Renewable energy generation in Europe has surged over 280% since 2000 and now accounts for more than 50% of the continent’s total power generation. Solar power has seen particularly strong growth in recent years due to significant cost declines. However, the rise of renewables has also led to challenges for the power industry, as the sector’s underlying profitability declines and an increasingly competitive energy landscape emerges.
Apart from hydropower, the operational performance of most renewable power assets is determined by a combination of weather and consumption patterns, meaning they cannot be ‘market optimized’ to generate when prices are high in the way that gas power assets can, for instance. This especially hits solar power plants, as these typically generate power in the middle of the day when, although cooling systems run full throttle during summertime in Europe, demand is not sufficient of offtake generation, which leads to low realized prices. In addition, solar panels do not generate any power at night, when prices often are higher. An increasingly popular solution for asset owners is to pair intermittent renewables with power storage capabilities, such as batteries. However, these only offset the shortcoming in part. As a result, capture rates (the prices attained compared to average market prices over time) for solar power are plummeting along with increased deployment of the technology.
While initially masked by the power price response in the wake of Russia’s invasion of Ukraine and Europe’s ensuing shift away from Russian gas, wholesale power prices across Europe are increasingly under pressure from hybrid renewable projects with close-to-zero marginal costs, which in turn is undercutting the revenue potential of the region’s power market.
Meanwhile, governmental support for renewable energy is also changing. Renewable projects are underwritten through governmental support mechanisms such as contracts for difference (CfDs) and feed-in tariffs, which guarantee predictable revenue streams for renewable energy producers. However, as the cost of renewable energy technologies have decreased, these support schemes may gradually be scaled back.
Compounding this is the evolving nature of the energy landscape which has intensified competition within the sector. Europe’s power sector was previously dominated by dedicated renewable developers and utilities, but is now seeing new entrants such as oil and gas companies, power traders and innovative power demand management players. Similarly, new types of demand is emerging such as data center players requiring consistent, high-volume, 24-hour power supply.
The solution to the current challenges lies in diversification and innovation, driving balanced portfolio generation profiles and enabling market optimization. Beyond building and leveraging the full flexibility of a diversified portfolio of solar, wind, storage, and thermal generation, more customer-centric strategies are emerging. Octopus Energy is a British software and power trading company that works to balance power supply and demand through demand-side smart devices such as electric vehicle (EV) chargers, lighting systems, and heat pumps. Similarly, integrated oil and gas players such as TotalEnergies are using the knowledge attained in business-to-consumer markets through the gasoline and retail end of the business to enter the demand-side power market, mimicking their success in oil and gas.
The integration and interconnection of systems across the entire power market value chain, along with the efficient processing of large datasets and the automation of energy dispatch, are becoming essential for modern energy companies. Software and smart systems will be key to this, emphasizing advanced technical capabilities and data analytics over the traditional supply-to-market business model that utilities have traditionally subscribed to. By embracing these changes, energy companies can better position themselves for success in a rapidly changing power industry.