Ensuring long term investment for large scale solar power stations: Hedging instruments for green power

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Journal Article
Solar Energy, 2013, 98 pp. 167 - 179
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There is a general consensus that solar power is one of the cleanest energy technologies available. Nevertheless, investment in large-scale Solar Power Generators (SPGs) is largely impeded by the intermittent nature of solar power. Since the electricity market has a critical responsibility to maintain the reliability of energy supply, the SPG can be registered only as the market semi-scheduled generator (AEMC, 2011). This option excludes the advantages of providing baseload supply, which in turn impedes efficient market contracting for SPGs. The existing approach relies on energy storage or co-generation facilities to be built at the same connection point as the SPG to compensate for output shortages when there is insufficient sunlight. The co-located facilities require significant additional investment in infrastructure.This paper proposes a market based financial approach that does not require an additional construction effort. The approach financially links solar or other intermittent power generation with a gas-fired station through a set of tailored swap-type instruments.These swaps (based on solar energy forecasting) are designed to insure and hedge the SPG against a drop in its output. They contractually link physically separated solar and gas generators to form a single entity termed the Virtual Generator (VG). The VG arrangement requires the SPG to provide solar power when possible and the gas generator to kick in when there is any shortfall due to random clouds or at nightfall. Thus the proposed VG will have the capacity to produce reliable baseload supply. The profitability and design of the proposed financial setup for both the solar and gas generator has been tested in this research. The model has been prototyped on real market and solar data, the results demonstrate the benefits of implementation. While the paper is focused on links with gas generators, the developed financial setup is applicable to a broad range of fast-ramping power generators, such as hydro, including pumped-hydro storage as well as electrical batteries and biofuels. © 2013 Elsevier Ltd.
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