Green growing pains: What happens when renewables 'grow up'?

The renewables sector is maturing. To succeed in a completely transformed renewable energy market, a transformation of the business model, corporate culture, organisational structure, and technological landscape of independent power producers (IPPs) is required. Jan-Phillip Kock of renewables investment company Encavis outlines why.

It could all be so simple - or rather, it used to be simple.

For many years, investing in and operating renewable energy generation facilities, particularly in onshore wind and photovoltaic sectors, was a straightforward business model.

While not without risks, these risks were manageable and well-known: prices were guaranteed — typically through government feed-in tariffs — output could be reliably estimated using statistical models, costs were predictable, and financing was easily accessible and affordable.

Although renewable energy facilities generated electricity just like coal or gas power plants, the renewables market was, in a way, a parallel world.

It was characterised by small-to-medium-sized project developers and a wide range of investors, from individuals to institutional investors and independent power producers, resulting in an ownership landscape as fragmented as the renewable energy facilities.

The renewables market seemed to operate independently of business laws, and economies of scale were not a significant success factor in a market defined by defined and manageable risks.

The success of renewable energy, for example in terms of the ability to competitively generate green electricity, has led to the dissolution of the ‘renewable parallel world’, with renewables becoming an integral part of the energy market.

Subsidies in the form of traditional feed-in tariffs are no longer necessary, as the levelized cost of energy for onshore wind and PV is now significantly lower than that of fossil fuels or nuclear energy.

This success, akin to growing up, brings new challenges that do not have simple solutions.

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Increasing volatility

The high penetration of renewable energy, and thus the dependence on intermittent generation, leads to increasing volatility in electricity markets and immense strain on grid infrastructure.

Investments in grid expansion must rapidly increase, as we are far from reaching the limit, and the costs of managing short-term market disturbances are also rising sharply.

Achieving ambitious international and European climate goals require a significant acceleration in the expansion of renewable energy.

Currently, concerns from local residents (the ‘NIMBY’ phenomenon) and environmental organisations often impede or delay RE projects, increasing costs and slowing down development and commissioning. Many national lawmakers in Europe have taken action in recent years to shorten development cycles.

However, these concerns cannot be simply eliminated from above. The industry must find solutions to better involve citizens in the development and operation of renewable energy facilities and make the facilities more environmentally friendly.

Upcoming challenges

For every complex problem, there is an answer that is clear, simple, and wrong… more or less. Let me explain.

In light of changes such as the elimination of subsidies, cost and margin pressures, competition for the best sites and permits, the environment for renewable facility operators has also undergone significant transformations.

For several years, the industry has been witnessing signs of industrialisation. Project developers and operators of renewable energy facilities are professionalising and employing traditional business tools to survive in this environment: reducing ongoing costs through contract bundling, lowering maintenance costs by standardising technology, centralising system landscapes, optimising existing contracts, such as financing arrangements.

When these measures are not sufficient — and they rarely are — operators consider expanding their value chain, such as covering not only commercial, but also technical, operations and maintenance in-house.

In project development and construction, operators also try to internalise more value.

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None of these measures are wrong — they are all necessary. However, they are far from sufficient to overcome the upcoming challenges.

To succeed in a completely transformed renewable energy market, where the 74 generation and marketing of electricity from renewable facilities are subject to the same laws as conventional power, combined with the unique challenges of these facilities, a complete transformation of the business model, corporate culture, organisational structure, and technological landscape of IPPs is required.

IPPs must recognise that their responsibility for their ‘product’ (energy) does not end at the point of injection but extends to ensuring that the produced energy is compatible with the entire infrastructure and power grid.

Baseload capability and grid compatibility must be the goals that renewable facility operators strive for.

As part of this transformation, IPPs must acquire new hard skills, including energy management, power trading and portfolio optimisation.

These skills must be combined with new tools such as simulation applications, increased use of external data, such as electricity prices, power purchase agreements and weather data, as well as risk measurement and assessment instruments.

To develop these tools and skills and maximise their potential, an organisational structure is required that breaks down existing silos and integrates essential areas such as operations, financing, energy trading, risk management and IT.

IPPs must move away from optimising individual power plants and recognise the interdependencies between all existing and future facilities.

However, this transformation must begin with a cultural shift, where all employees learn to work in new structures and with new instruments.

At the same time, everyone in the organisation must accept that decisions will be made with greater uncertainty than in the past.

This does not mean that risks should be blindly taken: on the contrary, we need a better understanding of risks, precisely because the risks in comparison to the ‘old world’ are larger, more abstract and more complex.

All of this can only be achieved on a solid foundation of digitalisation, where all the necessary data is collected, processed and available for analysis.

In the new world where optimisation and investment decisions no longer occur at the individual asset level, dependencies and influences within the portfolio must be made transparent.

The central challenge for an IPP is to shape and steer this transformation to their own advantage in line with the energy transition, which also requires entirely new skills from senior management.

The journey continues

This fundamental transformation is necessary for renewable energy facility operators to survive in a changing energy market and continue working towards achieving the Paris Climate Agreement goals.

Renewables will no longer just be an integral part of the energy market — they will be the energy market.

Renewables will be at the centre, and other technologies must be used in a supportive manner to ensure the overall system functions.

Environmental disasters, extreme climate events, and most notably, Russia’s attack on Ukraine and the resulting political situation, will and must further accelerate the expansion of low-carbon energy generation.

The intermittent availability of sun and wind must not be an obstacle to uninterrupted power supply. New technologies such as green hydrogen or power-to-X, battery storage and intelligent plant controls will ensure the physical functionality of the system.

This way, facility operators can leverage market volatility for thriving business models without jeopardising energy security.

ABOUT THE AUTHOR

Jan-Phillip Kock is an Investment Strategy Manager for Encavis in the Netherlands, an independent power producer.

Jan-Phillip Kock will be speaking at Enlit Europe in Paris in the 'Powering Independence: The Crucial Role of Batteries for Driving Encavis’ Corporate Development' session in the Hydrogen & Storage Hub on 29 November 2023.