Transformation of global power markets led by renewables

wind turbine sunflowers

In 2015, renewables surpassed coal to become the largest cumulative share of global power capacity, and this impressive growth will continue over the next five years. Despite lower fossil fuel prices, renewable power expanded at its fastest-ever rate in 2015. Enhanced policy support in key markets, technology improvements and sharp cost reductions all contributed to renewables now accounting for more than half of the world’s additional electricity capacity. Yet, wind and solar energy producers and distributors face unique challenges in both volumetric and price risks. The remarkable progress being made in renewables requires innovative risk mitigation solutions in order to ensure that the pace of investments continues.

The International Energy Agency (IEA) announced this week that renewables have now surpassed coal as the largest source of installed power capacity in the world. Renewable energy now represents more than half the new power capacity around the world, reaching a record 153 gigawatts (GW), 15% more than the previous year. Record additions in both onshore wind and solar photovoltaics (PV), include approximately a half million solar panels being installed every day around the world last year, and in China, two wind turbines installed every hour in 2015. Contributing to the growth of renewables has been the sharp decline in costs. Average global generation costs for new onshore wind farms fell by an estimated 30 percent in the last five years, and costs for large solar panel plants fell by two-thirds.

At the same time, the IEA raised its five-year renewable growth forecast by 13% more between 2015 and 2021 than it did in last year’s forecast. It now foresees that global renewable electricity capacity is expected to grow by 42% (or 825 GW) by 2021. This is attributed to the stronger policy backing for renewables in the United States, China, India and Mexico. Countries are seeking to mitigate climate change, but also to cut air pollution and diversify energy supplies in order to improve energy security. It is expected that generation costs will continue to drop for both solar PV and onshore wind as a result of policy changes (by 15 per cent on average for wind and a 25 percent for solar power), improved market conditions, and improvements in technology.

Having said this, coal still generates more electricity than wind and solar installations and remains the largest source of electricity generation around the world. This distinction is important; wind or solar farms cannot generate constantly like a coal power plant, and will produce less energy over the course of a year even though they may have a higher level of capacity. For this reason, the growth of renewables is heavily dependent on government support, including giving renewable energy provider long-term power purchase agreements (PPAs). These agreements are a critical part of planning a successful wind project because they secure a long-term stream of revenue for the project through the sale of the electricity generated by the project.

The private sector is also instrumental in supporting the development of renewables. Like any other commodity, when there is a surplus of wind production, the price of electricity plummets, and when there is low wind production, electricity prices soar. For instance, in Spain a 15% wind capacity factor is correlated with the monthly electricity price reaching over 50 EUR/MWh, and a 35% monthly wind capacity factor seeing prices fall to under 40 EUR/MWh. Moreover, the wind load factor can fluctuate greatly in a country by the time of year. For instance, in Belgium, onshore wind load factor increases by approximately 10 percent during the winter.

Price fluctuations like this can spell disaster for an energy producer. The market requires the guarantee of a steady price from wind farm energy producers. For this reason, risk management solution providers such as Meteo Protect, who can structure index-based hedging solutions for renewable energy producers and distributors, are invaluable. They allow renewable energy producers to lock-in prices up to 10 years in advance thanks to multi-year covers.

Meteo Protect currently works with four of the ten largest energy companies worldwide in helping them to reduce or even eliminate their exposure to volumetric and price risks. Almost any level of protection can be provided, and under some conditions, there is the possibility to have a monthly or quarterly settlement. In this way, Meteo Protect is playing a vital role in supporting the development of the renewable energy market and playing a key role in international efforts to combat climate change.