A little respect (just a little bit): FCAS costs hit solar hardest

Wholesale energy prices may have hit some of their lowest prices in years, but the total cost of Frequency Control Ancillary Services (FCAS) skyrocketed in Q1 resulting from the South Australian Islanding event. The islanding event threw back into the spotlight the importance of understanding the costs associated with FCAS causer pays. This Chart of the Week takes a look at how causer pays factors have changed for technologies over the past couple of years.

The SA islanding event saw the emergence of new market behaviours whereby some generators reduced their output to zero to avoid the risk of being hit with significant costs resulting from ‘causer pays’. (Quick recap – A causer pays factor is based on how much a generator deviates from their linear ramp rate to meet their next dispatch targets for each dispatch period). While renewable energy generators have historically turned off to avoid negative pricing, a new operational consideration for renewables is the liability that high regulation FCAS prices pose to the profitability of current and future renewable energy projects.

As prices have been driven down, potential power purchase tenures have shortened and loss factors have fluctuated, developers and investors are keenly aware of any additional risk to project costs. FCAS liabilities are now firmly on the due diligence agenda as new projects look to forecast the future cost of regulation causer pays.

Solar farms have been significantly affected and are responsible for paying somewhere between 10%-20% of total regulation FCAS costs in any given month (See Figure 1). This is disproportionate to solar’s energy generation in the NEM, which in FY20, was only ~3%. Wind is far more proportionate with cumulative FCAS causer pays factors accounting for ~10% of FCAS regulation costs, while wind provided ~9% of total generation for the NEM in FY20.

Since 2018 regulation FCAS costs have fluctuated between $10-$40mn a quarter. Q2 2020 was a relatively small quarter by recent comparisons at $15mn (the last three quarters before that were more than $35mn a quarter). If we assumed $15mn a quarter for regulation FCAS costs, for which solar was responsible for 15% of these, and that current solar installed capacity is ~3.8GW, then FCAS causer pays costs solar farm owners, conservatively, around $2,368/MW/yr, which is about ~$1.55/MWh (in 2019 this would have been closer to $5.5/MWh). It should be noted that not all regions are created equal. Solar farms in QLD in CY20 on average have higher causer pays factors comparatively to the other states. Also, Black Coal in NSW has causer pays factors that are more than double those of its QLD counterparts.

Having an understanding of the future trajectory of FCAS costs is not only key for battery storage revenues but is now more important than ever for identifying and quantifying the future profitability risks for renewable energy projects.

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