Electricity Retailer Hedging Using Fungible Financial Renewable Energy Contracts

ABSTRACT

In energy‐only electricity markets, such as the Australian National Electricity Market (NEM), all electricity is bought and sold within the spot market and energy retailers hedge their load using financial contracts. These interrelated markets are key aspects of the NEM design. As governments increasingly decarbonise electricity grids through direct underwriting of variable renewable energy (VRE), they are also replacing the types of contracts available for retail hedging. A recent review of the NEM proposed a series of alternative contracts to both finance new VRE and hedge electricity retailer load. This article models the ability of a suite of different ‘firmed renewables’ derivative contract types to hedge electricity retail load and compares their performance to traditional financial futures and caps contracts currently available to retailers in the NEM under a specific modelled scenario. The results suggest that the contracts proposed by the NEM Review can replicate the proposed benchmark in their ability to hedge retail load.