Pöyry outlines the risks and rewards associated with rising levels of renewable energy on the grid
The electricity system in the UK is facing unprecedented change. The UK is planning to build significant wind generation, as well as solar to meet its renewable and decarbonisation targets.
Output from wind and solar is inherently variable, and difficult to forecast accurately. Substantial growth in intermittent renewable generation will lead to a growth and variability in forecast error - as wind and solar generation cannot be forecasted perfectly.
As a result, greater flexibility will be needed to manage the unpredictability and variability of intermittent generation (wind and solar) and new plants will be needed to replace the existing thermal capacity which is being shut down.
During 2013, Pöyry ran a major multi-client study to understand the risks and opportunities associated with rising levels of renewable penetration on the system for all plant types.
Increasing wind penetration leads to wind becoming the dominant source of error on the system in the future. The subsequent flexibility required by the system is provided primarily by CCGTs and pumped storage/Demand response.
Outturn price volatility increases much faster than day-ahead price volatility - the increase in forecast error and the need to balance positions leads to more expensive plant being offered into the market at short notice.
Despite the increasing within-day price volatility, within-day re-trading revenues are low on average compared to energy and capacity payment revenues - however, the most efficient plant within a particular class could take advantage of this within-day price volatility.
In addition, the study analysed the effectiveness of the FiT CfD (Feed in tariff Contract for Difference). The objective of the FiT CfD is to improve the incentive to undertake low carbon generation investments by increasing certainty for investors, in particular in reducing/removing the long term market risk for investors.
We have examined how the risk for offtakers and developers changes under the new FiT CfD compared to the current Renewable Obligation.
Independent generators under the FiT CfD will not be required to enter into a Power Purchase Agreement (PPA), but we consider this will be likely in order to manage their basis risk exposure.
The PPA discount in the case of the FIT CfD will therefore consist of the following:
- A FiT CfD basis risk which in turn comprises:
- the within-day re-trading risk - any price and volume risk accrued through adjustments to the generator's positions through market actions up to gate closure (T-1);
- the imbalance costs if the generator is unable to meet its contractual positions and is therefore either long or short at outturn;
- Risk related to the possibility of negative market prices, negative day-ahead capture price risk. While the FiT CfD provides a top-up to the electricity revenues up to the level of the strike price, the FiT CfD payment will not be higher if the reference price is less than zero, hence, a potential risk to both offtaker and the generator; the likelihood of negative reference prices increases with rising levels of wind generation on the system; and
- Transaction costs.
The public report for the study is available here
Asheya Patten is senior consultant at Pöyry Management Consulting