4. Limitations on Ability of Lines Companies to Sell Generated Output
It has been argued that lines companies are constrained by the current legislative provisions from investing in generation because there are limitations on their ability to retail the output of their generation.
While there are no legal restrictions on lines companies retailing the output of their generation to anyone, by whatever contractual arrangements they wish (subject to only selling their own output), lines companies are not permitted to trade in electricity generally or to buy and sell hedges.
The practical effect of this is that lines businesses are limited to selling their output either on the spot market, or to other parties able to manage variations in output from lines companies' generation plant. In practice, such parties are likely to be restricted to retailers (who are also generators) and major users.
This presents lines companies with several difficulties:
- Selling on the spot market results in volatile and unpredictable revenue streams, making a project difficult to finance;
- Selling to other retailers may not be an attractive business proposition because these retailers are also likely to be major generators, and are therefore lines companies' competitors in generation;
- Selling to major users is only feasible where there is a direct physical connection.
Retailing to other types of consumers, although permitted by the legislation, may not be feasible due to lines companies' inability to meet standard customer requirements.
In general, customers require:
- Fixed prices; and
- Ability to draw variable quantities of electricity.
However, because lines companies are not permitted to trade in electricity and may only sell their own output (which is lumpy, especially from renewables plant), lines companies/generators are not in the position to guarantee customers either fixed price or variable quantities on demand.
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