Improving hedging with hourly matching
24/7 renewable PPAs for enhanced cost certainty and energy stability
As the global energy landscape transforms, striking the right balance between climate objectives and cost-effectiveness becomes paramount.
How can companies make credible clean claims while protecting themselves against volatility in the wholesale electricity markets?
Eurelectric, together with Pexapark, initiated a study to better understand whether the 24/7 carbon free energy (CFE) corporate sourcing strategy can help consumers to better hedge themselves against increasingly volatile electricity prices. We’ve found that a 24/7 hedging approach provides clear hedging benefits.
But first, have you ever heard of 24/7 carbon free energy (CFE) matching?
Also known as hourly matching, 24/7 CFE is a contemporary solution for companies to procure clean energy and reduce their carbon footprint. This approach aims at matching demand with carbon-free energy supply on an hourly basis, providing businesses with stability in unpredictable markets. To guarantee this timely match, corporates procure clean electricity on the same grid and generated at the same hour as where they consume power.
The analysis confirmed that more hourly matching can improve a corporate’s hedging strategy by ensuring higher price certainty and reduced exposure to the spot market. Although the costs of hybrid PPAs are in some cases increased due to the use of storage technologies, the increased PPA costs will be recovered by avoiding higher spot prices.
“24/7 is the next level in corporates’ commitments to decarbonisation. Most importantly, it is a powerful driver of innovation and investments into clean, renewable and storage technologies as well as an opportunity to better hedge consumers wishing to reduce their exposure to volatile spot energy markets.”
Marianne Karu
Business and Communications Director
Hedging is an effective way to manage risk and decrease price volatility
Last year’s surging gas prices, which inevitably escalated electricity costs as shown in our Power Barometer 2023, magnified the urgency for dependable and sustainable energy solutions.
Hedging acts as a protective measure against unpredictable energy shifts. Renewable energy agreements, particularly Power Purchase Agreements (PPAs), are tools to stabilise energy costs.
In other words, if electricity prices unpredictably surges at a given hour during the year, consumers with PPAs can instead source carbon-free energy from a portfolio of renewable generation and storage assets, obtaining a more stable price.
Realised monthly baseload prices in Germany
Consumption & Solar Pay as Produced PPA (monthly granularity)
Any deviation between PPA production and buyer's demand leads to market exposure
The hedging value of any PPA hinges on how the energy produced aligns with consumption. When the energy supplied by PPAs doesn’t match a buyer’s consumption, it can introduce financial uncertainties. Factors like how the energy is delivered play a role. Especially with renewable sources whose output will vary, ensuring an hourly alignment becomes crucial for price stability.
Let’s delve into the specifics of the 24/7 hedging
We wanted to test the effectiveness of hedging with 24/7 PPAs, so we picked two countries, Germany and Finland, and a combination of several technologies with low, medium and high power price scenarios.
Pexapark analysed a consumer profile in both Germany and Finland with a constant demand of 10 megawatt matched by different combinations of technologies including onshore wind, solar photovoltaic (PV) and co-located Li-Ion battery. Advanced analytic tools were employed to provide a holistic understanding of the potential future hedging benefits of hourly matched PPAs, and, secondly, to carry out a retrospective analysis based on realised electricity prices in 2020, 2021, and 2022.
Up to 90% hourly matching can be obtained with minimal oversupply in dissimilar markets and in the absence of carbon-free firm generation
Modern advancements now allow corporate electricity consumers to achieve up to 90% hourly alignment between consumption and production. In the scope of this study, this is achieved using a mix of solar, wind, and li-ion batteries. Even in the absence of the latter, a combination of wind and solar assets alone has shown impressive results in countries like Finland and Germany, achieving hourly matching in the range of 60-75%. That’s already a significant increase over single technology PPAs and an excellent way for companies to get started on the 24/7 journey.
Germany highest hourly matching of 90.16% with hybrid solar and wind
Finland highest hourly matching of 89.91% with hybrid wind + solar
24/7 hedging approach provides clear hedging benefits
In our forward-looking analysis, high levels of hourly matching bring considerable financial benefits. Their effectiveness varies according to market price levels and PPAs structures.
In our forecasts we show how well the 24/7 CFE supply portfolio can perform in the future. When looking at Finland, there are benefits for nearly all levels of hourly matching and price scenarios.
Finland
In Germany, the results are more nuanced. A hybrid-wind portfolios, where wind assets are combined with storage, provide positive hedging benefits in all hourly matching scenarios. A hybrid-solar portfolios, where storage is added to PV assets, on the other hand, provide positive hedging benefits up to approximately 90% hourly matching. The price of the PPA is driven up by Li-Ion batteries.
The use of clean firm and dispatchable generation or long-duration energy storage technologies, while not explicitly modeled, could allow for higher hourly CFE percentages and potentially make hedging even more attractive.
Germany
Hybrid Wind+Solar
Germany
Hybrid Solar+Wind
Back testing of the 24/7 approach also confirms positive hedging benefit
Historical data reinforces the benefits of the 24/7 hedging approach. Higher hourly alignment has consistently resulted in positive outcomes. Notably, differences between Germany and Finland can be traced back to Germany’s larger energy portfolios and prices.
Finland
In 2022 and 2021, the PPA buyer could have saved up to 14 million euro and 4 million euro, respectively, if it had achieved a 90% hourly match. In 2020, the buyer would have incurred a net cost, but importantly the cost would have been 10 times lower than the gains in 2022. This demonstrates one of the most important benefits of hedging – while creating a hedge can come at a cost, it provides significant benefits and can shield buyers against worst-case outcomes. This is critical in an era of increasing volatility in electricity markets.
Germany
In Germany we see similar trends. In 2022, more matching resulted in more hedging benefits, too. However in 2021 – a medium-priced year, an 80% matching with just wind and solar gives the most benefit as spot prices are not high enough to cover the added costs of li-ion batteries, highlighting the potential for other types of storage or clean dispatchable generation to provide a more cost-effective matching.
Hybrid Solar+Wind
Key Takeaways
1
Higher hourly matching provides greater absolute hedging benefits.
A 24/7 CFE approach improves the effectiveness of renewable-based power purchase agreements (PPAs) as a hedging tool against price volatility by adopting a more granular approach to better match energy supply with demand.
2
During periods of high prices, the benefits of hedging are much higher than hedging costs
to the point that they also compensate for periods of low prices where the benefits are lower than costs.
3
Hybrid portfolios are able to achieve higher levels of hourly matching while maintaining a consistent hedging benefit.
While adding co-located energy storing technologies to a renewable portfolio increases the hedging costs, the increase in renewable matching effectively decreases the exposure to the wholesale market which results in more consistent hedging as tested with historical data. Notably, in Finland, hybrid PPAs with a score of 85% hourly matching show superior hedging results.
Improved Hedging is one of the many benefits of hourly matching
Studies from the International Energy Agency, Technical University of Berlin, and Princeton University have shown many benefits of moving towards 24/7 matching. Some of these include:
1
Increasing transparency of corporate sustainability claims and potential granularity of carbon accounting;
2
Increasing investment in renewable energy and new signals for storage and demand flexibility not typically incentivised in today’s PPA markets;
3
Accelerating electricity decarbonisation by supporting the development of renewable energy assets to better reflect when and where RES-E generation is most needed;
4
Facilitating new business models and innovative technologies;
5
More closely aligning markets with the physics and economics of the grid and the variability of supply and demand energy matching.
The 24/7 Journey from niche to mainstream
Government institutions in the European Union and the United States have also begun to recognise the need for a more trustworthy and authoritative accounting method that tracks and traces clean energy at a granular level. This system will serve as a valuable solution against perceptions of greenwashing that could undermine public confidence in policies aimed at decarbonising our economy.
The European Commissions’ rule for qualifying green hydrogen is a case in point. To differentiate green hydrogen from fossil-fuel-based “grey” or “blue” hydrogen, the fuel must be produced with electrolyzers certifiably matched by renewable power coming from the same grid, on a monthly basis until January 2030 and on an hourly basis thereafter.
The United States federal government is considering a similar rule to ensure that grid-connected hydrogen production is provably supplied by clean power supplied by clean power for every hour of consumption. The system benefits of granularity were further highlighted by ENTSO-E. The United Nations has further spotlighted this trend and convened a 24/7 Carbon-Free Energy Compact that clearly articulates the key principles of 24/7. The goal of the Compact is to work collectively to ensure that energy consumption is verifiably matched with clean energy produced
- within the same hour
- within the same local or regional electricity grid site
- with any carbon-zero electricity technology
- with a drive to add new clean energy generation capacity and
- with an impact of displacing fossil fuel electricity generation.
Potentially more consequential to business and industry is the World Resources Institute’s ongoing review of the Greenhouse Gas Protocol (GHG Protocol). This is one of the main internationally recognised standards for measuring and reporting a company’s carbon footprint. The reform of the GHG Protocol may lead to companies finding themselves in a new landscape where they must answer to more accurate tracking and reporting requirements on their emissions.
The good news is that existing clean and renewable technologies are already enough for corporates to embark on the 24/7 PPA journey.
Raising awareness both locally and internationally on this new approach to clean energy sourcing is key to bringing 24/7 from niche to mainstream. As an early signatory of the UN Compact for 24/7 carbon free energy, Eurelectric is at the frontline of the awareness campaign with a 24/7 CFE business hub dedicated to developing solutions for corporates to embark on the 24/7 journey and accelerate power system decarbonisation.
