Renewable Energy Pricing: What Every Investor Needs to Know
There's no doubt the growing importance of renewable energy in the face of impending carbon reduction targets, regulatory developments and technological advancements. However, investing in renewable energy may not just contribute positively to the environment; it may also positively influence your business.
Understanding energy pricing is crucial for investors to foresee potential pitfalls and benefits of investing in green energy. It's important that all potential investors seek advice from a financial advisor to ensure the pricing and volatility of the renewable energy market is one that will be profitable for your business.
Factors Influencing Renewable Energy Pricing
The renewable energy market can be volatile to enter due to the range of elements that can affect both the production of renewable energy and, in turn, its pricing.
Supply and Demand Trends
Creating renewable energy networks requires significant investment, and not all countries have the finances, infrastructure or resources to create them. This means they may rely on other countries to fulfil their energy needs, including the procurement of fossil fuel-led energy. When a country providing energy to another becomes politically unstable, sometimes due to geopolitical effects, they can manipulate the supply of energy, meaning the demand for energy is higher than the supply of energy, causing energy price spikes or crises'.
Regulatory and Policy Impacts
Government regulations and policies can positively or negatively impact renewable energy rollout, though the common attitude from government policy is to support the development of renewable power. This is partly because of global regulations set out in directives like the European Energy Directive, which lays out guidelines for member countries to reduce their carbon emissions. The policies that are developed to support these directives by member countries can include pro-renewable energy schemes such as energy tariffs or subsidies and grants to develop or install renewable energy technologies.
Renewable Energy Cost Breakdown: Solar vs. Wind
Solar energy prices
Solar panels harness the sun's power to generate solar energy, so it's understandable that the sun can impact energy production. We examine the key factors affecting solar panels and how future developments may mitigate some of the negative factors.
The effect of temperature on energy prices
Currently, solar panels are only manufactured to withstand heat from the sun at less than 23 degrees, which means extreme weather events such as heat waves can negatively affect solar production. Extreme heat can prevent the transmission of energy. To mitigate these effects, future solar panels will have to be manufactured with a higher tolerability of heat.
The effect of cloudiness on energy prices
Solar energy relies on clear skies and sunlight to generate electricity, it needs 400-800 nanometre wavelengths to be productive, and anything that might potentially block that light source may have an effect on production. This can include man-made clouds such as pollution or aerosols, as well as natural clouds. In the future, these contributing factors may negatively affect solar power further, as summers become cooler and rainier and winters become warmer and rainier, potentially increasing the cost of solar energy as demand outstrips supply.
Wind energy pricing - regional differences
By contrast, wind technology harnesses the power of the wind, but these systems are at just as much risk from solar energy, which affects the pricing of wind energy.
Stormy regions: impact on energy prices
High storms can affect the pricing of wind energy because they can increase the amount of energy produced in a windier region, driving down the cost of renewable energy in that area as supply outstrips demand. This could result in 'flooding' the grid with excess power, meaning future grids need to become smarter and more resilient to wind droughts and energy floods.
Regions lacking in wind: impact on energy prices
When a large scale case of high pressure occurs, what's known as a wind drought can occur. This is due to lack of wind, which can impact the amount of energy a wind farm in this region that produce, potentially driving up the price of wind energy in this region as demand outstrips supply.
Regions in the path of the Jet Stream: impact on energy prices
If you've flown on a commercial airliner, the likelihood is you've experienced the effect of the Jet Stream on flight travel. Jet Streams can also affect wind energy creation, as it can create wind droughts in the summer seasons.
Investment risks and opportunities in renewable energy pricing
Energy price volatility
A volatile market generally, renewable energy can often be affected by volatile pricing. This is because a number of factors affect the price of renewable energy that traditional fuels, such as fossil fuels, do not, particularly elements that are out of human control. A major factor is the weather: as the majority of renewable energy is produced by the weather, extreme weather events can impact the amount of renewable energy created, both positively and negatively.
Renewable energy contracts: Long-term Power Purchase Agreements (PPAs) and stability
A PPA tends to feature a contract clause that fixes electricity for a certain amount of time, for example, a 10-year period, to appeal to energy procurers who want to set their energy prices at a fixed level for a certain time period. This can help with business operations such as budgeting, financial security and production scheduling. PPAs also offer renewable energy providers stability: they receive guaranteed investment in their projects for a set period.
Emerging trends in green energy investments
One of the key developments set to affect renewable energy pricing is energy storage. We take a look at two factors in this growing area of renewable energy:
Energy storage
Battery storage is one of the more common methods of renewable energy storage due to its flexibility to store and retain energy generated via renewable methods. This energy can then be used at a later date, stabilising renewable energy output and potentially stabilising pricing. Battery storage mitigates the volatility of renewable energy, delivering energy even during downtime or energy droughts.
Grid-scale storage
Rolling out this energy storage model on a larger basis is grid-scale storage, which will help to secure grid stability in a renewables-first market. Grid-scale battery storage reached 28GW by the end of 2022, a sizeable increase of 75% in installations since 2021. This added a huge 11GW to the grid.
Navigating the renewable energy market requires a deep understanding of pricing volatility, regulatory influences, and emerging technologies like energy storage. While the sector offers substantial opportunities for long-term investment, it also presents unique challenges that investors must carefully consider. By staying informed about market trends and seeking expert advice, businesses can successfully align their green energy investments with both financial returns and sustainability goals.
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Written by:
Montel Team
