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Posted on: 26/04/2019
Given the recent power price drops and the uncertainty with embedded benefits values long-term, Chris Smith, Head of Renewable Sales, explores the key findings from our latest report, ‘The Future Revenue Stack: Driving Value in an Uncertain Future’, which is jam packed with generator insights and forecasts from our Trading and Asset Optimisation teams.
The challenges facing generators in the years ahead was summed succinctly by one of leading generators at a roundtable we ran recently, when they remarked, “Like everyone, we’re concerned about where the next cut will come from: whether it’s embedded benefits or whatever else…I’m not sure there’s much more juice in the lemon?”
The session with leading UK generators and investors held in February, provided some expert insights into the current perspectives of generators pondering the future of the renewables sector. This was complemented in our report about the future revenue stack, by quantitative responses to survey questions, which we have represented graphically throughout.
One generator summarised some of the key trends culminating in an uncertain outlook when saying, “The UK market is becoming very difficult to work in – investment is an ongoing challenge. Policy and regulation are out of kilter, and the [Targeted Charging Review] TCR sends mixed messages and breeds uncertainty.”
In both the roundtable session and the survey that we conducted, thoughts were shared on the current UK policy environment as well as investment appetite. A wide range of perspectives also came to the fore when the discussion shifted to opportunities to gain value as the revenue stack changes.
Is there any silver lining?
Although our headline figure highlighted that there will be as much as a £15 per MWh of power generation drop in revenue for generators up to 2023 – resulting mainly from Transmission Network Use of System (TNUoS) and Balancing Use of System (BSUoS) moving from a revenue to a charge – optimism was clear when discussing elements of the revenue stack that offer more stability, such as:
1. Wholesale prices – when actively managed
2. Long-term certainty in Renewable Energy Guarantees of Origin certificates (REGOs) payments
3. The use of batteries – as costs fall and more market opportunities emerge
4. Participation in the Capacity Market and/or Balancing Markets – optimising existing and new assets
Gaining the value for you deserve for your REGOs
In considering the market for REGOs, and looking at the potential for renewable project growth under National Grid’s future energy scenarios, the market is forecast to grow to approximately £87 million by 2023 in the Two Degrees outlook.
Our survey of renewable generators highlighted that there is a range of prices paid for REGOs as respondents typically stated prices between 10p-30p. The majority of respondents (68%) were aware that some suppliers pay a market rate for REGOs, while some (16%) did not know this information previously.
The importance of gaining REGO value today was summarised by a generator in our roundtable session when saying, “You certainly have to think about every piece of revenue that’s out there: ones that you might not have traditionally gone for – such as REGOs – that’s key to the unsubsidised projects.”
SmartestEnergy have proudly paid generators for their REGOs since 2015. Following on from the closure of the LEC scheme, we were the first to realise the value of REGOs – we set the price annually and began to fix the price in for new contracts.
For some, this payment might seem nominal, but it represents something much bigger – recognition for independent renewable generators and validation of their work supporting our transition to a zero-carbon future.
Considering new revenue streams
Under section five of the report we explore practical steps for generators to take control of their revenue stack. A large part of this is centred around new revenue stream opportunities.
As subsidies drop off, generators will be able to consider the option to participate in the Capacity Market (subject to the outcome of the EU review of it). We explored the forecasts of three generation types – solar wind and hydro using a 5MW capacity as a benchmark. Out of these three technology types, hydro stood to earn the most from Capacity Market participation (£54,054 annually).
Meanwhile, in considering the forecast for generators participating in the Balancing Markets, wind projects came out on top with the potential earnings from a 5MW project equating to £49,582 annually.
Options to optimise your assets in this way, are dependent on what flexible capacity your asset(s) can provide, how quickly your asset(s) can respond and how reliable the flexibility capacity is. SmartestEnergy’s Asset Optimisation team is well placed to help generators weigh up the options for these additional service offerings, as well as the potential to use or co-locate with batteries, as generators consider what to do ahead of the end of their subsidy period.
If you would like to gain further insights, and review our latest findings related the future revenue stack, we encourage you to download a copy of our report.
About the author
Chris joined SmartestEnergy’s Renewables team in 2017 from Danish energy trading company Neas Energy. He works with generators to develop solutions to help them maximise returns in a changing environment for renewable projects. Chris began his career in the energy sector in 1996 with Eastern Natural Gas. He went on to work as a Generation Services Senior Business Development Manager at RWE npower, developing PPA solutions for customers. He has also worked on the supply side with industrial and commercial users. His role as Business Development Manager at Neas saw him build its UK PPA and CHP portfolio from market entry. Chris has a BA in Business Studies from De Montfort University, Leicester.
