By Brent Nelson, PhD, Senior Managing Director of Market Intelligence, Ascend Analytics

In US energy markets, the ‘green premium,’ in which buyers pay for a clean energy power purchase agreement (PPA) above its forecast wholesale value, is here to stay. This dynamic is driven by rising clean energy costs, as well as by state procurement obligations that support continued renewable development beyond what electricity revenues alone can justify. Collectively, this demand raises a consequential procurement question: how much will utilities and corporates pay for clean energy when the contract is expected to be underwater before environmental value is counted?

Key Takeaways

• Clean energy procurement obligations support levels of development and depress electricity revenues to the point where new entry is not economic without meaningful renewable energy credit (REC) values. These dynamics will keep renewable PPA prices above their forecast merchant value over the long term, with environmental attributes accounting for the difference between contract cost and market value.

• Renewable buildout erodes the value of renewable generation. For example, solar depresses prices during its own production hours, reducing the revenues available to both existing projects and new investment.  

• Other resource additions can also erode renewable value even as load growth creates more offtake opportunities and demand for RECs. When new generation accompanies that load, lower-variable-cost resources, including more efficient gas plants, can displace higher-cost units and depress wholesale prices.  

• Rising equipment, construction, and interconnection costs put upward pressure on the PPA prices needed to finance projects. Changes to federal tax credit eligibility and supply chain requirements add further pressure. Buyers face a widening premium when those costs increase faster than the market value of the electricity and other contracted services they receive. Rising costs don’t have a direct effect on power prices, however, especially when the majority of renewables are deployed under previous tax credit structures.  

• A PPA with negative forecast merchant value can still meet a buyer's environmental or compliance objectives, though buyers need to quantify the premium separately and compare it with the value of eligible attributes and alternative procurement options. As premiums rise, maintaining procurement volumes requires greater willingness to pay; constrained budgets force purchases or ambitions downward.

Why Will More Clean Energy PPAs Have Negative Merchant Value?

Renewable PPA prices exceed their forecast merchant value because buyers pay for both electricity and the renewable energy attributes represented by RECs. State procurement obligations and corporate commitments create demand for those attributes, thus supporting renewable development beyond what electricity revenues alone can justify. State-level mandates create inelastic demand until the cost of the REC exceeds the alternative compliance penalty threshold (ACP) or until the price is deemed to be politically unpalatable and the ACP is revised downward.  

As additional projects compete to sell power during similar production hours, captured electricity prices decline, leaving REC value to bridge the gap between contract cost and merchant value. This ‘green premium’ gap represents the amount by which a PPA’s total economic cost exceeds the forecast value of its electricity and other monetizable market revenues, excluding RECs.

Competition reinforces this dynamic over time. Where electricity revenues alone justify new renewable development, additional investment erodes that opportunity. Positive REC values support further development even as electricity revenues decline, sustaining a premium for renewable attributes.

Ascend therefore expects the green premium to persist wherever procurement obligations and buyers’ willingness to pay for RECs support continued development, though the magnitude will depend on the contract’s price, location, generation profile, and terms.

How Does Market Saturation Reduce Long-Term Renewable Revenues?

Increasing renewable deployment intensifies competition for the same revenue opportunities. As more solar comes online, for example, coincident output displaces higher-cost generation, allowing lower-cost resources to set electricity prices. During oversupplied hours, prices can fall enough to induce curtailment, further limiting project revenues. These effects constrain the revenues available to both existing assets and new projects over time.

For buyers evaluating a solar PPA, then, the most relevant metric should be generation-weighted capture price, which represents the average electricity price received during a project’s production hours, weighted by its output at the delivery or settlement location. Using the market’s annual average electricity price to value a solar PPA can overestimate its electricity revenues because solar often generates during lower-priced hours.

Why Are PPA Costs Rising as Captured Revenues Erode?

Rising construction, equipment, and interconnection costs increase the contract prices developers need to make renewable projects financeable. Tariffs and equipment-sourcing restrictions add further cost pressures, while reduced access to federal tax credits shifts more of a project’s cost recovery onto PPA revenues. These costs can rise even as renewable buildout depresses electricity prices during project production hours, widening the gap between PPA prices and forecasted merchant value.

Federal tax credit changes compound this pressure. Earlier termination provisions for wind and solar credits make construction and completion timing more consequential, while restrictions involving prohibited foreign entities complicate equipment sourcing and credit eligibility. Projects that lose or receive less tax credit support must then recover more costs through other avenues. Uncertainty over eligibility and delivery dates can also complicate financing and increase the cost of committing capital.

For buyers, higher development costs can translate into higher PPA prices without an equivalent increase in merchant revenues. The resulting premium intensifies affordability concerns for utilities and puts greater pressure on corporate procurement budgets.

Can Load Growth Reduce the Green Premium?

Load growth creates more offtake opportunities, deeper energy markets, and additional demand for RECs where renewable procurement obligations or corporate commitments apply. However, when serving that load requires additional generation, the new supply can depress wholesale energy prices, limiting the potential for higher electricity revenues to reduce the green premium.

As illustrated in Figure 1, demand and supply expand together. Reserve margins and capacity accreditation can require roughly twice as much additional nameplate capacity as new load, depending on the resource mix. New renewables and efficient gas generation generally have lower variable costs than the resources they displace. Consequently, supply additions can push electricity prices downward even as consumption increases.

Wholesale prices are likely to rise initially as load growth outpaces new generation and reserve margins fall. However, the long-term outcome differs when large loads come with the new generation needed to self-serve at high levels of reliability. New generation needs to exceed the peak consumption from large loads by a significant margin to account for outage rates, renewable ELCCs, long-duration winter events, and reserve obligations. During non-peak consumption hours, that surplus capacity becomes an even higher fraction. These new resources will displace the most expensive suppliers on the grid as newer thermal generation is more efficient than legacy thermals, and as renewables and storage are able to undercut the full generation stack. This collectively decreases prices as demand grows.

Buyers therefore should not assume that load growth will make renewable PPAs economically attractive through electricity revenues alone. Utilities and corporations must still determine how much they will pay for the associated RECs. If the premium rises, maintaining procurement volumes requires larger budgets; buyers with limited willingness to pay will need to evaluate the tradeoffs between cost and meeting obligations.

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