Dispatchable renewables in the NEM · 2019-06-23 · The economics depend on the value to the...

Copyright © Baringa Partners LLP 2019. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

Dispatchable renewables in the NEMA markets and investor perspective

Australian Energy Storage ConferenceJune 2019

Copyright © Baringa Partners LLP 2019. All rights reserved. This document is subject to contract and contains confidential and proprietary information. 2

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Copyright © Baringa Partners LLP 2019. All rights reserved. This document is subject to contract and contains confidential and proprietary information. 3Client Confidential

Contents

Utility-scale storage: overview of use cases

FCAS bankability

Wholesale arbitrage and cap contract value

Hybrid economics across the NEM

Firming and bankability


Storage applications, or ‘use cases’As the NEM generation mix moves increasingly to a more intermittent and (in future) a potentially tighter supply side attempting to meet a relatively inflexible demand side, flexibility will become critical to system stability

Examples

Assist AEMO in maintaining stable system frequency by providing changes in generation or demand

Be available to generate when there is a supply shortfall (e.g. plant trip), to restore system frequency

AncillaryAbility to respond quickly to external

signals

ArbitrageShifting energy in

response to a price or time signal

Service Applications

Price arbitrage in the NEM wholesale energy market

Provide cap contract cover to retailers and large customers

Match shape and profile of renewables to customer demand to provide firming services

Market opportunity

Increasing need for faster-acting response due to lower system inertia and retirement of existing response providers,

providing Regulation and Contingency

Increasing peak/off-peak spread and renewable

generation profiles create opportunities to profit from

moving energy between periods

Network and system stabilty

System stability provision and enabling the deferral of network

investment

Provide system services to renewable projects and/or NSP to reduce losses, local curtailment and voltage instability

Generate at peak times to receive embedded benefits or avoid peak retail tariffs for a customer

Strategically locate storage in areas of high renewables to

provide system stability, reduced curtailment and

deferral/avoidance of network reinforcement

Shape of electricity charges across the day

Effect of battery charging/ discharging on grid consumption

CHARGE

DISCHARGE

00:00 23:00

00:00 23:00

50.0

50.1

50.2

49.9

49.8

Grid frequency (where 50Hz = perfect supply/

demand balance)

+ kW

- kW

Battery output in response to mismatch in supply/

demand balance

p/kWh

kW

Consumption

CHARGE

DISCHARGE

00:00 23:00

00:00 23:00

Solar output

Consumption

+kW

-kW

Solar output and site consumption

across the day

kW

Battery charging/ discharging pattern


How big is the FCAS market?While we project a doubling of secondary response requirements in line with increased intermittent renewable penetration, the market size will remain modest at around 300-400 MW across the NEM

Reflecting this technical relationship, we can generate a projection of Regulation FCAS over time under our Reference Case

We estimate a near-doubling of requirements to 2030

Expect intense competition for this 300-400 MW

Regulation requirements are linked with variability Projected Regulation FCAS market size

As penetration of intermittent renewables on the system increases, it is expected that the amount of regulation FCAS required to maintain frequency within the Normal Operating Frequency Bounds (NOFB)

AEMO has mapped this relationship in its Integrated System Plan (ISP) from 2018

Large-scale solar deployment has a more material impact on Regulation FCAS requirements compared to onshore wind

Source: AEMO, ISP 2018 Source: Baringa Analysis


Is FCAS revenue bankable?While potential revenues for Regulation Raise today are lucrative ($30-40/MW/hr), competition is likely to push prices lower as thermal plant is displaced by storage competing on opportunity costs. Will the price collapse entirely?

Secondary Frequency response – Regulation Raise

Copyright © Baringa Partners LLP 2019. All rights reserved. This document is subject to contract and contains confidential and proprietary information.Baringa Confidential

7

Wholesale arbitrageBuy low, sell high (and lose some along the way)

Example: QLD pumped storage – characteristic day operations


8

Storage as a key enabler of renewablesIn a system with high renewables penetration, storage providing arbitrage is critical to system security and reliability –shifting output from low-price to high-price periods right across the year

NSW, February 2040 NSW, August 2040


9

How important is duration?Longer duration storage such as Snowy 2.0 with one week of reservoir capacity can provide multi-day and every multi-week arbitrage in the long-term

Example: Snowy 2.0 – characteristic week of operations


Banking on arbitrage valueInvestors and lenders need to understand the fundamental drivers of price shape and spreads in the market, and how these could change over time and under different market scenarios

Example: QLD pumped storage – price shape and spreads


Cap contractsWith its rapid response time, storage can provide cap contract cover to retailers and large customers, and there is evidence to suggest they are willing to pay for the insurance

QLD cap contract analysis

*The analysis is based on the available data for traded contracts, starting 1st Jun 2004 for the contract ‘QLD BASE QRT $300 Mar05’ (quarter ending Mar 2005)


Hybrids and firmingBatteries can be physically or virtually co-located with renewables to provide ‘dispatchable’ or ‘firm’ capacity to the system, and potentially improving the economics relative to a stand-alone renewable system

Example: QLD generation mix and price shape (indicative)

Hybrid systems can also enable the shaping of renewable output into fixed clip sizes to reduce trading costs and spot price exposure

This can create a ‘saleable’ product in the market, which may be valuable to a retailer with a fixed retail profile to meet

The economics depend on the value to the retailer within its portfolio, in particular the value of avoided imbalance or spot price exposure

Can hybrid systems enable the creation of a ‘firm’ product from an otherwise intermittent generation source?


Fixed Price/Volume Fully MerchantCap Contracts10yr Toll

Is merchant risk investable?The level of merchant risk to the project can be defined along a spectrum, with innovation required to move investors and lenders from left to right

Debt LeverageMerchant Risk

20

21

20

24

20

27

20

30

20

33

20

36

0

50

100

150

2002

02

1

20

24

20

27

20

30

20

33

20

36

0

50

100

150

200

20

21

20

24

20

27

20

30

20

33

20

36

0

50

100

150

200

20

21

20

24

20

27

20

30

20

33

20

36

0

50

100

150

200

$/k

W

Gap in market for structures which share merchant risk between generator and offtaker – requires innovation

Volume Risk MLF / Curtailment

Baseload Price Risk Volatility


Our capabilities on storage

Power market modelling and scenario development

– Outlook on the market (Baringa NEM Reference Case

price projections and report)

– Development of bespoke market scenarios and

sensitivities

– Market due diligence and lender reliance

– MLF and curtailment studies

Business case development

– Asset modelling to produce wholesale arbitrage gross

margin projections

– Long-term projections for other revenue streams

– Revenue stream optimization to produce long-term gross

margin projections

– Input to assessment of bankability of revenue streams

We are able to deploy our industry-leading market modelling approach for the NEM, alongside our deep expertise and experience with storage asset developers and investors in Europe (both utility-scale and DER)

Storage business model development

– Connection configuration and hybrid options

– Technical capability and assessment of revenue stream

eligibility (e.g. arbitrage, cap contracts, FCAS, NSCAS)

– Developing revenue stacking models and contracting

strategies

– Behind-the-meter and DER platform strategy

Commercial advisory

– Assessment and pricing of route to market options

– Analysis to underpin PPA negotiation and contract

structuring

Operating model development

– Trading strategy

– Implementation of systems and processes in operation

Dispatch modelling and gross margin projections Strategy, commercial advisory and delivery


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For more information please contact:

Peter [email protected]+61 457 676 940

Phil [email protected]+44 7887 794 204

baringa.com

About Baringa Partners

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Dispatchable renewables in the NEM · 2019-06-23 · The economics depend on the value to the...

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