Turning the duck curve into a super contract
8 December 2020
The Australian electricity market is undergoing a rapid transformation, with much higher volumes of variable renewable energy entering the system every year. Renewable Energy Hub is meeting these changes with commensurate innovation in financial markets.
The current suite of contracts and hedging products used in the energy markets were designed several decades ago and developed around coal, gas and hydro supplies. Since then they have not changed materially to accommodate the transforming supply, demand and price dynamics created by the rapid deployment of renewable energy.
With support from the Australian Renewable Energy Agency (ARENA), Renewable Energy Hub is delivering 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 (e.g. battery storage, pumped hydro storage and demand response), as well as the changing needs of energy retailers and large customers.
One of these, is the Super Peak contract.
What is the ‘Super Peak’?
The ‘Super Peak’ swap contract covers the high demand hours of the morning and evening when solar output is low, thereby addressing the volatility caused by the duck curve. As solar output ramps down at sunset just as demand picks up, prices tend to spike as more expensive gas and hydro generators ramp up to meet demand. These price spikes, or devil’s horns, are illustrated in the chart below, with morning and evening peaks occurring when solar output is low. The Super Peak contract periods are shown in grey.
Average daily spot price and operational demand in Queensland across FY20. Super Peak contract periods shown in grey. (Source: AEMO data, accessed via the Hub marketplace platform)
The product seller is likely to be dispatchable, peaking generators (e.g. hydro) and energy storage operators (e.g. pumped hydro and batteries). The natural buyers of the product are energy retailers looking to more efficiently cover high volatility periods of the day.
After being launched by Renewable Energy Hub in March 2020, there’s been a really pleasing volume of activity with this contract. Most transactions to date have been in Queensland, possibly because of the growing ‘duck curve’ demand profile and ‘devil’s horns’ price spikes in the Queensland market. These factors are providing a clear driver for utilisation of alternative hedging contracts such as the Super Peak.
As a standardised product, the Super Peak provides greater price transparency for market participants thereby supporting more liquidity in the market. To date we have supported over 40 trades in the contract amongst 10 counterparties, with in excess of 500MW changing hands.
Feedback from the market has been that the Super Peak product provides buyers an effective risk management tool for the most volatile periods of the day. Previously, a full day contract (either a peak or baseload futures contract) would be purchased with the intention of covering the morning and/or evening peaks. Now participants have the flexibility of being able to hedge themselves against just the most expensive periods of the day, meaning a potentially a more cost effective and efficient hedging tool for retailers.
If you’re interested in trading or want to learn more about the product, please contact us: firstname.lastname@example.org