What’s different about Hachiko?
OK, so you’ve read our blog about why optimisation is important. You’ve looked at the market, and you see a couple of others talking about their optimisation products too. Why is Hachiko different, aside from having a team that could blow anyone else’s out of the water (metaphorically obv)?
Background
Project developers build and operate distributed battery projects, often co-located with solar PV, and sometimes co-located with load. These batteries supply energy (which is a merchant-traded commodity) to the market (and to the site load, if applicable), and are also a useful source of capacity for grid contingencies. For any pedants reading, I’ve paraphrased here for simplicity. If you take issue with my paraphrasing, please tell me via the comments so we can feed the algo.
Traders value energy and capacity very highly. They can monetise these in a number of different ways. Energy can be monetised in the merchant/spot market (i.e. right now), but also via derivatives products (traded on the stock exchange). Capacity can be monetised across a number of different markets via services procured by System and Network Operators.
These traders sometimes work within a project developer’s business (usually the case for vertically-integrated utilities, less common for a specialist developer), but more often work in separate businesses (vertically-integrated utility without development capability, or a retailer without a generation portfolio).
The energy supplied on site can concurrently reduce demand charges (if applicable), which represent a source of high cost to the site owner. Reduction of this cost can therefore create significant value for the site owner, and this value is often shared by the site owner with the developer, who normally takes the capital risk on the battery project.
To add more detail on the value of capacity, to draw on one of the market’s biggest buzz-phrases from the last few years, batteries can also deliver frequency response (referred to in the NEM as Frequency Control Ancillary Services or FCAS). FCAS is broken down into two major categories (Regulation and Contingency) but I won’t go into detail on those right now. A future blog will cover this topic with my usual hot takes.
“What’s important for you to know for the time being is that Regulation FCAS is much more involved than Contingency FCAS, and that most Distributed Energy Resources (DERs) participate in Contingency FCAS only.”
The beautiful thing about the 8 Contingency FCAS markets is that you can often bid into several of them whilst doing other things, because the market rewards you for your potential to deliver FCAS, rather than your actual ongoing delivery of it. If a contingency event occurs and your bid for those markets has cleared, then you must deliver FCAS. However, contingency events are relatively infrequent, which means that you often find yourself making money in multiple markets at the same time.
The existence of multiple sources of concurrently ‘monetise-able’ value from a single battery has given rise to the term ‘value stack’. Development of a well-specified and effective multi-market optimisation product enables the user of said product to access the value stack. Building a portfolio of batteries enables the user to increase the scale of that value, and a well-managed portfolio can, in fact, access more value than a disparate set of the same number of sites (for reasons I won’t go into here).
However, there are a couple of barriers in the way of making this happen.
The barriers
Project developers
Developers are really good at finding good sites, then building and operating good projects, but they are not as good at trading the output. The market is complex and has changed a lot over the last few years. Project developers have been caught up with origination, construction, and staying across the changes in battery technology. They’re now trying to find ways to scale their portfolios using effective trading, but the types of trading contracts they’re being given are either:
Tolling/other lease-type agreements - not universally valuable enough to warrant the effort of development and construction. The developer’s counterparty takes on the responsibility for controlling the asset fully, in exchange for a fixed annual payment to the developer. This sometimes yields enough to justify the developer’s investment, but not always.
Direct merchant agreements - these are based on 100% exposure to the merchant market. Their counterparties often want an ongoing share of all revenues. There is no revenue certainty in these agreements, which means they cannot be used to fund project development/construction. For a developer to execute this strategy themselves, they need good and cost-effective optimisation software.
Pay-as-produced Power Purchase Agreements (PPAs) - 'Generate electricity whenever you can and I’ll pay you a fixed price for it whenever you do'. Incredibly rare nowadays, especially in Australia, because of the prevalence of negative pricing. Where available, they are typically nowhere near valuable enough to justify the developer’s investment.
Baseload/shaped PPAs - These are gaining traction now and are generally considered to be the most valuable source of revenue certainty available to developers today. Their characteristics warrant a separate post. The key takeaway here is that these are incredibly difficult to deliver against for developers because of the multiple technical challenges presented by such structures.
These contracts relate to the energy market, which is much deeper and richer in value than the FCAS markets, which are by comparison quite shallow. Despite delivering some days of very high value during major market events (e.g. when interconnectors trip), FCAS is seen more as a nice-to-have than something on which you can bank for big project returns.
“If someone tells you that FCAS is the real gold mine in battery project returns, be wary.”
Traders
Traders are very good at structuring complex products (PPAs), trading in the derivatives and merchant markets, and earning their keep when major market events happen. However, they are not good at building projects. The best traders focus on trading, and originating opportunities to secure PPAs which enable them to hedge their market positions. However, they do not have good tools to enable them to do this with distributed portfolios. Distributed portfolios are growing in popularity now because batteries <5MW are much quicker to build.
Developers who are good at building portfolios quickly cannot meet traders where they need to, though. The reasons for this are outlined in the Project Developers section above.
The solution
The ability to incorporate complex shaped products into optimisation in a scalable and configurable way is of high importance to developers, traders, project investors, and by extension the transition to renewables.
Hachiko’s product solves this problem for all these stakeholders, enabling them to both grow their respective businesses by delivering to them scalable, configurable, and highly effective multi-market optimisation and portfolio management software. In so doing, we also create a buoyant market for the many project investors who are very keen to deploy capital into these projects.
As you can read further here, we’re doing what we do in this way because we want our customers’ businesses to grow, which in turn enables our growth.
Wins all round!