Inside Southeast Europe's Power Markets with Dimitar Enchev of CWP Global

Speaker A: Foreign welcome to the pexpark Podcast. Every two weeks we'll be bringing you fresh updates and insights on the renewable energy market, along with a guest who'll share unique perspectives on the critical trends shaping our industry.

Speaker B: Welcome to a new episode of the Paxopark podcast. The forces that reshape Western European power markets. Negative prices, rising volatility, cloud capture rate pressure are now arriving in the Balkans, but they land against a different backdrop. Higher prices, wider spreads and a deal environment that still looks healthy. Today, we want to understand what it takes to develop and contract renewable assets across southeastern Europe. Few people can read this region as clearly as someone who has built across it for two decades. Joining me is Dimitar Enchev, CEO of CVP Global, the developer behind the deepest independent track record in the region. We'll explore where capture rates are heading accord across SE markets, where the regional price premium is durable or simply a, uh, lag before convergence. Who is actually signing offtake today and what role best plays. And as I do every two weeks in the second part, I'll take a look at some of the excellent reporting from the Paxapar team. This time we head to Munich for our quarterly customer briefing on the German power market entering a new phase. And over to Great Britain where corporates are steadily shifting toward operational PPA as the additional tonality premium starts to bite. Today I'm happy to have with me Dimitar Enchev, CEO of cwp. Uh, and we're going to talk southeastern Europe bez market developments, but in general about a region which I've worked a lot in, but we haven't covered a lot lately. So Dimitar, welcome to the show.

Speaker A: Thanks for having me.

Speaker B: Luca Dimitar, first CEO of cwp, largest independent developer and operator of assets in southeastern Europe. Is this right?

Speaker A: We're one of the largest developers. We've been around for quite a bit, pushing on 20 years now and I would say we're one of the pioneers of large scale renewables in Eastern Europe. We started in Poland, then quickly entered Romania, Bulgaria, Serbia, Croatia. Uh, we developed what was the largest wind farm in Europe for 10 for over 10 years in Romania. 600 megawatt project, that was back in 2008. We started construction on that. So we've been around for a long time. We had a bit of a detour as the region cooled a little bit with regards to renewables. We focused our efforts in Australia where we built one of the largest renewable energy companies which we exited a few years ago. And now we're fully focused Back on Southeast Europe.

Speaker B: Right, so describe us a bit. The power region. So as to say we like to think of Europe as some big power areas like continental Europe, Germany, France, gp, Iberian Peninsula. Had to think of Southeastern Europe as a, uh, power market. This is one region.

Speaker A: What comes to mind, uh, Southeast Europe is getting more and more closely integrated with the broader European market. A lot of the countries in the region are members of the European Union and they're now coupled, uh, their energy grids, the power grids are coupled. So you see increasing flow of energy and increasing interconnection capacity and increasingly converging prices. But the region is still a uh, unique block in the European power grid and it has its own characteristics. We also have a few countries, a few small, few big ones that are outside of the eu. So they're not subject to the EU ETS as of the beginning of this year. They're actually the border between the EU and non EU is subject to the sea bomb which created some, some difficulties or some divergence I guess in the prices. And of course you've got a lot of coal and lignite in the region which is being pushed out of the market. So the region is short power as a whole and it's probably the last bastion of coal in Europe, uh, which obviously needs to change. So you see a lot of rapid development in renewables and storage as well as a whole because the region is short power. It's trading at a premium to Central Europe, to Germany, but it has a lot of solar. So midday actually you've got lower prices and then in the evening you've got a, you've got a shortage. So you've got a very large daily min max variance which of course makes uh, the conditions very, very good for battery storage. And we're seeing an explosion in storage in Southeast Europe, uh, especially in Bulgaria where I'm based.

Speaker B: Right. Already a lot to unpack like just in size of the market. I mean Romania is well known large renewable market. If you were to give us some headline figures, how big is uh, the power market overall in terms of potential solar demand or solar capacity or battery storage which the market could absorb?

Speaker A: I would say, depending on how you count and which countries you include in the region. Obviously you've got some big countries like Ukraine which are I would say part of the region but not part of the European Union. But broadly speaking we have, I would say between 50 and 100 gigawatts of renewable energy capacity that needs to be built in Southeast Europe. If you take a place like Bulgaria, which has seen an explosion in solar and storage. Bulgaria is now about, at about 6 gigawatts of operating solar and one of the largest, if not the largest storage markets in Europe with 4,000 megawatts, over 10,000 megawatt hours grid connected and operating in, in the, in the country that's been a, um, major success story. But the region can absorb a lot of renewable energy. It needs a lot of capacity, both because it's short power, but also because it's displacing coal, which is very, very expensive, especially in the context of the EU ets.

Speaker B: Right. And what is driving project development? Uh, I mean, you mentioned some of the good fundamentals, like high spreads, overall high premiums compared to German prices. But like from an offtake side or from a, um, revenue monetization side, what are, what are the ways to go in these markets?

Speaker A: So we at CWP have about 6,000 megawatts in our portfolio. And our strategy was partially advised by our experience in Australia where we saw quick solar cannibalization. So solar, obviously, it's much quicker and easier to develop and build and it tends to overshoot. So we focus on wind. Most of our portfolio is wind and standalone storage. We have a little bit of solar, but that's the exception to the rule. And this is where we see value. Wind in Southeast Europe is inversely correlated solar both on an intraday basis and on a seasonal basis. So it generates in the morning and evening and most in the winter when you have, when demand peaks in, in Southeast Europe, the, the, the consequence of that is that you've got very high capture rates. This is partly because it's again inversely correlated to solar, but it's also decorrelated with the major, major wind areas in Europe, uh, namely northern, Northern Europe. Right. So it's a different weather zone. You've got very little capacity operating. Just to give you an idea, you've got, in Bulgaria you've got only 700 megawatts of wind. And Romania we've got about three, three and a half thousand megawatts of wind and very little of that has been built in the last few years. So it's, it's nowhere near saturation level. Combined with the fact that it's inversely correlated to solar and decorrelated from, you know, northern Europe, it makes for very high, high capture rates. So we're, we're talking, if you take one of our projects in Bulgaria, I just, I was just looking at, uh, the metrics that we keep track of year to date, it would be about 105% of base float of Bulgarian base float, which is about 15, 20% above German base float. Right. So you get a premium product. This is why, obviously, we're focused on wind. It's difficult, uh, to develop, but it's worth it. Uh, and then you've got standalone storage, which is because of the dynamic I described before. It's also capturing very good spreads in Bulgaria, which has seen an explosion of storage. Again, one of the biggest markets in Europe. Arguably, it's actually become the largest storage market in the world, adjusted for size. Right. And it's certainly top three in absolute numbers in Europe. But Bulgaria, even though it now has 4,000 megawatts of storage operating, so more than 10,000 megawatt hours, you still have spreads that are above €100 per megawatt hour on average. Uh, and this is because you have a lot of solar, and then you have insufficient capacity in the evening peak. So you still have quite good conditions. And this is actually, this comes to show that it's one big market now. It's not the Bulgarian market, it's the common European market. Because if Bulgaria was an island and that had 4,000 megawatts of storage on top of the nuke, on top of other generation, in a demand environment where, you know, 5,000 is or 6,000 is kind of the best of days, you would have very, very different pricing. But because Bulgaria is exporting and selling to the rest of Europe, you have this, this dynamic. So more and more, again, we look at these markets as part of, uh, the broader European market. More and more we're seeing convergence, and therein lies the arbitrage opportunity. I mean, we've been. I've been in renewables for a long time, and I think Southeast Europe right now is one of the best value propositions in renewables, not just in Europe, but anywhere in the world. Because you have this relative arbitrage opportunity with the rest of Europe. You're basically selling into the common European market, but you're actually generating with local assets that have the right generation profile.

Speaker B: Fascinating. Dimitar. Let's just stick to Bulgaria then. How are best projects monetized and secured? Is it all merchant or is there any revenue security through tolls, for example?

Speaker A: Yeah, so you have a bit of everything, I would say, and it's still very new. So just to give you an idea, Bulgaria had probably a thousand megawatts at the end of last year, and now we're at 4. So this has been an extremely rapid expansion, driven by people rushing to secure your funding before a certain deadline. So a lot of these projects haven't really figured out the monetization path fully. But you do have tolling agreements? Absolutely. The big energy traders are now, most of them are active in the, in the market and they're offering tolling agreement. You do have swaps which is basically partial hedge. I uh, do have a lot of merchant capacity as well.

Speaker B: Right. And if you were to go over to the wind projects, how would they be secured? On the revenue side?

Speaker A: It varies from market to market. So in some markets you've got government schemes, CFDs basically. Uh, we have those in Romania and Serbia. We've been active in Serbia for example in the CFD auctions, but in Bulgaria there is no CFD scheme. But in both Bulgaria and Romania I think you are seeing a robust corporate offtake market. And this is both local demand but also increasingly virtual cross border PPAs enabled by guarantees of origin across Europe. And if we have to be specific about wind, it's actually an interesting product because people, the dynamic I described about the value of the profile, the generation profile, smart, sophisticated off takers actually get it as well and they are seeking this product and there is a scarcity effect because there aren't that many new projects. So we are seeing a lot of corporate offtakers who have probably over indexed on solar, have quite a bit of uh, capacity already that they're slowly realizing that wind in southeast Europe is kind of the so called missing hours in their portfolio as they try to get a uh, more comprehensive balanced book.

Speaker B: Interesting. You mentioned in your beginning an impact by cbam. I would be curious to hear what this impact of the CBAM mechanism is maybe for our listeners, uh, if you could, uh, what CBAM is and how it impacts.

Speaker A: Yeah, so I'm not going to go into too many details because it's a very complex system and that's part of the problem actually it's too complex. But basically this is the carbon border adjustment mechanism that the EU introduced. It's intended to prevent carbon leakage so that a uh, country that's not in the EU and a generator that's not subject to the EU ETS is not freely selling power into the European Union. So for example a coal plant in Serbia cannot sell untaxed, um, uh power at a low price and capture at a low cost and capture the price for it. The effect that it initially had is that it basically froze the market a little bit so the trading ceased. People traders weren't sure how to deal with it and they weren't sure how to manage the exposure, which for example, in Serbia reduced prices by about €30. So prices diverged. They have, the spread has since narrowed. So they're now back to almost being the same between Serbia and Bulgaria and Romania. But the intention here is that if you are, if you are a non EU country, you have to be put on a level playing field against a EU country that's paying the EU ets. And the consequence of that for, for us and for the corporate offtake market is that if you're an exporter into the eu, so for example, you have a factory in Serbia And I think 60, 65% of Serbia's exports go into the EU, you're going to get taxed unless you procure green power and you can prove that you procured green power. Um, so you're going to get, your product is going to be uncompetitive because of the very high carbon cost and the very high carbon intensity disturbing grid. So long story short, the system is still being worked out or the market is still trying to adjust to the system. But this is supposed to level the playing field and push exporters in non EU countries to procure green power as a consequence. So we see it as an opportunity for us.

Speaker B: Right. So that's also how I understood it. It should be fostering PPA demand. But you mentioned there was an impact of actually lowering prices in Serbia, if I got it right.

Speaker A: Lowering power prices? Yes.

Speaker B: And why was that?

Speaker A: Because people couldn't export Serbian power into the EU because they were worried about how to pay for the Seaba. Right. And it's not very, the system is not very clear. Even if it's green power, even if it's power coming from one of our wind or solar projects, there isn't a very good system to certify this green and export it, uh, into Bulgaria, Romania or Hungary, which made the market stop. So basically Serbia had more power than it needed at times and, and this is why the price dropped again. That effect has since been negated, but the spread has narrowed. But it is going to create a long term structural opportunity here for, for renewable energy PPAs in non EU countries.

Speaker B: So the original intent you believe is, will be playing out to, uh, the benefit of, let's say, PPA demand in those non European countries.

Speaker A: Correct? Yeah. And of course the most important part of the original intent is to level the playing field because you don't want to be allowing free imports of goods coming from non EU countries where these goods are made by cheap polluting lignite Power at a lower cost and thus making European industry non competitive. So the sea bomb is, is a very important component of Europe's carbon strategy and it goes hand in hand with the EU ets. We're not quite there yet, but I think it's an important part of the picture here.

Speaker B: Right. I want to take a step back again and look at a typical waterfall of revenue and costs. We already talked about capture, we talked about wholesale prices, overall price levels. Two other important elements are guarantees of origin, uh, and balancing costs. I would be very curious, high level or maybe focusing on a few markets how those revenue elements look or pan out.

Speaker A: Yeah, so balancing, I'll start from there. Um, I mean balancing is a zero sum game so your cost is someone else's profit. So it's, it's all a matter of perspective. But it's a big, it's a big part of the, of the cost of a renewable energy generation portfolio. It's a lower cost if you have a portfolio that's diversified versus a single asset and it's a much lower cost if you're using storage to uh, lower, to manage that cost in a smart way. So that's the renewable energy IPP perspective. And this is why more and more the old world of you build a wind or solar asset and just sit back and collect revenue and that's going away more and more. You need to be a smart proactive participant in a more and more complicated power market to capture the full value of your assets.

Speaker B: Um, so yes, I was just wondering if there is actually a natural advantage for players used to high balancing prices. So uh, the way I understood is that for example in Serbia, Bulgaria you might have historically higher balancing costs compared to markets like Spain or Germany. But due to this fact there is already a scale and capabilities on how to manage it.

Speaker A: Uh, say the market's quite there yet, but people, participants are getting more comfortable managing that risk. And it is, I would say on a relative basis, uh, especially Romania has been quite costly.

Speaker B: What would costly mean? Is it a two digit euro per megawatt hour number?

Speaker A: Yes, yes. And of course it depends on the, the technology. Right. Some, some, you know, some are different than others. But uh, yes, that order of magnitude, the there, there's been also a lot of regulatory change. So you're, it's a bit of a moving target than you're trying to hit. And the only really good hedge is the physical hedge. Right. This is why I believe in storage as part of a renewable energy portfolio. And you mentioned revenue stacking. Well, this is an important part of the revenue stack. If you have standalone storage, then obviously, um, balancing may be, you don't have any wind or solar to balance. Uh, you're just relying on time shifting and ancillary services. But uh, in a, uh, diversified portfolio, balancing actually is probably one of the best uses of storage. Right. Then you've got ancillary services. And as with the, with the energy market, the ancillary services market is also getting more and more integrated. So it's turning into one big, um, European market. So for example, Bulgaria joined Picasso last year. So you're seeing more, more and more integration which should lower cost for the European market as a whole. Uh, of course in certain locations it will have the exact opposite effect. Right, because you'd be, you'd be getting. So a place like Bulgaria for example, which has lots of storage on an isolated basis, maybe you will have lower balancing costs because that storage will be competing down the price. But if it taps into the broader European market, then the cost for Bulgaria would be on a relative basis lower than, higher than it would have been. But as the whole, the market will have a more optimized system and a lower cost for everyone. But getting back to the revenue stack, I think an important part of the equation is to have a good optimization engine that allows you to dynamically prioritize and make the most out of your asset. And as Bulgaria has become such a hot market, we've seen a lot of the, uh, leading European optimizers come into the market and it's become quite an interesting dynamic locally.

Speaker B: Yeah, maybe coming a bit to an end. Where would you see the major developments over the next 12 years in the region?

Speaker A: Well, you're going to see more and more storage. The big unlock that is yet to happen and we're working very, very hard on making it happen. Is the region finally building some wind, some onshore wind? After a ten year pause, we are seeing now some new projects. We have about 2 gigawatts of wind the, that that are maturing over the next few years, which, which are, you know, prime onshore wind, wind assets that, that will have a, uh, very important role in the system. And the big question is what happens with storage? How quickly is the market going to get cannibalized? I think a lot of players have been surprised by how well the, the spread has held up in Bulgaria. Again, this comes back to the fact that this is a broader European market, but at some point there will be some cannibalization. You're going to see more and More storage, uh, come online and the spreads are going to compress in terms of renewable energy build out. I think the march is going to continue. We're seeing more and more demand. Obviously these economies are some of the fastest growing economies in Europe. We are also seeing now on top of the usual demand growth, electrification and so on. We're seeing data center developments which are, which are going to be adding to that demand growth. So I think, to sum up, I think that we're going to continue building renewables. Wind is going to be a premium asset, storage is going to continue to get built, although probably at a slower pace in some markets. And market integration and convergence is going to continue across the region and across Europe. I think that's again, in this environment it's incredibly difficult to predict anything, especially years out. Um, the one thing that's for certain is volatility is here to stay and market complexity is going to keep increasing. So flexible assets, a diversified portfolio and the ability to manage the complexity and volatility of markets is a must these days if you want to be an ipp. Yeah.

Speaker B: And evergreen trend across the entirety of Europe.

Speaker A: Yes, absolutely.

Speaker B: Dimitar, thanks for this fascinating overview of an emerging growing region. Thanks for sharing your insights.

Speaker A: Thank you very much. Thanks for having me.

Speaker B: The Pexapark team was on the road again and this time we were back in Munich. We had our quarterly customer briefing with 80 clients and we shared prices, we shared insights and we laid out our review on where the German power market is heading. So let me give you the five drivers we think you need to be watching. First, solar PPAs, they are still under pressure. Capture rates keep falling and that of course means that solar PPA price values are going down with them. The upshot is that colocating with storage has basically become the default now. And the route to market options are evolving fast, especially standardizing, if we can say this around Green Bess. Second, wind auctions are getting crowded. Onshore EEG auctions are oversubscribed and that means that strike prices are sliding. But here's the interesting part. For the longer term, greenfield PPAs are starting to look like a real alternative for developers. So yes, finally, after many years, onshore wind PPAs for new build might just be staging a, uh, comeback. Third, storage financing is maturing. Debt is taking a bigger and bigger share of best project and alongside that we're seeing a steady rise in fixed price FPAs, flexibility, purchase agreements, particularly tolls and day ahead swaps. And when we questioned the room, everyone is expecting those structures to dominating dealmaking in the near future. Fourth, the regulation is shifting. The EEG update brings in a two sided CFT and changes the subsidy opt out. What does that mean? In practice we expect fewer short term opt out uh PPAs on new builds and more activity across the existing fleets. And finally fifth, demand is being driven by two policy levers, the industrial power price subsidy and Germany's data center strategy. Together they're pulling through PPA demand, especially for new build wind and co located solar. So if I had to sum up in one line, storage colocation and a lot of moving parts on the regulatory side, that's the center of gravity in this market right now. If you want to read through our presentation, you find them all on the platform. Then let's move over to Great Britain where corporates are steadily shifting toward operational PPAs as the additionality premium starts to bite. Activity has picked up sharply this year. So we see now operational assets making up almost 40% of reported capacity. And we believe this is because buyers are increasingly reluctant to pay the premium needed to support new build. So what's actually going on? It used to be in the GB market that 10 to 15 year pay as produced PPAs were backing new projects. Today's buyers care more about a competitively priced hedge with some sustainability benefits attached. But additionality has slipped to become a secondary concern as long as the project still meets the asset age rules in schemes like Re 100. So price is the driver and developers are still pricing new build at a premium level of around 25 to 30 pounds per megawatt hours above Paxo Park's fair values. And a lot of corporate buyers are telling us that it's getting generally hard to push through internal approvals. Operational assets on the other side sit much closer to fair value, often at a discount of 10 to 15 pounds versus new build. Add in lower execution risk, fewer lender constraints and more flexibility on tenor and you can see why operational PPAs are winning. When we look on the structure, we see that annual baseload PPAs have become the preferred option. Yes, baseload, because they let buyers match a chunk of demand with a predictable profile pay as produced by contrast leaves them exposed to shaping costs and profile risk. So a lot of these deals now need a third party, usually the corporate's own energy supplier or utility that comes then in to shape the variable generation into baseload. And guess what? This comes at the cost. Overall, we expect this trend to deepen and broaden with other markets following GB leads. And just to put this into perspective, the operational PPA market, if you want to call it like this, is a factor bigger than the new build. We're talking factor 5 to 10, depending on which market we are covering. So in a way, this is very, very positive development, and it also corresponds much better to the needs of corporate buyers and let's say also to the natural liquidity horizon of the wholesale market. Overall, shorter tenors, but much more volume.

Speaker A: Thank you for listening to the Pexapark podcast. Uh, if you're interested in more news, data, uh, insights and analytics on the energy transition, head to our website pexapark.com to find out more. Mhm.