Cap Contracts

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For more information about how caps can be beneficial to BESS owners, check out our explainer here:https://modoenergy.com/research/

What are Caps?

A cap is a derivative that protects buyers from volatility in the wholesale energy market by limiting the price they are exposed to at a defined strike price (usually $300/MWh). Since this clips off the top of the prices during peak periods, batteries are great sellers of the product, as they are typically discharging during this period they can "defend" the contract quite well.

The cap module models how batteries can monetise cap contracts alongside energy arbitrage. It calculates how many MW of caps a battery can "defend" at a given confidence level, based on its dispatch behaviour. The battery earns upfront premium income but must pay out during high-price events.

How do we model it?

The model performs a bootstrap analysis on dispatch results to determine defendable cap volumes:

Capture Rate Analysis: For each day, calculate what percentage of potential cap revenue the battery actually captured while discharging.
Bootstrap Sampling: Randomly sample 7-day windows to create a distribution of capture rates.
Defendable MW: Extract the defined confidence percentile from the distribution, i.e 90th percentile would require defendability in 90% of samples.
Premium Pricing: Calculate base premium from average payouts, then apply regional ASX market uplift.

What is the regional ASX market uplift?

Cap contracts have historically sold at a greater price than their end of quarter settle. This is due to an implicit "risk premium" that is placed on products that protect the downside exposure for energy buyers (and limit upside for energy sellers). We've estimated what this uplift is by calculating the difference between the settle prices of cap contracts on the ASX the day before a quarter starts and the last day of the quarter. This is then aggregated by state so each region gets its own unique cap price.

What are my resulting revenues?

After volumes and premiums are determined, the revenues can be calculated with the actual dispatch volumes and prices of the model. Every interval, the battery receives a payment equal to the Cap MW multiplied by the Cap premium and if the spot price is greater than the strike price then it will pay out equal to the spot price less the strike price multiplied by the Cap MW.

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For each trading interval, the net cap revenue is calculated as:
Net Cap Revenue = Premium Income - Payout
Where:

Premium Income = Cap MW × Cap Premium ($/MWh)

Payout = max(0, Spot Price - Strike Price) × Cap MW