Foreign new energy power generation subsidies have declined, and PPA contracts have emerged as the times require. Similar to the development of domestic renewable energy, the development of new energy in Europe initially relied on subsidies. For example, the contract for difference policy adopted by the United Kingdom provided government subsidies to renewable energy power companies based on market reference electricity prices. With the continuous decline of the cost per kilowatt-hour of wind power and photovoltaics brought about by technological progress, the subsidies for renewable energy power in various parts of Europe have gradually decreased, and the marketization of electricity prices has continued to increase, and renewable energy PPA contracts have emerged as the times require.

The so-called PPA (power purchase agreement, energy purchase agreement) refers to a long-term power purchase agreement signed by a power provider (power generation company) and a power demander (company). The term is generally 10-20 years and can be renewed after expiration. In the agreement, the two parties will agree on the transaction power, electricity price, green certificate price, delivery period, delivery point, etc. during the agreement period, and the electricity price generally adopts a fixed electricity price. In this way, firstly, it can reduce the risk of investors' income fluctuation; secondly, it can avoid the cost fluctuation risk of power purchasers; and thirdly, it can reduce the credit risk of financing parties such as banks.

At present, overseas PPA contracts can be divided into entity PPA contracts and virtual PPA contracts:

1) The physical PPA contract is directly signed by the power purchaser and the power seller, and then the power seller communicates with the power grid company to transmit the power to the power purchaser, and the power grid is only responsible for power transmission. Under the entity contract, the purchase and sale of electricity must be in the same area.

2) Virtual PPA contract, also known as financial PPA or synthetic PPA, is essentially a financial contract for difference signed by the electricity purchaser and the electricity seller. Under the virtual PPA contract, the electricity seller sells electricity to the grid company at the market price, and the purchaser also buys electricity from the grid company at the market price. After that, the two parties settle the settlement according to the difference between the market electricity price and the fixed electricity price. Compared with a physical PPA contract, the two parties in a virtual PPA contract do not need to be in the same area, so it is more flexible.

Since the beginning of this year, the price of natural gas in Europe has soared, which has driven the price of natural gas in North America and Asia to follow up. We believe that the core reasons are: 1) In the context of increasing geopolitical tensions, the Nord Stream 2 natural gas pipeline from Ustilu, Russia to Europe cannot supply gas smoothly, resulting in limited natural gas supply in Europe; 2) European gas supply is limited; Renewable energy accounts for a relatively high proportion. The worsening wind conditions in Europe in 2021, coupled with insufficient hydropower output due to dry weather, have led to a substantial increase in European demand for natural gas, coal and other traditional energy sources. 3) After the epidemic, energy demand in various countries has gradually recovered.

According to the latest data, the UK IPE natural gas futures settlement price has risen to 243.05 pence/sem (about 6.7 yuan/cubic meter), an increase of 331% this year. At the same time, affected by the rising gas prices in Europe, coupled with the upcoming peak season of natural gas consumption around the world, buyers in Asia and North America panic buying, leading to substantial increases in natural gas prices in Asia and North America, with increases of 104% and 154% since the beginning of the year.

European gas-fired power generation accounts for a relatively high proportion, and the price increase of natural gas pushes up the cost of gas and power fuel. From the perspective of power supply structure in Europe, gas-fired power generation will account for about 20% in 2020. Calculated according to the natural gas price of 6 yuan/cubic meter, even assuming that the energy conversion efficiency is 100% (the actual domestic gas-to-electric conversion efficiency is 50%-60%), the fuel cost of gas-fired power generation has reached 0.65 yuan/kWh, which is much higher than that of the current cost per kilowatt-hour for photovoltaic and wind power.

The increase in the cost of traditional energy drives the increase in overseas wind and solar PPA electricity prices. Driven by the price increase of traditional energy sources, the electricity prices of renewable energy PPA in Europe and the United States have continued to rise this year. According to the statistics of pexapark, the European regional renewable energy PPA price index has reached 55.36 euros/MWh (about 0.41 yuan/KWh), an increase of 39.31% since the beginning of the year. At the same time, the U.S. wind and light PPA price index Q3 reached 36.14 USD/MWh and 32.39 USD/MWh, respectively, up 10.5% and 18.1% year-on-year.

Under the background of rising electricity prices, overseas power plant customers' acceptance of module prices is expected to increase significantly. Since the beginning of this year, due to the continuous increase in the price of upstream silicon materials, the price of photovoltaic modules has also risen sharply. In particular, the price of modules has risen to more than 2 yuan/W recently, causing the market to worry about new photovoltaic installations throughout the year. We believe that in the context of the continued increase in overseas electricity prices, the acceptance of component prices by foreign companies is gradually increasing. According to calculations, when the electricity price is 0.4 yuan/kWh and the total project investment rate of return is 6%, the highest acceptable range of component prices for downstream power plant customers reaches 2.4 yuan/W.

In the long run, most European countries in photovoltaics will phase out coal power before 2030, and Europe’s own natural gas resources are relatively scarce. Other renewable energy sources such as hydropower will face fluctuations in incoming water and other factors. The electricity gap generated is expected to be mainly filled by photovoltaics. Taking into account that the increase in PPA electricity prices can effectively stimulate the demand for overseas photovoltaic installations, we estimate that the global new installed capacity of photovoltaics is expected to reach 155GW in 2021, and at the same time it is expected to reach 220GW in 2022.