Storage swap contract steadies revenue outlook for renewables
As predictable coal is replaced by unpredictable renewables in the energy system the mechanisms that underpin the trading of energy need to be updated. The latest manifestation of change is an electricity swap contract for buying and selling stored energy.
In the first deal for Renewable Energy Hub’s Virtual Storage product, announced in January, seller Hydro Tasmania and buyers Macquarie Group and Shell-owned ERM Power will agree on a spread between the charge and discharge price for a determined daily amount of energy in megawatt hours. In Hydro Tasmania’s case the energy will be supplied by pumped hydro energy storage.
Transactions will begin July 1 for the 2021-22 financial year but Renewable Energy Hub, the broker and architect of the offering, is ready to offer the standardised contract to operators of other storage assets.
“The nature of these contracts is much more suited to these new technologies that are commercialising rapidly and looking to go to scale,” says Renewable Energy Hub head of markets Chris Halliwell.
“The key is that they are all based on a spot-exposed model, and we know the spot price is going crazy because there is so much intermittent renewables and negative pricing. This is a way to manage a portfolio around [renewables] and hedge them. It’s much better than being exposed to the world’s craziest spot price.”
Standardised contracts for energy were developed 25 years ago to mimic baseload generation, but times have changed. In a system where generation relies on daily and seasonal weather patterns – all the way down to passing cloud cover – contracts are needed to match the dynamism of renewables. “Different proponents will choose them with different motivations,” Halliwell says.
Melbourne-based Renewable Energy Hub received $845,000 in grant funding from the Australian Renewable Energy Agency in January last year to develop hedge contracts that would allow developers of wind and solar projects to better forecast revenues.
Over the past few years rising levels of solar generation have pushed energy prices into negative territory around midday in some markets. “We’re seeing a significant shift away from people wanting merchant exposure because of how dramatically that risk profile has changed,” Halliwell says. “The distribution in half-hourly value across the daytime is so dramatic now that people want to manage those exposures in a more targeted fashion.”
The contract gives Hydro Tasmania the benefit of certainty with a prudent hedge to volatile pricing but it also means the company will miss out on some of the opportunities to profit from gyrations in the spot market. “Yes, but you need to be able to manage the risks,” says Halliwell. “You can’t have all your eggs in one basket when you’re managing an asset.”
It would be reckless, he says, for an owner of a sizeable portfolio of renewables to rely solely on the spot market. Likewise, developers must accept that eventually the market for power purchase agreements will be satisfied. (Halliwell says the Hydro Tasmania contract, for 20MW of capacity, isn’t part of a PPA – “not at this stage”.)
The energy market has undergone a permanent change in only a handful of years. Whereas owners of solar farms a few years ago thought exposure to the spot market was the obvious lucrative option these days they are trading in a completely different market affected by ever-rising levels of utility-scale and behind-the-meter rooftop solar. “They want to shift from being unhedged to totally hedged – and when they do that, they want be able to do so with the types of product that suit their technology.”
Renewable Energy Hub’s Virtual Storage product is part of a suite of standardised hedge contracts which includes Super Peak, Solar Shape and Inverse Solar. More than a gigawatt of transactions have been completed since launching last year.
Renewable Energy Hub – part of global financial services firm Tradition Group – is hoping Hydro Tasmania will leverage storage contracts to take its Battery of the Nation project to scale. “This is a precursor to wanting to build that out for further assets.”