The National Electricity Market (NEM) is becoming more volatile as coal generation retires and renewable output grows. Falling dispatchable capacity leaves the system susceptible to sudden, sustained price spikes, particularly during periods of high demand or low renewable output.

Cap contracts let flexible generators turn this uncertainty into a steady revenue stream by selling protection against extreme prices. Sellers receive an upfront premium to cover spot prices above $300/MWh, effectively monetising this volatility.

Batteries are uniquely suited to provide this protection. Their rapid response and flexible dispatch allow them to capture high prices while limiting liability, boosting merchant revenues and smoothing quarterly cash flows.

This report explains how cap contracts work, why batteries are well-positioned to defend them, and what historical market data reveals about the opportunity and the risks ahead.

Executive summary:

• Cap contracts limit the buyer’s exposure to energy prices above $300/MWh. The seller receives an upfront premium and, in return, covers costs when prices exceed this threshold.
• Batteries are the ideal technology for defending cap contracts. Their fast ramp rates and instant response to price spikes give them the edge over traditional gas and hydro sellers.
• Shorter-duration batteries have historically struggled to defend cap contracts. Their limited energy capacity means that they can defend 20-40% of their nameplate capacity.
• Selling cap contracts could have increased merchant revenues by $8.1k-$27.9k/MW each quarter. Queensland shows the largest potential gain from selling caps, with cap revenues equal to 45-50% of their merchant earnings.

Cap contracts limit exposure to extreme energy prices for buyers

A cap contract is a financial derivative that is traded on both the Australian Securities Exchange (ASX) as well as over-the-counter. Each contract is typically traded as for a single quarter. These contracts protect the buyer from extreme wholesale prices by capping their exposure at the strike price The seller of the contract, usually a dispatchable generator or storage asset, pays the buyer the difference between the spot and the strike price when the price exceeds the threshold. In return, the seller receives an upfront premium for every MWh in that quarter.