Renewable investments, hybridised markets and the energy crisis: Optimising the CfD-merchant revenue mix

Abstract

Energy markets were designed to maximise productive, allocative and dynamic efficiency. Although renewables have become the dominant investment in deregulated energy markets, decarbonisation may not proceed at a pace consistent with the aspirations of policymakers. This has led governments in a number of jurisdictions to prime markets through ‘Contracts-for-Differences’ (CfDs) or Power Purchase Agreements (PPAs), thus bringing forward investment and decarbonisation efforts. The war in Ukraine and the resulting energy market crisis only served to emphasise a sense of urgency from a security dimension. Variable Renewable Energy (VRE) projects in Australia are typically underpinned by run-of-plant PPAs, but an emerging trend has been rising number of semi-merchant projects whereby some level of spot market exposure is retained. In this article, we examine how and why the semi-merchant investment model has arisen along with the minimum contracted coverage for a bankable project financing. Results reveal for investors with a target of 60–65% debt within the capital structure, a revenue mix comprising 73–78% PPA coverage (and 22–27% merchant plant exposure) is viable and a tractable project financing. For policymakers seeking to elicit 5000 MW of VRE plant capacity, the auction need only offer ∼3800 MW of CfD's capacity, which has the benefit of reducing taxpayer exposures (cf. on-market transactions).