Wholesale electricity prices in most National Electricity Market (NEM) regions have nearly doubled in the last several years.
The retirement of low marginal cost coal-fired generation in NSW, VIC and SA and a growing share of intermittent renewable energy sources have resulted in increased reliance on gas-fired generation to firm up supply. With gas-fired generation setting spot prices more often and gas prices on the east coast rapidly increasing due to demand for LNG production, spot and contract electricity prices in the NEM have increased dramatically.
Electricity supply costs account for a significant share of the total operating costs for many industrial and large commercial customers, so increasing electricity prices are putting significant pressures on their profitability.
These customers are actively exploring various options to reduce their electricity supply costs, including:
- competitive procurement
- longer term retail contracts with more competitive pricing
- demand side management
- corporate Power Purchase Agreements (PPAs) directly with generators and
- development of on-site generation capacity.
The market for corporate PPAs in Australia is becoming more active, as industrial and large commercial energy users are looking to procure power supply directly from generators or appoint developers to build and operate generation capacity at their sites.
A recent study by the Australian Renewable Energy Agency reports that just under half of large businesses in Australia currently use renewable energy, but it makes up less than 10 percent of the energy mix for the majority of them.
Both corporate PPAs and development of on-site generation by energy users have the potential to grow the market for renewable energy. The declining costs of wind, solar PV and batteries create opportunities for renewable energy projects to provide competitively priced electricity supply to corporate buyers. The majority of businesses using renewable energy are reporting cost as the main driver in their deployment of renewables.
If they have sufficient land or rooftop space available, many energy users are exploring options for ‘behind the meter’ renewable energy at their sites. Behind the meter renewables can provide electricity at a significantly lower cost than grid supply, become a source of Large-scale Generation Certificates (LGCs), and deliver savings on network losses and the variable component of network charges.
From our experience advising both renewable energy project developers and corporate electricity buyers, there are highly competitive markets for capital, equipment supply, and construction & operation services to enable corporate buyers to source electricity and LGCs under corporate PPAs from renewable energy projects.
The key challenge is securing firming supply, i.e. the balance between customer’s demand and variable supply from renewable energy sources. Solar PV combined with battery storage is already economically viable against diesel-fired generation in many remote off-grid areas. However, for grid-connected customers, batteries are not yet able to provide competitively priced firming supply and finding cost effective solutions to firm up variable supply from solar and wind remains a key challenge.
Most grid-connected energy users considering on-site renewable energy solutions are seeking to source firming supply from the grid. However, energy retailers often find it difficult to price firming supply for large variable loads under long-term contracts and savings on electricity supply costs from on-site renewables may be diminished by higher costs of sourcing firming supply from the grid.
Despite the challenges, the opportunities for significant cost reductions available through the deployment of on-site renewables by large energy users are driving increasing activity in this market segment.
Dmitry is presenting more on “Corporate PPAs – Opportunities and Challenges” at the All-Energy Australia 2017 Conference at the Melbourne Convention and Exhibition Centre.