New energy contracts for a new energy future
Renewable Energy Hub was created to accelerate the transition to a clean energy, low carbon economy through innovative transactions solutions. A big part of that work begins with working with market participants and seeing where their pain points are, and what problems need solving.
Early on in our journey, it became clear that the rapid transformation in the energy markets, towards a much higher proportion of variable renewable energy coming into the grid, was not being met with commensurate changes and innovation in financial markets – where energy is bought and sold. This is where Renewable Energy Hub and our team of leading energy market experts thrive.
In 2019, Renewable Energy Hub commenced a project to develop a suite of innovative, standardised hedge contracts that are suited to both variable renewable energy generators and new sources of clean dispatchable capacity. With support from the Australian Renewable Energy Agency (ARENA), and in collaboration with major industry players, this project set out to meet the changing needs of energy retailers and large customers, while accelerating Australia’s transition to a clean energy future.
In their 2020 Integrated Systems Plan, the Australian Energy Market Operator (AEMO) said that Australia’s electricity system is now is “now experiencing the biggest and fastest transformational change in the world”. In their analysis, even a “do-nothing” business-as-usual scenario delivers a 74% of renewable generated energy by 2040. A “step-change” could deliver 94% renewables by 2040. The message was clear – the energy transition is happening, and it’s happening fast.
The current suite of hedging products (swaps, caps and options) used in the financial markets to trade energy were designed several decades ago and developed around coal and gas generation. Since then, they have not changed materially to accommodate the transforming supply, demand and price dynamics created by the rapid deployment of renewables, both utility scale and behind the meter.
Hedge contracts allow energy retailers and large electricity users to manage the price risk associated with the electricity they buy. Generators also rely on hedge contracts to manage the risk of volatile wholesale electricity prices, smooth revenue flows and support financing for new projects.
But with the rapid change of the energy mix, with ever-increasing amounts of renewables entering the grid, the hedging needs of market participants is also changing. They need new hedge contracts for a new energy market.
Renewable Energy Hub has worked in partnership with industry to create four new hedge contracts that are specifically designed to work with renewable energy. These contracts and a brief summary of their market impact are listed below.
Solar Shape and Inverse Solar Shape
These two related products provide a level of contract flexibility to manage the intermittency of renewable generation. The shapes of the contracts are tailored to specific periods of the day and provide an alternative to flat contracts.
These contracts are best suited to support solar generators to minimise their merchant exposure by providing them coverage against prolonged periods of low prices. In particular, they’re suited to developers or relatively immature generators who are not established and do not have strong credit lines, thereby supporting these solar developments to enter the market. In this way, they’re supporting the growth and investment in new renewable energy projects in Australia.
The Super Peak contract offers a hedge against the “duck curve”, where demand peaks in the morning and evening when the sun isn’t shining and the wind isn’t blowing. Previously it has been difficult to contract around these periods, which is why the energy market have been extremely supportive of the Super Peak swap contract, especially buy-side businesses.
The Super Peak potentially reduces the need for further hedges against these large peak times. Standardising around a transparent product opens the market, creates more liquidity and makes it easier to manage these periods of the day.
The Virtual Storage contract is innovative financial instrument for the buying and selling of stored energy. It helps market participants agree upon a set spread between the charge and discharge price for pumped hydro energy storage and battery operators.
In early 2021 the first transactions of the Virtual Storage contract were announced, which led to a marked increase in interest and attention to the Virtual Storage contract. It is expected that merchant battery operators will be the main sellers of this product, as it enables them to de-risk their energy arbitrage revenue. Energy retailers will be the natural buyers, as they look to cover high priced periods of the day. The move to five minute settlements is also expected to increase utilisation of this product.
Since their creation, all contracts have been traded in the market at more than 1GW with almost 50 counterparties. All are available on CORE Markets for use in our price transparency, data visualisation and contract evaluation tools. The market demanded more variety in hedge contract types, more sophistication, more liquidity and more transparency. So that’s what we’re doing – and there’s more to come.
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