As the proportion of electricity generation shifts from largely dispatchable technologies to an increasing amount of intermittent supply sources, such as wind and solar, new products and services will emerge in the wholesale market to manage price risk.
ERM Power recently released an innovative set of derivatives into the market that provide both price transparency and facilitate the risk management of solar generation. With the rise of new generation companies entering the National Electricity Market, and the heightened interest from corporate customers considering asset backed renewable energy procurement strategies, it became apparent that a need existed for both ‘firming products’ and for a greater understanding in the difference between non-firm and firm pricing.
(1) Solar Profile Product
The solar profile product pairs a monthly profiled electricity swap with a forward settled large-scale generation certificate (LGC). Each month has a pre-defined half-hourly profiled swap that replicates the typical production of a single-axis tracking farm. Profiles will vary month to month to reflect changing generation output throughout the year. Put simply, the profile will be wider in summer and narrower in winter. LGCs are matched to the swap on a one LGC for one MWh basis. Each calendar year that equates to 34,288 LGCs (as there are 34,288MWh in the profiled electricity swap each year), per 10MW of capacity.
Besides the benefits this product delivers for hedging purposes, it also provides useful price information on the trend of ‘sunlight hour’ electricity swaps. Currently parties can easily access the price of flat and peak swaps, however the price of the sunlight hours is quite opaque. Buyers and sellers will both benefit from the increased price discovery this product brings, particularly those considering negotiating a power purchase agreement.
Naturally the price of a ‘firm volume’ swap, such as the solar profile product, will be priced at a premium to a non-firm run of generation meter product.
(2) Solar Firming Product
The second derivative, known as the solar firming product, is an electricity swap for all hours in a year that are not included within the solar profile product. LGCs are not paired with the second product. A transaction for 10MW of capacity for this product would amount to 53,312MWh per annum.
It is anticipated that the most popular use for the solar firming product will be as a complimentary hedging strategy for solar generators. Solar generators could sell flat swaps on the open market, and buy back the solar firming product therefore leaving themselves exposed to pool prices for only the few hours that their solar generation does not correlate with the firming product. This residual risk maybe mitigated through insurance strategies, battery storage, contractual agreements with peaking generation, or alternatively held on their books as an open risk position.
At the time of writing, environmental market brokers TFS Green had pricing in Qld, NSW, Victoria and South Australia on a number of these products. Organisations wishing to transact these products would have generally entered into standard market agreements with brokers and other wholesale counterparties, such as retailers and generators.
These new product concepts have been well received by the market and while liquidity has initially been focused with TFS Green, we anticipate other similar product innovations will continue to emerge across the market.