Coupling a BESS with solar allows developers to offer more flexible and attractive contracting options. But hybrid assets introduce a layer of contractual complexity that needs to be carefully navigated. We discuss the various contracting tools being deployed.
The Australian renewable energy sector has seen a significant wave of solar projects reaching commissioning in recent years, with a large volume of assets also progressing through the development pipeline.
However, excess supply during solar hours (from both utility and rooftop solar) has led to low spot prices and very diminished appetite from offtakers for standalone solar projects.
To address this challenge, developers are increasingly retrofitting Battery Energy Storage Systems (BESS) alongside solar assets to enhance value and improve offtake appeal.
By coupling a BESS with solar, developers can offer more flexible and attractive contracting options. Yet, hybrid assets introduce a layer of contractual complexity that needs to be carefully navigated.
In this article, we delve into the nuances of selling offtakes for hybrid solar and battery assets, exploring:
Historically, solar assets have been contracted with a run-of-meter PPA, and standalone BESS assets with a physical toll.
In a solar run-of-meter PPA (shown below), the seller receives a fixed price ($/MWh) for a percentage of volume generated by the solar asset. While these contracts are simple, they may not be the ideal structure for seller or buyer, and there has been very limited appetite from offtakers for solar in recent years.
In a physical toll contract for a BESS asset (shown below), the seller receives a fixed payment for the buyer to assume full operational control of the asset. The buyer then has access to all associated revenue streams, namely energy arbitrage, FCAS and any network support agreements.
These contracts are simple and appropriate when each asset is standalone.
However, when contracting co-located systems, there is an added complication in managing a shared connection point, particularly if the combined maximum capacity of the solar and BESS assets exceeds the connection point limit (i.e., a 200MW solar asset, 200MW BESS behind a 200MW Point of Connection)
These constraints require hybrid asset owners to explore alternative ways to secure revenues into the future and achieve bankability.
So, what are the options?
The below examples are several existing and emerging contract structures that hybrid asset developers are exploring in today’s market.
A first option is for the asset owner to keep operational control of the hybrid asset and sell a financial product on the BESS.
There are many financial products that are defendable with a BESS and can secure bankability, we will explore two here:
In a virtual toll, the buyer pays a fixed fee to provide virtual charge / discharge nominations. Buyer receives variable energy arbitrage payment based on the charge / discharge nominations and actual price outcomes. The owner of the asset keeps revenues associated with other markets (FCAS, network support).
A virtual toll opens the door to offtake from trading houses and other financial institutions that don't have the ability to take operational control of the BESS.
In a synthetic swap, the buyer pays a fixed fee to get access to energy arbitrage based on a fixed formula calculated against actual spot price outcomes.
The most common is a ‘daily contiguous’ agreement, where the buyer pays a fixed fee for the rights to the arbitrage between the highest and lowest two hour periods.
Other forms of synthetic tolls are available, such as a ‘heads and tails’ agreement (4 lowest and highest 30 minute periods) and a fixed time block (arbitrage between set time periods, say 12-2pm charge, and 7pm-9pm discharge for example).
A further option is to sell a firm shape, where the owner takes on the firming risk in order to sell a shape that is of more value to an offtaker. Increasingly, large retailers and large industrials are interested in buying flat green swaps for specific time periods.
The main time-based blocks seen in the market are:
5pm to 9pm green swaps are of interest to retailers seeking to hedge evening peak demand. These essentially work as a Contract-for-Difference (CfD) for a fixed volume between 5pm and 9pm with the seller also providing an appropriate volume of green certificates.
The seller takes on the risk of delivering a firm block of energy in the highest pricing periods, but can demand a significant premium on top of a run-of-meter contract for these risks.
5am to 9pm green swaps are of interest to retailers seeking to hedge demand across the day. These essentially work as a CfD for a fixed volume between 5am and 9pm with the seller also providing an appropriate volume of green certificates.
Finally, depending on the size of the hybrid asset, they can be used as part of a portfolio to sell a contract of greater value to an offtaker, or the owner can stack multiple contracts for the one hybrid asset to meet financing requirements.
Portfolio contracting and contract stacking provide additional options for asset owners when contracting.
Portfolio contracting involves the “stacking” of multiple assets in order to meet the requirements of an offtaker. As shown in the example below, a wind, solar and BESS asset have all been utilised to meet the volume requirement of an offtake without any short exposure.
Portfolio contracting can be utilised to mitigate operational risk, especially if an asset in the portfolio fails, other assets can discharge higher volumes.
Contract stacking refers to having multiple contracts for one asset. This may allow asset owners to develop a larger project.
Additionally, it may allow asset owners to contract some capacity with an investment grade entity at a low price to satisfy debt financiers and some capacity with a non-investment grade entity at a higher price to increase equity returns.
Recently there has been a significant uptake of solar developers retrofitting a BESS to maximise the value of their asset. However, combining the two assets behind one point of connection creates contractual complexity.
In response, hybrid asset developers areleveraging various contracting tools that allow them to better manage the revenue opportunity and manage risk.
The CORE Markets team works with renewable energy project developers to deliver high impact project go-to-market services. Get in touch to see how we can help.
Solar and BESS assets. How do you sell an offtake in today's market?
Coupling a BESS with solar allows developers to offer more flexible and attractive contracting options. But hybrid assets introduce a layer of contractual complexity that needs to be carefully navigated. We discuss the various contracting tools being deployed.
Coupling a BESS with solar allows developers to offer more flexible and attractive contracting options. But hybrid assets introduce a layer of contractual complexity that needs to be carefully navigated. We discuss the various contracting tools being deployed.
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