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Germany’s solar PV development market has seen better days, with falling power prices, associated cannibalization concerns and a glut of projects available for sale contributing to a sharp decrease in the valuation of projects and pipelines in recent quarters.
Time was, until around 12-18 months ago, when developers looking to recycle capital could have a reasonable expectation of being able to sell ready-to-build projects for around EUR 200,000/MW to project-hungry investors or IPPs.
This was in part brought on by the spike in power prices resulting from Russia’s invasion of Ukraine in early 2022, related gas supply shortages and concerns, and Germany’s corresponding increase in national solar PV installation targets, which led to heightened appetite from market consolidators and incoming international investors to bolster their presence in the country.
Fast forward to July 2024 and Germany, like the Spanish market, is now tussling with a sharp fall in power prices, related PPA price drops and a surplus of projects bidding into Germany’s auctions for 20-year EEG tariffs which in turn has resulted in lower and lower clearing prices. Indeed, the country’s most recent solar tender in March this year led to an average winning tariff of circa EUR 51/MWh, and a low of EUR 36/MWh.
And these levels don’t look like changing for the next solar auction, bids for which were submitted at the start of July, with one developer telling NPM they’d lodged offers for a clutch of projects in the high EUR 40s/MWh range.
All this has contributed to a sharp drop in pipeline valuations as potential acquirers also weigh up sobering long-term power price forecasts and ongoing high all-in senior debt costs (relative to two years ago).
The more optimistic developers contacted by NPM Europe in recent days argue that the best RTB projects can still achieve valuations of EUR 100,000/MW - EUR 130,000/MW (with a EUR 200,000/MW valuation very much an outlier). However, others in the advisory community argue that sellers would do well to accept offers of EUR 80,000/ MW before the market worsens further.
For projects 12 months or so away from RTB the prognosis is even worse, with the more pessimistic citing valuations of EUR 50,000/MW or so.
These depressed project and pipeline prices, also in evidence in Spain and Poland (the latter more due to current curtailment levels grazing 20% of production), among other markets, plays into a broader renewables industry conundrum - what to do with production capacity now there is so much renewables generation coming online and capture prices are often so low?
In the German context, the more bullish developers argue that now is actually a perfect time to acquire pipelines or sign co-development agreements at attractive valuations, as demand will eventually come back over the coming years through a combination of the electrification of transport and the construction of additional data centres and the surge in power demand that will come with the increased implementation of artificial intelligence.
Asset owners are also starting to spend more time thinking about alternative ways that they may be able to generate revenue later in the decade, other than through simply selling power to the market or via PPAs, with green hydrogen production one potential option.
In the meantime, there are concerns that current market conditions will lead to some near-term issues for both developers and investors.
Firstly, developers which had been hoping to recycle project pipelines at higher valuations will either have to crystallise these lower returns and pull the trigger on sales, or risk running out of cash, which could in turn lead to an acceleration in topco level equity sales. This shift is arguably already well underway, although there is also a growing number of debt providers looking to provide short-term development capital finance.
Secondly, as with the Spanish market, investors and developers which acquired projects and pipelines at higher valuations 12-24 months ago on the assumption that power prices would stay high for longer, will also have to take a view on whether to book a loss on their investment and scrap projects, or proceed with their construction in the hope that those assumptions will once again come back.
On a related note, battery storage roll-out in Germany is projected to accelerate rapidly over the coming quarters, with BESS developers seeing a huge opportunity to help balance out supply and demand and address some of the issues created by the proliferation of solar. Such groups are looking to rapidly develop project pipeline in order to feed growing investor demand.
Obton was one of the earlier investors into the market last year with its deal to acquire a multi-hundred MW BESS pipeline from Kyon Energy, and Kyon Energy’s shareholders subsequently opted to sell the business itself to French energy group Total some months later.
A growing number of BESS projects are projected to hit the market over coming months, with Elements Green one group understood to be in the early stages of divesting a 400 MW project in Alfstedt. The developer is mooted to also be set to bring to market a larger, multi project pipeline later this year.
Sdp Energie is another group understood to be currently divesting a c.45 MW project, while it is also believed to be lining up the sale of several larger 250 MW - 300 MW schemes over the coming months.
Some financial advisors believe the business case is already there for BESS in Germany, and that investors just need to see a couple more quarters of operational track record in order to get totally comfortable deploying capital in the space.
“We see RTB or operational German BESS projects as being able to offer investors returns of 10-11%, which is around 200 bps less than UK projects due to the lower cost of institutional capital in the country,” says one.
Others are not so sure, conceding that the German BESS market could see huge growth but pointing to an ongoing lack of a capacity market revenue option, and sometimes prohibitive grid connection costs and associated co-location expenses and complexities, as barriers to this happening.
On the regulatory front, there are also lobbying efforts being made by German solar developers to make it mandatory for solar projects bidding into the country’s main 20-year EEG tender for the technology to also incorporate a co-located battery storage element. This is believed to be seriously under discussion, and appears to have broad support from the solar developer community which sees it as a way to help address collapsing capture prices.
In the meantime, the more sanguine point to the cyclical nature of the solar market, and the renewables industry in general, counseling that it’s simply time to tighten belts and lower expectations.
“I don’t know why people are surprised [about lower capture prices and project valuations] - we’ve all been talking about cannibalisation concerns for years and we're now entering a more mature period of the market,” says one European developer active in the German market.
They add: “The fact is we have been spoilt - I used to be able to hit targets by divesting two smaller solar projects each year, whereas now I need to sell five larger projects annually to generate similar revenues.”