A key piece of Australia’s energy price puzzle

Australia's east coast electricity market, the National Electricity Market (NEM), is undergoing a dramatic transformation. To meet the federal government's ambitious target of 82% renewable electricity generation by 2030, and ultimately achieve net-zero emissions by 2050, a massive investment in large-scale wind, solar, storage, and transmission is required.

This shift towards a renewables and storage-dominated grid, with the increasing retirement of traditional thermal generation, is fundamentally altering the NEM’s market dynamics.

The past few years have seen a large increase in price volatility – as the ageing thermal fleet is replaced by renewable generation, times of high sun and wind result in lower prices. However, when demand peaks or renewable resource is low, more expensive technologies such as gas are increasingly required to take coal’s place, elevating prices and driving this volatility.

Investment in renewables in the NEM is underpinned by long-term renewable electricity offtakes in the form of power purchase agreements (PPAs). For a project to achieve financial close, power producers must generally secure a long-term offtake with an energy customer in the NEM (such as retailers, large industrial users, corporations and governments), which fixes a level of revenue for the project and provides the price certainty required for debt financing and long-term equity investors.

As volatility in the market increases, energy customers are becoming more conscious about protecting themselves from exposure to high prices, and at the same time are aiming to increase the procurement of renewable energy to meet sustainability targets and net zero goals.

To effectively manage both requirements means going beyond the traditional single asset renewable PPAs that have dominated the offtake market to date. Enter ‘firm’ green off-take products. These innovative solutions cater to the specific demand of energy customers by offering more than just renewable energy; they provide a guarantee of firm supply and price stability.

Firm green off-takes provide for a fixed price for the Seller (typically at a premium to market), whilst at the same time securing a consistent supply of renewable energy for the Buyer. 

This dual benefit effectively mitigates the risks associated with price volatility, provides for appropriate risk-adjusted returns, whilst ensuring customers’ sustainability goals are met.

Whilst firm renewable offtakes are still developing in Australia, there have already been several such PPA’s signed (most notably BP’s Olympic Dam offtake), and these fit within the existing frameworks. As financiers and investors become more comfortable with the structures and associated risks, their position in the market will grow immensely.

A portfolio approach to development and contracting is emerging as the key enabler of firmed renewable offtakes. The diversity of a portfolio comes through both technological and geographical diversification - wind and solar have typically complementary generation profile, and when coupled with storage of the appropriate size, can provide a physical position to support bespoke customer demand profiles.

The geographical spread of wind and solar resources across different regions within the NEM offers another layer of diversification for investors, and allows contracting with customers throughout the NEM. By investing in geographically diverse projects, portfolios can hedge against regional imbalances and weather events, further mitigating risk and smoothing returns compared to a single asset.

Balancing the level of contracted and merchant revenues across a portfolio can further increase returns, with the merchant or uncontracted portion of the portfolio assets, in particular storage, able to take advantage of the volatility and provide additional upside.

The Australian energy market is undergoing a paradigm shift, with renewables and storage driving the biggest changes.

A diversified portfolio of renewable generation and storage is a compelling investment opportunity for investors seeking to capitalise on the concerns over growing volatility and the drive for net zero. By diversifying portfolios across technologies and locations, power producers and their investors can provide an increasingly in-demand product, generate attractive risk-adjusted returns and contribute to Australia's clean energy future.