Green energy’s intermittency problem: mitigating power price volatility

As net-zero targets loom, the race to decarbonise is becoming increasingly urgent. While renewable energy is key to achieving this, the intermittency of resources such as wind and solar has left power prices subject to growing volatility. Jean-Louis Malon, Head of EU Power Origination, Natixis CIB, explores how market players can mitigate risk.

To remain stable and avoid disastrous black-outs, the power market requires a real-time balance between supply and demand as electricity cannot be stored massively. In the day-ahead spot market, each hour of the following day is auctioned and settles at a different price. Even a minor shift in production or consumption can lead to considerable price volatility, and ongoing challenges – including geopolitical tensions and regulatory changes – have compounded issues in this regard. Perhaps most significant, however, is the impact of increasing levels of renewable energy on Europe’s energy mix.

Renewable resources, such as wind and solar, are intermittent by nature, meaning they only produce energy at certain times and in specific weather conditions.

Renewable generation is starting to dominate the supply side of the European power market, leading to major weather-driven price swings. This is going to be even amplified as in its commitment to decarbonize the economy, EU members states have decided to nearly triple renewable power generation by 2030. Though developers and producers use various risk-management mechanisms, many remain exposed (at least partially) to spot prices.

A diversified, flexible portfolio can go a long way when it comes to mitigating the impact of price swings. Combining solar and wind assets, for instance, can smooth out production profiles as solar patterns are easier to predict than wind, while wind is not as susceptible to price cannibalisation.

Alongside this, investments aimed at increasing flexibility can help reduce waste and protect pricing during periods of high output. Unsurprisingly, storage solutions, such as batteries and hydro pump storage, present the most efficient options for storing excess power – though technological and geographic – as well as costs – constraints limit scalability.

Meanwhile, power-to-X offers the option to convert renewable energy into a state better suited to longer-term storage such as chemicals, fuels and gasses. Hydrogen, for example, can be extracted from water via electrolysis from surplus electricity and stored in salt caverns.

Investment in large-scale infrastructure can also help to improve existing solutions. Interconnectors, for example, balance supply and demand by leveraging complementary generation mixes between countries via undersea or overhead lines.

As well as optimising output, demand management can play an important role in balancing consumption. For customers that can modulate their consumption, dynamic tariffication helps manage peaks and troughs. Electric vehicles, for instance, can load (and even discharge) into the power grid using this principle. 

While these solutions present their own unique merits, in the near term, the technology and infrastructure required for them to be impactful at scale are not yet mature enough. As such, energy market players must ensure they have a sophisticated risk management approach in place.

When it comes to mitigating risk in the energy market, traditional financial hedging instruments such as fixed for floating baseload swaps hedging offers little benefits – especially when it comes to renewables – given hard to forecast volumes and production profiles, as well as real time fluctuations. As such, finding the right solution can be challenging and often requires specialist financial advisory and expertise.

Partnering with a bank with a dedicated commodities offering can increase the range of options available given the tools and experience they have at their disposal. Acting as an aggregator, these banks can structure hedging solutions that allow their clients to benefit from intraday volatility. In the case of solar producers, for example – who face the highest exposure to intermittency – operators can be integrated or combined with storage solutions in a way that enables them to benefit from intra-day pricing fluctuations. In other words, energy is bought and stored when prices are low and sold when prices rise.  

As the renewables sector continues to grow, market players will require flexible solutions that enable them to mitigate the risk of fluctuating supply and demand and, in turn, pricing volatility. A diversified, flexible portfolio is paramount, but technology and infrastructure are not yet able to offer solutions at scale. As such, partnering with a bank with a strong understanding of the market is key to hedging pricing volatility and minimising associated risks.