) by long-term visions of developing assets not eligible for calls for tenders while carrying out major CSR communication operations.

Figure 3: Main PPAs signed on the French market

While it is likely that participating in PPE2 / CRE5 sessions and obtaining a secure buyback bonus will continue to be a preferred solution for developers of solar photovoltaic projects over the coming years, it is nevertheless clear that an ever-increasing shift towards the private sector PPAs must be anticipated, for several reasons:

  • The prospects of increasing electricity prices, coupled with a strong desire to conduct “green” operations, lead companies with a significant electricity bill to seek ways to optimize their supply, solar energy being a competitive energy that also allows them to achieve their goals. CSR objectives and communicate around them;
  • Developers will seek to define their long-term strategy, beyond the future CRE5 program, and must anticipate future market developments to develop skills internally or integrate external human resources to best succeed in this transition in the years to come. ; and
  • It is very likely that the constraints linked to calls for tenders – mainly type of land, origin of panels – will be carried over into CRE5 and that project leaders will identify a significant growth opportunity in private PPAs, which should enable them get more MW out of the door quickly with fewer planning and schedule constraints (no calls for tenders to prepare).

All these positive factors in the development of the private PPA market, however, remain subject to the obvious question of the financial feasibility (and therefore of the ultimate profitability) of PPA projects.

Assuming that a PPA project will save on CAPEX (mainly due to cheaper PV panels) and OPEX (less competition on land and rents), we observe for a single 50 MW plant the IRR of the following project (i.e. before financing) based on a 30-year lifespan and central market curve captured by solar energy:

Figure 4: IRR projects for different PPP values ​​(in € / MWh) according to their duration.

(Notes: CR = additional remuneration; € 53.4 / MWh corresponds to the average tariff obtained during the last call for tenders, € 52.75 / MWh on average over the previous round; PPA prices are not indexed on inflation)

Based on these assumptions, it is interesting to observe:

  • That the IRR of the project obtained thanks to a PPA of 45 € / MWh signed over a period of 16-17 years is similar to that obtained via a buyback premium of 50 € / MWh over 20 years.
  • Based on current electricity price projections, the IRR project for a power plant selling its electricity on the spot market is similar to that obtained via a CfD of € 50 / MWh over 20 years.
  • Given the upward trend in electricity prices, it now seems more strategic to sign PPAs lasting around 15 years, in order to benefit from high spot prices at 15 years and over.

We can therefore see that a PPA at 45 € / MWh, which can be considered in the currency by looking at the average prices of electricity in 2020 at 42 € / MWh (with an upward trend), has a profitability intrinsic roughly equivalent to the current diet. -in premium projects. It is therefore crucial to improve the solutions and the vision of long-term financing of PPA projects, the question of financing seeming to be the last obstacle to the accelerated development of PPA projects.

The rest of the story is therefore partly up to financiers, who will have to innovate and offer new, more flexible financing approaches or better accommodate the uncertainty associated with these new models. Even greater attention will have to be paid to the underlying electricity market because it is not only a counterparty risk that must be controlled, but also and above all a risk linked to market fundamentals. In the event of counterparty default, financiers will need to ensure that there is a solid market outlet for the duration of the funding period and a sufficient pool of potential buyers who will be interested in re-contracting with the producer. .

Finally, more uncertainty implies more risk but also more profitability. Developer-producers will need to consider less optimized financing structures in their investment decisions and likely commit more equity (this could mean considering subsequent refinancing scenarios and renewing PPPs at higher values) to justify target returns. attractive. This could also have the medium-term effect of increasing the profitability of promoters and “winning” projects, breathing new life into a sector with historically low returns.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of pv magazine.

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