How wind and solar electricity generation projects can meet the needs of the market determines their successful deployment.
The Australian electricity market is now at a crossroads. Due to increasing penetration of rooftop solar panels, embedded generation and also contraction in manufacturing, electricity demand is falling.
Difficulty in controlling the dispatch of solar (and wind) due to weather variability disadvantages renewables in securing Power Purchase Agreements (PPAs) or an appropriate return through direct National Electricity Market participation.
As happens with every new technology there is always a difficulty to accommodate it within existing market structures.
A local start-up, Green Trading Systems (GTS), has derived and proven a new approach in which disparate energy generation assets are hybridised virtually, through financial contracts, so that their combined output is firm and hedged for both price and load. The structure draws on the mutual benefits of each class of generation to form an optimised combined output, and is particularly attractive to small-to-medium size generators.
This purely market-based solution implies an ability to significantly increase renewable energy investment without substantial economic cost to the public purse.
Underpinning this proprietary structure is a novel type of swap contract which hedge for both price and load.
This output is sold by a third party ‘virtual generator’ and is palatable from either a retailer PPA perspective, or as a competitive NEM bid structure (see here).
The swap contracts financially encourage linking firm fossil or dispatchable renewable generation assets, with ‘intermittent’ generators.
This structure benefits both parties financially, above and beyond a notional ‘Business as Usual’ revenue potential, typically allocating payments at no additional capex or opex to the firm generator, and providing enhanced returns to the solar or wind generator to a level which enables sufficient returns on capital invested. There are no additional or hidden credit risk implications for investors.
GTS modelling has shown that hedging with VG contracts is much cheaper than with conventional exchange-traded contracts. For example, hedging with first quarter 2011 Victoria Peak and Base Futures turned out to be 23 per cent more expensive than with corresponding VG-type contracts.
The proposition can provide revenue security to fossil fuel generators under pressure from declining demand and downward price pressures partially created through enhanced distributed solar energy penetration.
Further benefits will arise from inclusion of demand side response into ‘virtual generator’ contracts. We are collaborating with UTS’ Institute for Sustainable Futures to extend and test our models in the DSM market.
Critically, through enhancing the investment proposition for renewables through synthetic and non-distortionary or interventionary means, the structure provides for an evolutionary pathway to renewable energy integration. GTS believes that its approach gives fossil fuel generators a unique opportunity to seamlessly diversify towards renewables.
The ‘virtual generators’ is immediately deployable without any further call on regulatory reform or cost to the public purse. The concept provides an immediate solution to an energy market problem which has inhibited capital investment into renewable energy generation.
Alex Radchik is a Visiting Research Fellow at UTS and Director at GTS, Igor Skyrabin is a BDM at ANU’s Energy Change Institute and Director, GTS and Andrew Jones is Executive Director at Waratah Power.