Value streams for renewable energy generation projects in a post-subsidy world
As the costs of solar and wind generation decrease, governments across the world are removing explicit support for solar and wind projects. For example, in the UK, the renewables obligation scheme closed to new participants in 2017 and the feed-in-tariff scheme (for projects up to 5MW) was discontinued in April 2019, whilst the latest round of contract-for-difference auctions almost reached grid parity. At the same time, increasing penetration of wind and solar means that wholesale electricity prices are starting to become depressed at times of high wind/solar generation. As a result, it is becoming increasingly difficult for wind and solar developers to make their business cases stack up; costs may be decreasing, but if subsidies are drying up, forcing developers to trade generation on power markets — at decreasing prices and thus adopting merchant risk — the business case may struggle.
Therefore, wind and solar developers need to start looking at new commercial solutions. Below are a few business model innovations which Upside Energy expects to become prevalent in the coming years:
- Multi-market optimisation: Currently, for many wind and solar developers, selling the electricity generated from their project means signing a power purchase agreement (PPA) with an off-taker. That route will always be available, but as the penetration of solar and wind increases, average wholesale prices will decline whilst variability of prices will increase. This means less favourable terms. But it also means that there is increasing opportunity to optimise across power system markets (including the balancing mechanisms/markets and imbalance settlement), if you are prepared to sell your generation on a merchant basis, accepting the associated risk. To conduct successful multi-market optimisation, you must develop functionality to forecast accurately, optimise across markets, and, ideally, automate the trading process.
- Provision of reserve and frequency response services: It may sound counter intuitive, but sometimes it pays to curtail a proportion of your generation — and not just during times of negative pricing. If the availability fee (the fee paid simply for being available to provide a service) is high enough, you may want to curtail generation, to be able to ramp it up when instructed. In order to understand whether curtailing some generation to provide a reserve/frequency response service is more advantageous than simply selling the energy, you need the ability to co-optimise an asset for these different types of products, and to be able to control the RES generator according to the suggested dispatch schedule.
- Co-locating RES with storage/flexible demand: Flexible demand and energy storage assets, particularly batteries, can access a number of revenue streams on their own. But co-location with solar/wind generation makes good sense for several reasons. Firstly, flexible demand/storage and solar/wind generation can share a network connection, reducing overall costs. In fact, by shifting export away from the times of highest generation, flexible demand/storage can serve to reduce the size of a connection. Reducing the maximum export will also reduce network costs when costs are tied to the agreed capacity of a connection. (This is the arrangement being implemented in G.B. for residual charges.) Calculation of the optimal battery and grid connection size is, however, not a trivial task, and requires integration of an operational optimisation model into a stochastic investment planning algorithm. Secondly, co-location allows solar/wind projects to achieve a greater capture price, by shifting export away from times of low and negative prices to times of higher prices, which also avoids the motivation to curtail output due to negative prices. This ability will become increasingly valuable as periods of low prices become progressively correlated with times of high solar/wind generation. Again, successful exploitation of co-located solar/wind and flexible demand/storage requires functionality to forecast, optimise, and control flexible demand/storage and solar/wind generation.
A key point to note with all of these innovations is that they cannot be accessed through a traditional, ‘set-and-forget’ PPA. This is because they all rely on optimising the set-points of solar/wind generation (and any co-located assets) in real-time, or close to real-time, on the basis of up-to-date forecasts of various prices and solar/wind generation. To access these revenue streams, you must accept merchant risk and then invest in the forecasting, optimisation, trading and control functionalities required to maximise revenue.
At Upside Energy, we are working with a number of major wind and solar project developers and owners, as well as electricity suppliers, to develop the new capabilities required to enable the development and execution of the above business model innovations. Through these partnerships, we are able to collaboratively develop these capabilities within our Upside Platform to fulfil the monitoring, forecasting, optimisation, trading, control and analysis requirements of these business models. Given the uncertainty, complexity and rate of change within modern energy systems, markets and regulation, this partnership-led development model is crucial to securing efficacious solutions that will allow our partners to thrive in a post-subsidy world.