As long-term PPAs become scarcer, integrating renewables into wholesale markets requires new levels of flexibility, the author writes.
The renewable energy industry is beginning to outgrow long-term power-purchase agreements (PPAs), and the trend is toward trading renewables on a shorter-term basis through participation in wholesale markets.
Long regarded as a crucial driver for institutional adoption of renewables, a PPA provides offtakers with a hedge against risks from future energy fluctuations by entering into a stable 20-year contract for renewable power in which the price for that power is locked in. When renewables were still costly and the risks high, PPAs were underwritten by major financial houses, allowing corporate procurers to buy solar and wind and set fairly relaxed schedules for renewable energy producers to deliver on the promised capacity.
However, with the costs of renewables having fallen dramatically over the last two decades, major offtakers are now looking at a different economic landscape rather than locking into long-term contracts.
Today, buyers are increasingly interested in signing shorter contracts to better follow the ever-falling cost curves of clean power. How must renewable asset holders adapt to this?
Renewables and the wholesale market
Instead of entering into long-term PPAs, many sellers are looking to reduce project risk by turning to wholesale markets and generating additional streams of revenue through market products. Given that renewables’ operating costs are next to zero, sellers can place bids lower than any other resource — all but ensuring they’ll clear the market.
However, wholesale markets expose some project developers to downside risk, particularly with the variability in production. These markets schedule production and must keep supply and demand balanced in real time, dispatching balancing resources during periods of shortfall or over-production. In order to maintain this precise balance, grid operators require resources that are firm and flexible.
Renewable energy project developers have a growing opportunity to provide these firm and flexible resources by using flexibility management solutions that seamlessly and optimally integrate their clean energy into wholesale markets.
Flexibility management solutions, paired with distributed energy resources (DERs) such as renewables and battery energy storage, allow sellers to maximize their return on investment while meeting the short-term demands of wholesale and real-time markets — thus increasing upfront revenue and reducing the risk associated with clean energy.
The building blocks of flexibility for today’s markets
The first piece of any flexibility management solution is real-time situational awareness. Participants in wholesale trades need to monitor generation and make decisions in real time. While a variety of approaches exist, onboarding real-time data through existing supervisory control and data acquisition (SCADA) systems is the preferred approach.
On paper, this step seems straightforward. But integrating these data streams in a complex project necessitates a high degree of reliability and scale, along with controls that can unify a variety of hardware from different manufacturers. This unification approach is a step beyond the conventional disjointed setup, which can involve several stripped-down dashboards from different manufacturers, proving for chaotic decision-making that can lead to missed revenue opportunities.
Once the data is in and the controls are unified, the next layer in renewable integration is forecasting, a crucial ability for wholesale and real-time market participation. Renewable generators must be able to accurately predict the output of their assets at a given day and time in order to bid and make nominations.
High-quality automated forecasting ensures a greater ROI when making bids and nominations — and inversely, poor forecasting can result in heavy penalties and missed revenue opportunities.
Beyond bidding and nomination, forecasting is also important to respond to fluctuations in market demand. Areas with high wind penetration frequently see curtailment on the weekends, requiring generation owners to be able to predict where energy prices will go negative.
Opportunities to maximize ROI in wholesale markets
Not all projects that employ flexibility management solutions are the same because not all solutions have the necessary features for optimal renewables integration.
Key functionalities that maximize profits and further reduce risk separate the good from the great. System automation is crucial for a flexibility management solution. Real-time alerts help dispatchers respond to asset malfunction or portfolio shortfalls.
A fully optimized flexibility management strategy takes into account a variety of DER technologies. Tapping a variety of different DERs within a single portfolio offers sellers greater flexibility to tap into each technology’s unique applications and hedge risks from individual assets’ shortfalls.
For example, adding a battery storage system to a wind farm allows market participants to dispatch variable generation renewables with greater flexibility and with lower risk. Storage can also provide ancillary services to support renewables integration.
Next-generation flexibility management solutions that incorporate the functionality proposed here offer renewables a path to full integration into wholesale markets. With the economics of renewables becoming increasingly favorable and climate goals pushing forward, now is the time to ensure our clean energy assets are firm and flexible to power us in both the long and short term.