Renewable Generation Off-Takers On The Rise

By Stacey Vacher, Edge Managing Director

We are seeing a significant increase in large users exploring renewable generation off-take opportunities. This includes behind the meter build-own-operate or power purchase agreements (PPAs), and offsite commercial arrangements otherwise referred to as corporate PPAs, synthetic PPAs, or simply contracts for difference (CFDs). The reasons are mixed. Some are looking to meet future corporate emissions targets.  Others are aiming to achieve lower energy costs. Some are looking to further diversify procurement strategies. All are fearful of missing out on the next big opportunity.

Edge are actively involved in taking large electricity users through the process of assessing, and where feasible, entering into arrangements with renewable generation. We provide a range of services covering everything from practical energy market expertise and advice through to strategy development and implementation and even transaction support. This is particularly helpful where the renewable generation forms part of a new or existing electricity sales agreement as negotiating terms can otherwise be difficult. Large mining, transport, agricultural and manufacturing clients are amongst those leading the way. Elsewhere in the market, we have all seen the announcements from users such as Sunmetals, Telstra, Onesteel, Sunshine Coast Council, Universities and smaller aggregated buying groups (to name a few).  The list is growing rapidly.

Looking beyond the consulting jargon, the diverging spectrum of price forecasting curves, and the race for the next Renew Economy or AFR headline, are these deals really the right thing for your business? Absolutely, they can be. But they may also not be. It is critical that you understand the current electricity market including renewable generation, and the potential financial benefits and costs these opportunities can bring to your business.  Edge can work with you to identify and understand these critical components to ensure you take the right direction when considering renewable generation in your portfolio. It is important to consider how adding renewable generation will affect your current position including your electricity contract.

You’re shown the aggregate market price of electricity and LGCs today and a comparable renewable generation blended off-take price.  Depending on the region and generation project, you’re looking at $130 to $150/MWh on the market against $60 to $70/MWh for renewable generation. The savings appear staggering. But some things may be too good to be true and the devil certainly is in the detail.

Term

These opportunities are long term propositions, typically seven to twelve years though can be as long as twenty years or as short as three years. A lot can happen in this time and only one thing is for certain, things will change.  Supply and demand profiles will change. Project and market pricing will change.  Governments and their priorities and policies will change.  Depending on your corporation’s view on being quarantined (for better or worse) from these changes, you may lean towards all longer term, a blend of longer and shorter term, or no longer term contracting.

Project Risk

Renewable project developers are everywhere. Long haul business class cabins are filled with them. Virtual office spaces have never had it so good.  But not all have the experience in developing projects in Australia, therefore lacking experience with NEM based network service providers (NSPs), Australian government and council bodies, EPC contractors, and the like. Go to any NSP public forum and you’ll see first-hand the challenges that face NSPs around renewable project connections. Be it sheer volumes of enquiries, network or timing constraints, project risk is rife. An off-take start date can quite literally make the difference between a business case supporting the opportunity or not.  Partnering with a credible counterparty and / or managing project risk is critical.

Price Forecasting

The harsh reality is, we spent 2017 being privy to too much price forecasting that existed simply to suit the narrative. You can make generation opportunity in or out of the money with a suitable forecast curve.   Price forecasting plays a significant role in assessing the optimal renewable generation project and the potential value and risk that sits within in it.  Projecting future spot prices is a quantitative minefield. There are a few well known modelling tools utilised by equally well-known consultants to generate spot price forecasts in the NEM.  Edge also generates in house spot price forecasting. Whomever you utilise to produce future price curves, challenge the inputs and demand shape on the outputs. With significant volumes of renewable generation set to enter the NEM and aging fossil fuel plant preparing to exit, we are moving into a new dynamic in the NEM.  The characteristics of the supply curve are changing considerably. As storage technology advances, the behaviour of intermittent generation too will advance.  As users are forced to explore demand side management (DSM) opportunities, the demand profile will also change.  Five-minute trading intervals will change supply and demand behaviour. To adequately assess any renewable generation or off-take opportunity it’s about the expected spot outcome and the sensitivity around this result, measured in each trading interval. Having a high and low case based around randomly selected forced outages doesn’t even begin to address the uncertainty in the electricity market. Even if a project is priced firm to a flat mega-watt (MW) profile, understanding the potential impact to the shape the merits of the firm pricing against other procurement strategies.

Regulatory Risk

Either we are getting older and more in tune with the volatile nature of politics, or politics has taken regulatory racket ball to the whole next level. Investment in new generation in the NEM has previously stalled due to policy uncertainty.  The more recent run of high electricity prices is testament to this. Just when the market does what markets are supposed to do and responds to price drivers with new entrants and technological advancements, our policy makers inject more uncertainty in the form of a National Energy Guarantee (NEG). The end game of the NEG is noble. To promote that we meet our international emissions commitments, whilst ensuring our electricity is reliable, secure, and of course affordable.  Achieving this whilst not forcing any politician to back down from previously stated principals. The practical application of the proposed design however is a very long way from readiness, and in its current form is alarmingly at risk of causing segregation and market power that can only result in higher energy prices.  Meanwhile the Government has cast a dark cloud over the application of the Renewable Energy Act, and specifically the ability for renewable energy projects to receive certificates if they are commissioned after the target date of 2020.  It’s a risk that not even all the developers are aware of.  As an off-taker you must make it your priority to be across it and manage it.

Shape Risk and Firming

Renewable generation is intermittent.  The question remains; what happens when the sun isn’t shining, or the wind isn’t blowing?  Storage solutions are on the rise, but the dispatch limitations and costs still make it very challenging to get the business case across the line.  Clients who are looking to integrate renewable generation in their portfolio must be aware of the risks associated with shape risk.  This includes managing their shape with the overall shape of their hedge portfolio (tenure, type, etc.) and spot risk.  How can one best introduce intermittent generation (or intermittent offtake) into a portfolio, and what is the most efficient and effective means to manage this risk.  Firming products are one of the most sought-after products in the NEM today. Physical solutions have their role in mitigating some shape risk and include DSM, onsite generation, and storage solutions. Financial solutions also stand to play a significant role, including both traditional electricity derivatives and weather derivatives.  Securing firming products is undeniably challenging.  Hydro and gas generators have five-minute settlement to consider.  Furthermore, gas generators need to clear long-term fuel supply hurdles.  Coal generators may not be so eager to firm a product that will ultimately stand as the perfect competitor to their own offtake. Edge work closely with clients to understand shape risk and firming solutions.  We actively engage with the wholesale market to seek and deliver solutions that work best for each individual client.

Settlement

Settlement of third party PPAs need not be complicated.  In fact, it need not be independent of your electricity invoices.  Edge has negotiated PPAs that settle directly between the project and off-taker. We have also negotiated settlement services with retailers to ensure consumers benefit from longer term renewable generation whilst still only receiving monthly invoices form their retailers.  Understanding the cash flow implications and adequately addressing credit counterparty risk is all critical but certainly manageable.

Accounting

There are accounting implications as to how these arrangements are structured.  Whilst we are across these due to our involvement in large offtake deals, we are not an accounting firm.  We would strongly recommend that any consumer exploring these opportunities ensures their accounting advisors are across implications such as implied lease agreements, impacts to the balance sheet, and / or derivative accounting.

Whatever stage your organisation is at in considering Renewable Energy as a part of your electricity portfolio, Edge can help. If you would like to learn more about Edge, please visit www.edgeenergyservices.com.au or alternatively you can call one of our team directly on 07 3905 9220 or on 1800 EDGE ENERGY.