Virtual energy storage hedge contracting demonstrated in Australia

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The first transactions of a new ‘virtual storage’ electricity swap contract have taken place between Hydro Tasmania and buyers Macquarie Group and ERM Power.

The new financial instrument, an offering from the financial services and energy markets platform Renewable Energy Hub, is for the buying and selling of stored energy with an agreed upon set spread between the charge and discharge prices.

With the Virtual Storage contract, merchant storage operators can de-risk their energy arbitrage revenue to move beyond complete exposure to spot prices and hedge their risk to capture more attractive revenue options in the forward market.

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The 2022 financial year transaction involves Hydro Tasmania selling the rights to the highest priced energy periods of the day ‘discharge’ and buying a fixed MW block of low priced energy ‘charge’. The charge/discharge legs are the same MWhs, and the transaction price is the agreed price spread between bought and sold legs.

“The benefits of deep storage are well understood in the context of providing firming capacity that will be needed as the energy market transitions and variable renewable energy becomes the dominant source of supply,” says Hydro Tasmania executive general manager of commercial, Caroline Wykamp.

“The Virtual Storage hedge contract demonstrates the value of such trades to the financial market and that further liquidity in such trades can support investment needed to develop pumped hydro and other storage technologies – it’s a win-win.”

As additional pumped hydro energy storage and grid-scale battery technology assets become more prevalent in Australia’s National Electricity Market, as indeed elsewhere, the need to effectively trade stored energy becomes essential to strategically capture revenue. The Virtual Storage contract is expected to become more utilised and generate increased liquidity in the market as this happens.

Virtual Storage is the most recent product developed by Renewable Energy Hub, as part of an Australian Renewable Energy Agency (ARENA) funded project to develop a suite of innovative standardised hedge contracts to meet the needs of a transitioning energy market. The other contracts, Super Peak, Solar Shape and Inverse Solar, have traded over 1GW since launching last year.