ERM Energetics Exchange
Follow developments in energy and climate risk with leading Australian consultancy ERM Energetics. Our podcast series features conversations between experts who advise Australia’s largest businesses and all levels of government Energetics develops market leading approaches to climate and energy risk management for ASX200 and all levels of government. For more information visit our website www.energetics.com.au
ERM Energetics Exchange
Episode 22: Surging renewable energy generation and the role of storage
There's no doubt that electricity markets across Australia are in the midst of a profound transformation with aging coal and gas fire generation leaving the market, and being replaced by large scale solar and wind capacity. The pace and scale of this change has and will continue to be rapid with various ambitious state targets further accelerating the transition. In our latest podcast, Energetics’ energy market experts Mark Asbjerg, Anita Stadler and Gilles Walgenwitz discuss the implications of this surging renewable energy capacity. Are we going to have too much? How can generators continue to make a return on their investment in such a market? And what is the value of storage moving forwards?
Featuring: Anita Stadler, Head of Renewable Energy Investments and Gilles Walgenwitz, General Manager - Energy and Carbon Markets
Our host: Mark Asbjerg, Principal Consultant
Note: The information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.
Welcome to the energetics exchange podcast conversations with energy and climate experts. Please note that the information and commentary in this podcast is of a general nature only, and does not take into account the objectives, financial situation, or needs of any particular individual or business business should not rely on the content in this podcast without first seeking advice from a professional.
Speaker 2:Hello, everyone, and welcome to energetics podcast series. My name is mark iceberg, principal consultant with energetics, focusing on electricity, contracting and decarbonization before I go any further. And in the spirit of reconciliation, energetics acknowledges the traditional custodians of country throughout Australia and their connections to land sea and community. We pay our respect to the elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples. Today. There's no doubt that electricity markets across the entire country are in the midst of a profound transformation with aging, coal, and gas fire generation, leaving the market and being replaced by large scale solar and wind capacity. The pace and scale of this change has and will continue to be rapid with various ambitious state targets, further accelerating this change. As an example, we have a new south Wales, 12 gigawatts of renewable energy capacity and two gigawatts of storage by 2030 Queensland and Victoria both have 50% renewable energy targets by 2030 south Australia has a 100% renewable energy target by 2030, and Tasmania has a 200% renewable energy target. By 2030, there are going to be many challenges as we seek to manage all of this additional generation often generating at coincidence periods of the di just Sunday, a couple of weeks ago, back on the 22nd of August, between 12 and 1:00 PM. We set a new record for minimum operational demand. At the time instantaneous renewables contributed around 57% of total generation across the name linked to this. And also a couple of weeks ago, we had origin announcing that they expected to turn off generation units at their raring power station, uh, for extended periods of time. So this is the largest coal fire generation station in the mix. Um, and they, uh, needing or needing to do this. Uh, they say to keep their generation business profitable and made a flood of cheap renewables. So it's in this context today that I'd be, I will be leading a discussion on the implications of all this additional renewable energy. Are we going to have too much? How can generators continue to make a return on their investment in such a market? And what is the value of storage moving forwards? Joining me today is your valgum bits. Energetics is head of energy and Callum markets, a close observer of Australia's energy transition many years now. Hi, Jill, thanks for joining us. And I'm also joined by Anita Statler, their head of renewables investment and energetics. Anita, have we got too much renewables,
Speaker 3:A great problem to solve the mark? I thought I've gotten off years ago in a, the Abbott government was in charge. We'll never get there. Unfortunately, what we said was enough as we will probably discuss today, we haven't arrived yet. So, uh, looking forward to, to talk to your angels
Speaker 2:Today, it is it's a fascinating space to be working in at the moment. I just say in the last sort of Q2 in spot markets, if I focused on spot markets, we had this combination of generator outages, the explosion of calorie power station, the flooding at your lawn, and increasing also our gas prices. We actually had one of the highest prosecutors on record. What stood out to me when you looked at this high price was the amount of volatility that was focused on the morning and evening peak periods and prices during the daytime hours actually remained quite suppressed. I know from a recent AEMO report that I was reading stock prices during the middle of the day in Queensland, through Q2 of this year, we're actually below zero for nearly 30% of the time. That's right in that period where you have all that coincidence, solar generation starting with you and ADA water. What have you been observing as the impact of the increasing penetration of coincident, renewable generation in all the work that we've been doing with renewable corporate PPS?
Speaker 3:Do you demand, as you pointed out in your original introduction, coupled with this gradual increase of renewable energy, that is being dispatched, particularly as you mentioned in the middle of the day, but not limited to that, it varies by state whenever there's actually a high levels of coincidence, renewable energy, and in a given state, you will experience a gradual erosion of dispatch weighted average prices. So what the effect of this in the port PPA market is really being that it's been driving a run of plant PBA prices downwards, and that is really to compensate the buyer for the decreased value in the dispatch weighted average prices. So organizations then starting to look at what do they even do with this off belong to renewable energy PPS, if they try and approach your retailer and trying to get them to just sleep that often as part of a retail intermediate DBA, they'll also notice that the retailers don't attach much value to this middle of the day, uh, dispatch in many instances, even if there's a good correlation with the corporate buyers load shed, consequently, this is, as you said, a significant increase in negative prices in the middle of the day. And, and you called out Queensland. I think if you just look in Q2 2021, as you deem a report that pointed out that there has been an increase across the Nim from 4% in Q2 2020 to 5.1% over the same period this year just mainly has been called out as well with 6% of the volume in negative price territory during that same period, strangely enough, that's between 1730 and 2030. So in the evenings, when obviously there's much more of a winter generation profile, so wealth is the financial impact of, of these negative price events are still subdued to the stage in Queensland for argument's sake during the Q2, it was$1.30 per megawatt hour and in Tasmania 50 cents per megawatt hour. And this is us because when prices moved into negative territory, it's seldom state lower than minus 100 for prolonged periods of time. Nonetheless, there's an increased risk of the frequency of these events occurring and that these events may start becoming more prolonged. This requires more accurate cell for costing and sophisticated, but anybody can capabilities from the generator sets participating in this market.
Speaker 2:It's clearly a lot riskier than it ever has been for a renewable developer to just be taking merchant spot exposure. Would that increase frequency and duration of these negative pricing tools, jail? What do you think generators can be doing to avoid getting caught up in that spiral of lower PPA prices and measuring revenue?
Speaker 3:I think I just highlighted the increasing compliance risk due to the high dispatch of coincidence and viable when you want to encourage. And then in this context, what we are seeing is that some generators, uh, we assessing the whole, the new strategy. So beyond the sale of, uh, generation following or one of planned complexity difference, uh, the question is whether these generators could sell, uh, firmer products and, and getting a greater value for such less risky product from the buyers. And if so, what is the white mix of power generation assets or contacts for them to enter into, to I use their own marketplace? So I can talk here about the ability to offer long-term or your NG, a flat swaps or shaped offtake agreements, uh, to better align with an off-takers on load shape, for example. Uh, so surcharge judgment, um, provides added value to a sophisticated by him seeking to improve the utility of our power purchase agreement as a hygiene instrument. So, um, examples would be, let's say, um, uh, a large industrial end-user without activity constant 24 hour, seven day operation could be more attractive for me to turn to our annual off-take agreement with a constant volume other than a whole new plant arrangement, uh, even so the type price will obviously be, be larger, but just give me a much easier, um, hedge, uh, to include in my overall of strategy for my look, uh, this added value with Lamont volumes can be sold by the generator at a higher pace and more in line, I would say with standard exchange traded or over the content of logistic contracts with the cost of energy, uh, being exp expecting to decline an energy only market, the values planet, uh, between, uh, generation, uh, following a standard and functional services at constant volume PPA, Y shaped PPA and even muscle a load following swap is expected to, um, to increase. Um, so the more, um, I would say covariance with you have, um, the more, um, uh, tequila, it would be for me to chase at a premium, uh, a flat swap one following conduct rather than the generation for new conflict. So I said that the ability for[inaudible] energy anywhere to offer such product requires a portfolio approach to product development and management, rather than an asset specific approach. So you can offer such from product with a combination of assets, at least management instruments of insurance products, but it could be whiskey for you to offer such a flat swap based only on one asset or even even one technology let's say, um, as we experienced, um, when was it in February, 2020, uh, in Texas in the ERCOT market, uh, doing, um, I think it was nearly five days of, um, um, extremely cold snap that takes us into experience. You had gas pipelines that were not available, um, and Gus is important. Um, surely in Texas you had a number of, um, uh, wind turbine generators that were not weather eyes and were not able to avoid doing this extreme weather conditions. And on the other hand that what they've done in, in Texas, that they involve regenerators where setting, uh, basis, um, hedges and ages, and, and therefore we're taking the volume list, but not being able to dispatch when actually the, the market was it at the cap of 9,000 us dollars, uh, per megawatt hour. So they, they lost, um, you know, equivalent of nearly, I think one year of expected revenue in a matter of five days. Wow. He, as Tanya, we have seen, um, some, uh,[inaudible] we tell a GC license, adding firming capacity, such as open cycle gas turbines to their portfolio to offer load following with our products. We also seeing, um, when we tender ourself for our clients, we can see some generators offering from products with normal. You went to a quiz being offered, um, and especially flat blocks, but by a mix of wind solar and battery storage, all these storage. So in some of your market, I believe that as an alternative volume use strategy, we will see an emergence of long term base and peak. When you blingy swaps supporting by bus four years of renewable energy and firming assets being proposed, uh, in the market,
Speaker 2:It really sounds like dispatchable capacity is, is what's going to be needed to unlock all that additional value. That's sort of the missing piece. Um, but we've got this at the moment. We've got a market, an energy only market, which really only rewards that energy sold. So it doesn't to my eye. It doesn't look like you have the long-term investment signal that you need to promote more dispatchable capacity being built and data. Um, I don't know if you've got any thoughts on that long-term investment signal and what's there for dispatchable capacity.
Speaker 3:There's no doubt that just jobs pointed out that, uh, given the current market design that the second old is rather than your church for long-term investment in capacity. However, there's, there's definitely signs that this will change, but more importantly, I think it's a recognition that transitions are always challenging and it requires a forward looking organizations to invest in your capabilities and skills to actually flourish in emerging markets. So, no doubt, I agree that you need to balance the, the aging benefits with the aging costs at all times, if you were to develop a structured, uh, and firmer products to offer the market. Um, however, if you're investing in short and long duration storage assets, or as John also talked about abusing, uh, guests as affirming conifer generator, it will actually open up new markets for noble energy generators in the time. And I think there's, there's strong signals that these markets will become much more lucrative. Um, S the designs of the post 2025 market starts emerging. So this is particularly important if you start moving towards multi portfolio level construct, which is also, uh, increasingly I think, necessary for generators to survive, to optimize their revenue. And I think therefore I do believe that it's very important to invest in these new capabilities. It's not only the physical capabilities, but also the people skills, uh, to optimize their revenue and to actually minimize costs of pay charges as well, which is increasingly something that generators need to deal with. It's no more a market where they can sit back and just dispatch. So we've been using both for you, the foreman's evaluation methods, ourselves synergies, to support some of those, um, when you're willing, GG to it is interested in, you know, reviewing them, um, off the strategy and portfolio consultants. So the idea is to when you're building generators to assess generation investment in lease management instruments targeting a specific product. So when doing so, we take into a conduit to entitles in the sport in the forward markets as well, but the historians of the specific Google NGP system, they are into us. So we consider a technological and geographical diversity when we're doing this type of analysis, for example, which mix of wind solar and farming capacity to consider where to ideally locate this capacity, to get complimented key off of degeneration profiles. If we get to, depending on who you invest in, or you contract with, uh, we assess net short and long positions, as you will spot and possibilities management instruments to use such as your split exposure. Therefore we gauge the hedge benefits or the hedging benefits against the cost as, um, any tax, just to reflect a few minutes ago. So, as I seen you a specific comment mark, about the increasing value of dispatchable capacity, very clearly, uh, the ability to from intermittent generation through aggregated demand response was, will seize our storage capacity being, but we still eventual title energy storage. All of the support or farm guest speaking capacity is fundamental in my view to manage social switch transitions. So the support can be provided directly within your own portfolio or contracted with a third party. One of the key questions in mind you would respond soon is whether we will have some competition informing services in the future, or end up with Waze or Eagle ballistic position with us, not small number of providers, such as[inaudible].
Speaker 2:I mean, it's clear that governments and aim are seeing the importance of dispatchable capacity in the mix. I know just a few months ago, we saw the new south Wales government announced a new, a hundred megawatt battery, which was going to be built in the Riverina to support its own retail electricity contract on a 10 year term. The contract I know is the second biggest in the state, um, and the numbers are, I know they're larger than your average contract. You're looking at 1.8 terawatt hours, a$3.2 billion contract value, but I just can't help. But suspect that it gives us an indication of the general future direction, which rates tilers and generators are looking at when they're constructing their portfolios into the trying to future-proof their portfolios. So, geo what advice would you give to a generator looking to, to future proof, their portfolio, given the significant changes and the challenges that we're expecting across the Nim over the coming decade?
Speaker 3:Well, the first short-term option potentially is to lobby against the options, but, um, let's, let's start to be a board listing now. Uh, so we know that the long term investment signals for, um, you power generation capacity and energy on the market will not be sufficient due to decreasing value of energy in the market with increasing penetration of low marginal cost, new book, teach innovation, this is nothing new, and it has been, uh, you can find extensive literature on the limits of an energy only market to support new generation capacity investment when you have higher penetration of renewable energy. So at the high level, two advice would be call this missing money problem. Uh, we could, um, highest capacity pricing, uh, then the current market price cap at$15,000 per mega, whatever, and moved that we know is a particularly whisky. Yes. Except if you start saying, well, yeah, we cap, what do we tell this charge to the customers? But then you end up with potentially we tell, is it going to inclination? We could set up a permanent spot reserved, basically paying qualify on generators to most of our other than shut down, which is not too different. What we're seeing in Germany, um, happening to support, especially the Unbound coal fired power stations in the Eastern part of Germany. Once again, particularly whisky and not really efficient as a non-market mechanism of value. So at DirecTV, we could set up a pile capacity market and the energy security board is currently pushing for such a decentralized capacity credit market, not, not a centralized one seminar to do the women as reserve capacity market in WUA and such. The expectation is that such desensitize capacity quake market would allow generators to claim credits as a function of the firmness and dispatchability of the assets. And we tell us to acquit the obligations to the load that they sell doing system peak by purchasing such credits. So if such capacity market mechanism is put in place through an expansion of the patella irrigation scheme, uh[inaudible] uh, that will have invested in firming capacity would be able to construct a generating revenue from both the energy and the key markets without talking here about holding the, from the frequency components, services market, or other systems services that we are likely to see marketed in the future. So when seeking to future or newborn energy generation assets, which I think you've asked your question mark, so there is therefore clear interest for sure. And for you, the question is then whether to own the fast response for me, dispatchable capacity or with a contract for it. Uh, we could spend more time talking about the two challenges and implications of such this one Polis capacity, quick market, but it's probably best to keep this to another forecast. Um, just thinking about any final thoughts from you, I think regardless of whether or not we have a capacity market, the bottom line is that renewable energy developers will need to become more sophisticated in managing their portfolios in order to maximize returns and minimize risk in this regard scale matters not only in, in asset management, where we believe that generators that retain their portfolios and grow their preferred Hills will be better able to compete in those markets that's emerging. But you also see in collaborative models emerging that will support an innovation in the management of risk, for example, aggregation of models for non-energy services and over the counter market for financial products specific to renewables, to back structured products, we believe will become much more common. Um, but that's all required renewable energy developers to, to grow in this sophistication, to be able to interact with these products.
Speaker 2:Thank you both for joining us today. It's really been a fascinating discussion. There's a lot here that we can unpack if we had more time, but a few key, I guess, takeaways for me, the first one is really that for renewable generators, straight merchant exposure will become increasingly risky and generators will require sophisticated forecasting and bidding capabilities just to be able to optimize their revenue strategies. There's also clearly an opportunity for renewable generators to further reduce risk and optimize returns by taking this portfolio approach that we talked about rather than an asset specific approach to managing their renewable energy assets. And the last one is that integrating storage into such a portfolio approach could help future-proof your investments by giving them the opportunity to sell from electricity, derivative contracts, rather than straight spot market exposure to our listeners. If you have any questions or comments relating to our discussion today, please don't hesitate to contact us through the website or your energetics account manager. Thanks again,
Speaker 1:Energetics exchange, podcast conversations with energy and climate experts.
Speaker 3:One instance for me as well, where I was talking to you, you probably have three cups to apply, just will give you eight to go for two. Uh, and then I think, uh, there was an instance where I, I stumbled on energy only market. Um, and so I said something like, well, with the cost of energy only market going down, which was a sentence, it makes sense. So, um, I started to gain, so Jesse we'll have to cut this as well.