Harnessing the potential of Australia’s renewables boom
The recent boom in large-scale renewable energy projects in Australia has seen 6400MW of capacity come online between 2017 and 2019. And there are no signs of it slowing.
But sitting behind this good news story is a challenge for energy markets: how to best put this new resource to work in a market that’s been traditionally geared toward buying and selling flat blocks of power. That works for coal and gas fired generation, but less so for large scale solar plants that ramp up then down every day as the sun moves across the sky.
To meet this challenge, in 2018 we joined forces with retailer ERM Power to design something new; a fresh hedging idea in the form of a firm solar contract that actually works with renewable providers, rather than in spite of them.
Shaping a new energy market
In a standard baseload futures swap contract, both parties agree to a price for a flat block of energy throughout the entire day. But that structure makes no sense for solar farms, who ramp up production when the sun shines, and then go quiet at night. Retailers can’t properly hedge their exposure to the volatile spot market with solar, because they’re using swaps, caps and options designed over 10 years ago.
Solar energy generation follows certain predictable patterns. All we needed to do was develop firming options to match. This has become the ‘Solar Shape’ contract.
What makes this firming option revolutionary is the shape of the contract. It isn’t flat, like a traditional swap contract – it follows the curve of solar power generation, governed by the path of the sun. By matching buyers’ needs with contracts for new renewable supply, we can now guarantee a predictable, fixed price and volume for energy generated by solar plants.
A smarter way to firm
These Solar Shape contracts give both parties security. Generators can sell their power forward and get a more stable cash flow. Using these new wholesale contracts to firm up their revenue also helps to unlock finance for new projects.
For energy retailers, Solar Shape contracts remove the biggest hurdle with solar hedging: intermittency risk. Retailers can tap firm volume and fixed price solar projects during the day, then switch to other sources when the sun isn’t shining – including wind, hydro power and battery firming options. To help them do this we developed an ‘Inverse Solar’ swap contract.
Thanks to contracts like this, renewable generators can now participate in the wholesale contracts market same way coal and gas plants already do. By standardising a solar generation curve, retailers can now fix their costs, and generators can fix their revenue. If the spot market suddenly spikes (or tanks as we’ve seen more and more of in recent weeks), both parties are somewhat protected.
It’s the first tangible example of standardised, renewable energy firming innovation in the Australian market.
In the same way that the grid needs to innovate to integrate solar, wind and other forms of renewable energy, financial markets need to evolve, and until now no-one has been doing a particularly good job of it. We’ve identified a gap in the market and, with the help of ERM and other market participants, filled it.
So far, Renewable Energy Hub has brokered more than 80 trades in these solar firming contracts, translating to over 500 megawatts of renewable energy hedging. Some of these are fixed for an entire year, or several years; other contracts are just for a particular quarter.
All of these options will be available on our new wholesale energy firming marketplace – the first of its kind in Australia. Emerging clean energy providers will finally get a point of access to the wholesale contracts market, and traders and retailers will be able to access live market pricing and evaluate risk under a range of different scenarios. It’s a bright new future for Australia’s renewable energy sector.
All of these options will be available on our new wholesale energy firming marketplace – the first of its kind in Australia. Emerging clean energy providers will finally get a point of access to the wholesale contracts market, and traders and retailers will be able to access live market pricing and evaluate risk under a range of different scenarios.
It’s a bright new future for Australia’s renewable energy sector.