thanks for the article but I don't fully understand it. I also had a look into the paper by Schlecht et al.
What is the aim of the generator? To produce as close to the benchmark generator as possible?
How is the solar generator incentivzed to be build in an east-west orientation (assuming in the moring and afternoon the electricity prices are higher) when the generator only gets a paymount on the basis of its installed capacity?
I was wondering how power producers time their maintenance programs in order to capture the maximum value of the market. Don't they need to do extensive planning to carry out maintenance work? Also, I'm curious to know how far in advance power producers can predict power market prices to schedule their maintenance so that it's both feasible and financially viable.
Nuclear plants do this extensively, and do the bulk of maintenance work in the spring and fall, when demand is generally lower, and time things to have staggered shutdowns to ensure enough capacity is available, and efficiently use the work crews.
A relatively simple option is to have the strike price linked to a medium term average (monthly seems to be the most practical). This means that projects bear the cannibalisation effect and have to be market-responsive in the short term and do profile optimisation to the extent they can
Indeed that's an option as well. Nevertheless, I have the feeling that it might decrease too much the "revenue security" because the renewable generator would have to forecast the monthly capture rates for the time of the contract, no?
What happens if the cannibalization effect is much more pronounced that what he expected? A CfD is generally signed for a long period (15 years for example). To have a link to a monthly average is good to hedge against the average price but maybe not enough. How can we effectively predict how will the capture rates develop against monthly average? It depends on many criteria (capacity installed, storage, load demand, grid, etc.).
Well yes, but that's a legitimate risk to put on the developer. This will limit development of solar in areas where there is too much of it already, and provide incentives for others to create smart demand. It may also encourage governments to fo to nodal pricing, which will also help manage the system better and direct investments where they are most valuable.
The canbolization risk is the major financial risk for negligible marginal cost prosucers. I don't think it's being priced in, but when it is it could be a very sharp impact.
The other part of this needs to be who the counterparty is and how do they select what projects to enter agreements with.
They can't just do blanket approvals, as that creates a huge revenue risk for them.
I think the only counterparty that can maintain the financial book to do it is the power wholesaler, who can add the cost difference between the CfD and the market price back to the users.
And in high penetrations from negligible marginal cost producers, the average market price (and espcially volume weighted market price by the contracts) will be much lower than the needed contract price.
Banks (lenders to projects) have been looking at capture prices for a while now. We don't know if their medium term assumptions are correct, but at least they are asking the question.
But from a regulatory perspective, it is fair that projects bear that risk - which could be mitigated by node pricing and/or better grid investment.
There are indeed mitigation measures that should be pushed forward.
In general, I believe that for wind, the cannibalization risk is much less present than for solar. For solar, I am really not sure that stakeholders are pricing correctly this risk. For example, in the calculation of the EEG in Germany (support for renewables, here : https://shorturl.at/oIQS3), the capture rate is estimated at 84% and 83% for 2023 and 2024 respectively, while the current value for 2023 is 74% (yearly value). For wind, the values are more aligned with reality.
Solar capacity was 75 GW this summer in Germany but they are planning to get to 215 GW in 2030. Capture rate will fall quickly along the way.
Fair or not, I don't think we get the deep penetration of clean, negligible marginal cost projects that are needed for deep decarbonisation if the projects need to bear the system risk, which is outside the project's control.
Hi Julien,
thanks for the article but I don't fully understand it. I also had a look into the paper by Schlecht et al.
What is the aim of the generator? To produce as close to the benchmark generator as possible?
How is the solar generator incentivzed to be build in an east-west orientation (assuming in the moring and afternoon the electricity prices are higher) when the generator only gets a paymount on the basis of its installed capacity?
Hi Julien,
I was wondering how power producers time their maintenance programs in order to capture the maximum value of the market. Don't they need to do extensive planning to carry out maintenance work? Also, I'm curious to know how far in advance power producers can predict power market prices to schedule their maintenance so that it's both feasible and financially viable.
Nuclear plants do this extensively, and do the bulk of maintenance work in the spring and fall, when demand is generally lower, and time things to have staggered shutdowns to ensure enough capacity is available, and efficiently use the work crews.
Hi Julien.
A relatively simple option is to have the strike price linked to a medium term average (monthly seems to be the most practical). This means that projects bear the cannibalisation effect and have to be market-responsive in the short term and do profile optimisation to the extent they can
Hello, Thanks for your comment.
Indeed that's an option as well. Nevertheless, I have the feeling that it might decrease too much the "revenue security" because the renewable generator would have to forecast the monthly capture rates for the time of the contract, no?
What happens if the cannibalization effect is much more pronounced that what he expected? A CfD is generally signed for a long period (15 years for example). To have a link to a monthly average is good to hedge against the average price but maybe not enough. How can we effectively predict how will the capture rates develop against monthly average? It depends on many criteria (capacity installed, storage, load demand, grid, etc.).
What do you think? Thanks.
Well yes, but that's a legitimate risk to put on the developer. This will limit development of solar in areas where there is too much of it already, and provide incentives for others to create smart demand. It may also encourage governments to fo to nodal pricing, which will also help manage the system better and direct investments where they are most valuable.
The canbolization risk is the major financial risk for negligible marginal cost prosucers. I don't think it's being priced in, but when it is it could be a very sharp impact.
The other part of this needs to be who the counterparty is and how do they select what projects to enter agreements with.
They can't just do blanket approvals, as that creates a huge revenue risk for them.
I think the only counterparty that can maintain the financial book to do it is the power wholesaler, who can add the cost difference between the CfD and the market price back to the users.
And in high penetrations from negligible marginal cost producers, the average market price (and espcially volume weighted market price by the contracts) will be much lower than the needed contract price.
Banks (lenders to projects) have been looking at capture prices for a while now. We don't know if their medium term assumptions are correct, but at least they are asking the question.
But from a regulatory perspective, it is fair that projects bear that risk - which could be mitigated by node pricing and/or better grid investment.
There are indeed mitigation measures that should be pushed forward.
In general, I believe that for wind, the cannibalization risk is much less present than for solar. For solar, I am really not sure that stakeholders are pricing correctly this risk. For example, in the calculation of the EEG in Germany (support for renewables, here : https://shorturl.at/oIQS3), the capture rate is estimated at 84% and 83% for 2023 and 2024 respectively, while the current value for 2023 is 74% (yearly value). For wind, the values are more aligned with reality.
Solar capacity was 75 GW this summer in Germany but they are planning to get to 215 GW in 2030. Capture rate will fall quickly along the way.
Fair or not, I don't think we get the deep penetration of clean, negligible marginal cost projects that are needed for deep decarbonisation if the projects need to bear the system risk, which is outside the project's control.