Renewable capture price cannibalisation

As renewable capacity increases, capture prices for renewable assets are decreasing and are expected to decrease even further. Senior Business Development Manager, James Marsh explains how the growth in renewable generation is causing price cannibalisation on the capture prices and what that means for the future of a Power Purchase Agreement (PPA).

Over the last ten years, the UK’s renewable generation mix has increased from 10,690 MW to 43,784 MW and as the net-zero agenda accelerates, wind and solar capacity expected to be up to around 113 GW.

In our latest Generator Revenue Streams webinar, we covered the extreme price volatility we’ve seen, and continue to see, in the wholesale energy market with the N2EX price reaching the highest Half Hourly (HH) price ever seen on the auction at £1,000.04/MWh between 5-6pm on 6th January 2021.

With subsidy schemes like the RO coming to an end, investors and developers are looking at maximising the commercial value available in the wholesale market via PPAs, whether Utility or Corporate.

Capture prices

National Grid accepts the generation source available with the lowest cost, for example wind and solar generation with zero marginal costs, over more costly fuelled assets. This inevitably means that the cheapest periods of supply are often when the sun is shining, or the wind is blowing. As more solar and wind assets are deployed, the weighted average captured price by renewable assets, versus the unweighted baseload power price, is reducing through cannibalisation effects. For example, during Storm Eunice on Friday 18th February 2022 wind energy generated 40.5% of Britain’s electricity and the capture price, for the wind assets able to withstand 122mph winds, averaged at £157.65/MWh.

How has the energy crisis impacted Capture Prices?

In the UK we’ve seen unprecedented price volatility, on the 7th March 2022 the Summer 22 seasonal price spiked to £382.50/MWh. In winter 2021, wind generation was significantly low and gas prices skyrocketed due to a surge in global demand, all against a backdrop of Russia’s invasion of Ukraine.

With expensive baseload or flexible assets providing the majority of the UK’s generation throughout the winter period, renewable generators have been unable to capture these high wholesale prices. This has widened the gap between the wholesale price and the capture price for a typical wind or solar generation asset more than ever.

Our pricing experts have revealed an overall trend of increasing discounts against the wind and solar capture price and the N2EX baseload price:

  • For wind: In Winter 2018 the capture price was only at a small discount of -£2.10 against the baseload price, yet in Winter 2021 we’ve observed discounts in the region of -£18.00. As wind capacity grows year on year, it may further penetrate revenues against a baseload asset.
  • For solar: Over the summer seasons for the last five years, we’ve observed a smaller capture price discount with Summer 2018 at a discount of -£0.04 and Summer 2021 at a discount of -£6.63. For Winter 2021, the capture price discount against the baseload power price was -£21.36, mainly driven by wider power market dynamics.

Solar generates very little in the evening peak (between 3-7pm), which reduces its value against baseload product.

What does this mean for PPA contracts?

Fundamentally, renewable revenue opportunities are changing over time, as the system becomes even more decarbonised and as we get closer to the 2030 deadline for reduced emissions targets, the future PPA contract must adapt along with the energy landscape.

SmartestEnergy have been awarded on our transparent approach to our commercial contract structures and our product development teams have been working behind the scenes to adapt our Flexible PPA to ensure a fair balance of risk.

I’ve outlined the key product features below:

  • Track and react to market opportunities and sell your power in monthly or seasonal blocks of volume
  • Freedom to lock and unlock your volume - access the full liquid market and published indices to flexibly sell power up to 5 years in the future.
  • Transact at the click of a button via our online trading platform, SmartFlex.