We have previously identified two ways that crypto miners may assist with existing New Energy generators in the Australian National Electricity Market (NEM). A proof-of-concept project by a joint venture between Blockstream and digital payment company Block Inc now shows that crypto miners can be responsible for New Energy projects being constructed.
From Follower to Leader
The joint venture is building a solar PV facility with a 12MWh Tesla Megapack for a 209 MW crypto mining facility. It is the first demonstration plant that shows that crypto mining facilities can fund the construction of New Energy generation assets.
In this article, we look at the challenges in Power Purchase Agreements and how crypto miners can solve them.
PPA’s in the NEM
One of the most essential parts to a development of a New Energy asset is an offtake agreement, also known as a Power Purchase Agreement (PPA). In the NEM, we differentiate between Off-Market and On-Market PPAs:
- Off-Market PPAs allow for the sale of electricity without any use of the grid. Rather, the electricity is sold by a private generator to a proximate off-taker. Hence, these PPAs are dependent on electricity buyers that have a long-term lease or property rights close to the electricity generator.
- On-Market PPAs regulate the sale of electricity from a generation asset through the grid and usually include the transfer of green products (e.g. Large Generation Certificates).
Off-Market PPAs are less contentious, but more difficult due to the required proximity of the off-taker. Common points of contention in On-Market PPA negotiations for New Energy assets are the risk regarding the connection agreement, economic curtailment or negative pricing.
The contentious question is, should those risks be:
- Solely with the developer? or
- Shared risks, and what are the associated consequences?
First, we should clarify what a connection agreement, economic curtailment or negative pricing are.
A connection agreement is an agreement between an energy generator and AEMO and determines the capacity that a New Energy facility can export to the grid (Connection Agreement).
In the NEM, New Energy projects often face difficulties in obtaining a Connection Agreement that matches the planned capacity. For example, a wind farm project may be for 20MW but the Connection Agreement may only be for 10MW or denied completely by AEMO.
If a Connection Agreement cannot be obtained as planned, developers and PPA off-takers face a significant financial loss and projects often come to a halt.
AEMO may at any time curtail the amount of electricity a project can export to the grid for various reasons (e.g. frequency control, congestion etc). Such curtailments are referred to as economic curtailment (Economic Curtailment).
Unless a project contains a battery, electricity generated during Economic Curtailment is usually lost generation and may prevent the generator to meet its obligations under the PPA.
During trading intervals where the spot price is negative, and the generator must pay for the export of the electricity to the grid is referred to as negative pricing risk (Negative Pricing).
Again, if a project does not have a battery a generator will loose revenue during Negative Pricing intervals.
How can crypto miners help?
In essence, the above risks all concern situations during which electricity is generated but no cash can be obtained it. Crypto miners can turn electricity into immediate cashflow, with the cash price for the generated electricity only being dependent on the price of the digital currency. This price may be volatile, however, not as volatile as the NEM Spot Price.
In conclusion, Crypto mining can generate revenue for the New Energy asset without any dependency on AEMO or the market. This means the New Energy developers can start the construction of a New Energy facility without bearing the traditional risks associated with Negative Pricing, Economic Curtailment or obtaining a Connection Agreement.
Taking it a step further, developers can, to a degree, quantify the market risk by the capital and operational expenditure of the crypto miners.
With their potential to change the responsibility matrix in PPA negotiations and reduce the complexities for both off-takers and PPA providers, crypto miners pioneer an innovative way forward for the future of New Energy.
Navigating through NEM risks
At Hamilton Locke, we help clients navigate through the energy and crypto mining project life cycle – from project development, grid connection, financing and construction, including the buying and selling of development and operating projects.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.