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Clean lucre: ARENA funds renewable-energy marketplace and derivatives

Encouraging money to chase firming of renewables is expected to be just one positive byproduct of a proposed new financial derivatives platform that will allow industry players to hedge against volatility in the pricing of renewable energy.

The Australian Renewable Energy Agency (ARENA) on Friday announced $845,000 in funding to support Renewable Energy Hub market advisors, to develop new financial products and a world-first trading platform designed for renewable energy.

In a statement, ARENA said the market for financial products that has evolved around the Australian electricity system is worth some $26 billion — almost $10 billion more than the wholesale electricity market itself — but the derivatives associated with traditional fossil-fuel generation have not adapted to suit Australia’s burgeoning renewables sector.

“Financial products have usually been based on baseload electricity traded in flat 24-hour blocks,” said ARENA CEO Darren Miller, “rather than hedging a few hours at a time or at peak generation times,” as occur with generation from solar and wind assets.

Common financial products that help Australian energy retailers fix their costs and generators stabilise their revenue include derivatives known as “forwards”, such as futures and swaps, which are based on predicted prices at an agreed time in the future; and “options” such as “caps” — contracts that result in payment to the buyer when the pool price of electricity exceeds an agreed price.

The new marketplace, says Chris Halliwell, Head of Markets at Renewable Energy Hub, “will facilitate trade in contracts that reflect the ‘profile of renewable generation.”

Energy-market topiary — shaping hedges around the sun

Renewable Energy Hub already has experience in this area. In November 2019 it announced the Solar Shape contract, which it developed in collaboration with energy retailer ERM Power, and which is based on the fact that solar generation follows some predictable patterns.

At the time, Renewable Energy Hub said Solar Shape was “revolutionary” because it isn’t flat like a traditional swap contract, but follows the curve of solar power generation as governed by the movement of the sun.

“By matching buyers’ needs with contracts for new renewable supply, we can now guarantee a predictable fixed price and volume for energy generated by solar plants,” said the Renewable Energy Hub in its announcement. “For energy retailers, Solar Shape contracts remove the biggest hurdle with solar hedging: intermittency risk.”

The company also described its Inverse Solar swap contract that allows retailers to not only access firm volume and fixed-price solar projects during the day, but to switch to other sources — wind, hydro and battery — when the sun isn’t shining.

The ARENA funding package will enable Renewable Energy Hub to “develop a suite of new hedge contracts … that could provide revenue certainty to renewable energy projects and help secure financing”, said the agency in its statement.

Risk relief for retailers and generators

Halliwell added that its new digital  marketplace, informed by data and featuring online tools to facilitate energy price discovery, compare trading options and minimise transaction costs, will fill “a gap in risk solutions”, and create “price efficiency to unlock more clean energy technology”.

The project has been announced at a time when investor confidence in large-scale renewable-energy projects has taken a dive due to lack of government policy around energy transition and the inability of Australia’s energy infrastructure to adapt quickly enough to gigawatts of new renewable generation ready to come online.

Returns on investment and the perceived dependability of renewables have been diminished by marginal loss factors, connection delays, the extra cost of connection when it becomes contingent on last-minute investment in firming technologies, and then curtailments of energy generation — each of these has chipped away at the ability of generators to deliver energy on schedule and to honour output levels specified in power purchase agreements

Interestingly, Halliwell foresees the renewable-energy marketplace and its innovative products not only as firming or hedging against energy-price-associated risks in the market, but as providing incentives for market players to seek out financial products aligned with battery storage and other renewable assets that balance the intermittency of wind and solar.

“This effectively turns a financial firming solution into a physical firming solution, hastening the arrival of those storage and other balancing resources required to help the energy system make the required transition to 100% renewables,” says Halliwell.

An encore for ARENA?

This new investment by ARENA underscores the vital role the agency has played since it was established by the Gillard Labor government in 2012, in recognising and financing development of pivotal projects and technologies that have enabled and accelerated Australia’s energy transition.

With ARENA’s transition coffers due to effectively be emptied within months (it’s expected that funds will then have been allocated out to June 30, 2022, when its grant-making remit comes to an end) urgent calls have come from industry and from The Australia Institute (TAI) for the Federal Government to top-up ARENA’s resources.

A discussion paper published by TAI in January recommended amendment of the Australian Renewable Energy Agency Act 2011, to allow for a $460 million extension of funding that would “ensure ARENA continues to operate at capacity” while the Government legislates for the next stage of funding, which TAI recommends will extend ARENA’s remit into powering transport with renewable energy, and powering industry with green hydrogen.

In the meantime, the agency strives to wring value from every remaining dollar.

“These new financial products,” says Miller, “will create new opportunities for renewable energy developers to sell their energy, and the marketplace will provide real-time visibility and the tools needed to support buyers and sellers.”

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