Europe's solar renaissance looks set to continue blossoming despite the impact of the coronavirus and falling power prices, experts and investors say.

A combination of new competitive tenders and the increasingly favorable economics of solar power-purchase agreements (PPAs) have dragged Europe's once world-leading solar market out of its post-subsidy malaise. New installations more than doubled last year across Europe, hitting 16.7 gigawatts, and annual additions could reach 35 gigawatts in 2022, according to the most optimistic scenario laid out by the trade group SolarPower Europe.

But does the COVID-19 outbreak or the likelihood of recession change the long-term picture?

Many in the industry remain sanguine. Supply-chain fears have yet to materialize and construction work at new projects continues, albeit at a slower pace. 

German renewable generator Encavis and U.K. developer Solarcentury are collaborating on two projects under construction in Spain, including the 300-megawatt Talayuela project, one of the largest unsubsidized plants in Europe. Talayuela has a 10-year PPA covering 75 percent of the capacity, with the rest to be sold on the market.

Jörg Peters, head of investor relations at Encavis, said that while the coronavirus outbreak has slowed work on Talayuela, the impact looks to be minimal. Social distancing rules mean having fewer workers on-site, running extra (but emptier) transport to and from the project, and making new arrangements during breaks.

“They cannot work as close together as in the past," Peters told GTM. "We have calculated that there might be one or two months' delay in being connected to the grid," a holdup that is still within the preplanned contingencies of the project.

“To be honest, we have the 10-year PPA and a project which will last for a minimum of 20 years — [probably] closer to 30 years. If it's connected to the grid two months later [than planned], it’s not nice, but it doesn't hurt at all,” said Peters.

Helpfully, the offtaker, an unnamed northern European utility, has agreed to shift the start date of the PPA by two months. Peters said this process was straightforward and entirely amicable.

Projects currently under or near construction may actually benefit from cheaper modules in the near term as the industry adjusts to travel bans and social distancing requirements. Initial fears for the China-dominated solar supply chain have not been borne out so far, and any knee-jerk price increases for modules are not expected to persist. 

“Solar PV costs should continue to fall through 2020,” said Tom Heggarty, principal analyst at Wood Mackenzie’s Energy Transition practice. “We expect module prices to soften as the supply situation in China returns to close to normal, while [near-term] module demand in Europe weakens."

The challenge of weakened power prices

Europe’s solar rebound began last year, led by Spain, where the annual market for new additions soared from 260 megawatts in 2018 to 4.9 gigawatts in 2019. The Spanish market could see a similar level of installations this year, and Germany, the Netherlands, France, Poland and Portugal were all expected to put up strong numbers this year as well.

A growing proportion of Europe's solar projects are unsubsidized, with revenue coming from trading power on the market or via PPAs.

“The weaker short-term power price outlook will undoubtedly make the investment case for unsubsidized solar more challenging," Heggarty said. "Offtakers will always be looking to sign PPAs at a discount to the wholesale market price."

"In Spain, PPAs are typically being negotiated at discounts of 10 to 20 percent. So any fall in power prices feeds through to PPA price expectations, and in turn through to economic models for unsubsidized solar investments,” Heggarty said, adding that in the two middle weeks of March, European forward power prices fell between 10 and 20 percent.

“The extent of any further price reductions and the duration of COVID-19-related restrictions will determine how much damage is done to the sector,” said Heggarty.

Peters at Encavis said it's possible that PPA contracts signed in the near term could include some kind of innovation to account for the short-term price shock of COVID-19 without skewing the price for the majority of the project's length. Offtakers and power providers often have to work together for a decade or longer; nobody benefits from using a black swan event to tilt the balance of the relationship in their favor.

In the long term, the fundamentals of subsidy-free solar in Europe look good, said WoodMac's Heggarty. "We would expect a significant rebound in activity when markets begin to return to normal."

A positive climate for renewable investment

James Knight, a partner at investment bank and advisory firm Augusta & Co., said assets such as solar projects may shine in a weakened global economy.  

“Traditionally, in the 20 years I've been doing this, infrastructure — particularly infrastructure that is non-correlated, government-supported, either directly or indirectly, and can offer a long-term yield — becomes more attractive in a period of uncertainty like this," Knight told GTM. 

"We've absolutely seen that in previous economic downturns or shocks, where we see enhanced capital flows. I think the story...this time around is a little bit more complicated, but that’s my first overriding impression.”

That said, Knight, whose company has closed 100 deals in the renewable sector totaling 20 gigawatts of assets, acknowledged that downward pressure on power prices makes conditions tougher for marginal unsubsidized markets like the U.K. In contrast, places like Spain, where solar prices are well below spot prices, will continue to look appealing.

Knight said he's confident there will be plenty of investment available for renewables in Europe looking ahead. “It wasn’t as if the market was starved of capital in the first place. It’s been a sellers’ market for five to eight years now. In places like Spain, there is more capital than there are projects.”

The pool of investors has been increasing too, he said, with foreign investors moving in and increasing interest from the oil majors.

With the latter also managing the recent halving of the oil price, however, Knight is cautious about the scale of investment the oil sector will be able to spare in the medium term as cost-cutting takes priority.

“The level of uncertainty is extraordinary. The good news is that of all the industries, the promotion of the energy transition — whether you do it for energy security [or] environmental concerns — continues to have strong momentum. The dynamics that have been driving this industry over the last few years are still very much in place."