Revenue Generation
Revenue Generation
Model
Revenue is generated from four well diversified and reliable sources:
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Power Purchase Agreement (PPA) - generating trading revenue via PPA with Statkraft from arbitrage opportunity in electricity price volatility vs input costs.
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Embedded Benefits - payments based on electricity generated (irrespective of electricity price) being delivered straight into national grid distribution system.
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Capacity Market (CM) - guaranteed minimum payments from government to provide capability (capacity payment) up to 15 years.
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Balancing Mechanism (BM) - additional income earned to balance the national grid when there are deficits between supply and demand.
Power Purchase Agreement (PPA)
The revenue generation model begins with natural gas supplied via a fixed connection from the GB national gas grid. This gas fuels reciprocating engines, which efficiently generate electricity. The electricity produced is then exported through a dedicated connection to the GB national electricity grid.
This seamless process allows for reliable electricity generation and distribution. Revenue is generated through a long-term Power Purchase Agreement (PPA) with an offtake partner, who trades and purchases the electricity from MED, ensuring a steady income stream while contributing to the national energy supply.
Input: Natural gas piped to site via fixed gas connection from the GB national (gas) grid
Process: Electricity generation: Gas fuels reciprocating engines, which generate electricity
Output: Electricity export: Electricity exported via fixed electricity connection to the GB national (electricity) grid
Revenue Generation: Offtake partner trades and purchases electricity from MED under a long-term PPA agreement
Embedded Benefits
Embedded Benefits in the UK are payments or cost savings available to smaller electricity generators, typically those connected to the distribution network rather than the national transmission system. Gas-peaking plants connected at the distribution level often qualify for these benefits, including Generation Distribution Use of System (GDUoS) charges.
Revenue Generation through Embedded Benefits:
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Avoided Transmission Charges: Embedded generators avoid paying Transmission Network Use of System (TNUoS) charges, which are significant costs for larger, transmission-connected plants. This results in reduced operational costs.
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Triad Avoidance Payments: Gas-peaking plants can earn revenue by generating during the three winter "Triad" periods of highest national demand. This helps reduce strain on the transmission system and provides financial incentives.
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Generation Distribution Use of System (GDUoS) Payments: Some embedded generators may receive GDUoS credits for helping to reduce demand on the distribution network. These payments compensate them for supporting local network efficiency by reducing the need for power to flow from the national transmission system.
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Reduced Balancing Services Use of System (BSUoS) Charges: Embedded generators may face lower or no BSUoS charges, which are applied to cover the cost of balancing the electricity system.
Embedded Benefits, including GDUoS payments, provide financial advantages to gas-peaking plants, enhancing their economic viability and incentivising local, flexible energy production. However, recent regulatory changes have sought to reform these benefits, aiming to align incentives more closely with system-wide cost efficiency.
Capacity Market (CM)
The Capacity Market (CM) in the UK is a mechanism designed to ensure a reliable electricity supply by providing payments to energy providers in return for guaranteed availability during times of system stress. Gas-peaking plants often participate in this market due to their ability to deliver quick, flexible generation.
Revenue Generation through the Capacity Market:
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Capacity Agreements: Gas-peaking plants secure contracts through competitive auctions held by the government. These agreements guarantee a steady revenue stream in exchange for committing to be available to generate electricity when needed.
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Availability Payments: Plants receive regular payments for their capacity, regardless of whether they are called upon to generate, providing financial stability.
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Stress Events: If the grid experiences a capacity shortfall, contracted plants must deliver the agreed output or face penalties, incentivising reliability.
The CM offers a predictable revenue source for gas-peaking plants while supporting grid stability, complementing other market mechanisms like the Balancing Mechanism.
Balancing Mechanism
(BM)
The Balancing Mechanism (BM) in the UK is a key part of the electricity market, operated by the National Grid Electricity System Operator (NESO), to ensure real-time balance between supply and demand. Gas-peaking plants, which can quickly ramp up or down their output, play a significant role in this process.
Revenue Generation through the Balancing Mechanism:
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Bids and Offers: Gas-peaking plants submit bids (to reduce output) or offers (to increase output) into the Balancing Mechanism. The NESO accepts these bids/offers when adjustments are needed to balance the grid.
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Pricing: If a gas plant's offer is accepted, it is paid the agreed price for increasing generation. Similarly, if its bid to reduce generation is accepted, it may receive compensation.
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Market Dynamics: The price paid often reflects the urgent need for balancing services, meaning gas-peaking plants can generate significant revenue during periods of high demand or system stress.
By providing flexible, rapid-response energy generation, gas-peaking plants leverage the BM as a key revenue stream.