by Andrew Stiel, Head of Energy Markets and Offtake, Edify Energy
The Gannawarra Energy Storage System (GESS) epitomises the breadth of opportunity that is opening up to the energy sector. Here, Andrew Stiel, Head of Energy Markets and Offtake at Edify Energy, discusses some of the unique aspects of GESS with a focus on the retrofit model and the role that offtake agreements can play in facilitating batteries; two features that will become increasingly important as we continue to usher in a high-penetration renewables future, in large part enabled by storage technologies.
GESS is a 25MW/50MWh Tesla Powerpack battery that was connected behind the existing point of connection of the 50MW Gannawarra Solar Farm. It was developed, structured and overseen into operation by Edify Energy and is owned in a 50/50 joint venture between Edify Energy and Wirsol Energy.
GESS could not have come into existence without the financial support afforded by a $25 million grant from the Victorian Government and the Australian Renewable Energy Agency (ARENA).
It is the first solar and battery project in Victoria and among the largest of its kind in the world. The financing of GESS was underpinned by a long-term services agreement with EnergyAustralia.
In its own right, GESS has set some interesting commercial precedents for financing batteries that may prove to be a commonplace route-to-market for future battery installations around the country.
But it is its integration with the pre-existing Gannawarra Solar Farm and its demonstration of how batteries can be retrofitted to standing renewable assets that makes GESS unique in the National Electricity Market (NEM).
The retrofit model for batteries with renewables
As the renewables boom has unfolded over the past few years, so too has the installation of dedicated substations servicing individual projects. In the case of a typical solar farm, a multi-million-dollar substation and other critical network infrastructure may only get used for eight hours of the solar day (or broadly a 25-30 per cent annual capacity factor). These ‘sunk costs’ represent a material opportunity for battery projects to access underutilised network infrastructure.
In doing so, future battery projects may avoid a material cost impost and long lead-time procurement item that otherwise would serve as a drag on battery project economics.
There are other potential benefits to the retrofit model. Where renewable projects are subject to systemic curtailment issues, the retrofit model may serve as a means to mitigate this curtailment by capturing energy behind a network constraint for dispatch at a later time after this constraint has subsided.
The rapid response and ramp properties of batteries may also permit genuinely firm dispatch of renewable assets, by operating the battery in a perfectly converse way to the renewable asset’s output against a fixed combined setpoint. This model could also be used to manage causer pays ancillary service charges that currently burden many standalone renewable systems in the market.
At present, these benefits are technically feasible, but challenging to access from both a regulatory and project structuring standpoint.
In a classic example of the pace of technology change outperforming that of regulatory change, the current regulatory model for retrofitting batteries to existing renewable assets is complex and has the potential to introduce risk to the standing asset, particularly where there are adverse implications for generator performance standards that have already been negotiated.
Project structuring is also not trivial, with a multitude of issues that arise concerning, but not limited to, differing ownership and capital structures between the battery and renewable asset, the allocation of prudential liabilities, and technical and operational obligations for each asset in the event that the combined output of the two assets is greater than the substation’s export rating.
For each of the potential benefits of the retrofit model outlined above, there is at least one existing regulatory or project structuring impediment that needs to be addressed before the market can truly access them in a seamless way. Edify Energy, through its learnings on GESS, is actively engaging with a number of industry bodies to seek to address and overcome these challenges and impediments.
Battery offtake agreements
A battery is conceptually a greater market risk proposition than a renewable asset, and one that requires a higher degree of operational sophistication.
This is for two reasons:
1. There is not only an outbound (i.e. discharge) market risk exposure, as is the case for a renewable generator, but an inbound (i.e. charge) market exposure too. This may be akin to fuel purchases for thermal generators, which is a hedge consideration less familiar to the growing field of pure-play renewable owners/operators that are taking an interest in battery technologies.
2. There is a constant decision that needs to be taken concerning the opportunity cost of a charge or discharge into energy or ancillary service markets. It is not a case of ‘set-and-forget’ dispatch if the sun is shining or the wind is blowing like standalone renewables. Rather, active management of a battery asset is required to harness its value.
In light of this, the route-to-market for deploying batteries is still evolving. Will we see pure merchant battery financings sitting in the hands of relatively high cost of capital owners and overseen by sophisticated asset management parties? Or will the standard investment case for batteries converge toward that of renewable generation assets and be predicated on an offtake agreement of sorts? Ultimately an offtake agreement is just a means for:
- A buying party to gain access to an asset’s products or services at a lower cost of capital than could be achieved by putting its own balance sheet to work
- A selling party to appropriate an asset’s risks to whichever party is best placed to manage those risks
As there are many more product and service options existing for batteries than renewable generators, it would be natural to expect that the terms of offtake agreements for battery projects would be for more diverse and complex than those of stand-alone renewables; being highly dependent on the project’s specific attributes, the proposed use-case for the battery and the counterparties to the contract.
However, in structuring an offtake agreement for a battery, care should be taken not to inadvertently limit the flexible operation of the battery and its ability to access its full value. To the greatest extent possible, full operational control of the battery should be held in the hands of a single party.
Anything less than this has the potential to apply a constraint on the battery’s operations and limit its flexible operation and full value. This is particularly true as market conditions and potential battery use-cases evolve over time.
In achieving this outcome, a battery offtake agreement should permit rational departures from physical hedge positions in pursuit of more lucrative market opportunities, without necessarily inciting non-financial default or termination provisions. This flexibility should ultimately be to the benefit of the seller and the buyer, as there is a larger potential pie of commercial value for allocation.
The long-term services agreement between GESS and EnergyAustralia achieves these principles. In this case, EnergyAustralia holds rights to charge and dispatch energy from the battery in exchange for making fixed monthly payments to GESS and receiving performance guarantees.
Here, EnergyAustralia is best placed to manage market risks, so interfaces with the market and has a fixed payment exposure. Equally GESS is best placed to manage the technical risk and performance obligations of the battery, through its arrangements with its suppliers. In this way, the agreement makes an efficient allocation of risk, thereby achieving an optimal commercial outcome, the lowest cost of capital possible and the greatest gains-to-trade for both parties.
In pursuit of the vision
The suite of technological and commercial options becoming available to the energy sector is undeniably exciting. With large-scale solar beginning to cement itself as the source of the cheapest electron, storage technologies will play an increasingly important role in enabling its limitless deployment.
As a sector, we need to identify the most efficient physical and commercial solutions to achieve this at lowest cost. Edify Energy will continue to play a market-leading role in pursuit of this vision by liberating its portfolio of renewable and storage projects and bringing more sustainable, reliable and affordable energy to Australian electricity consumers, as it has done to date through the Gannawarra Energy Storage System and Gannawarra Solar Farm, and other assets in its development and operational portfolio.