Flattening the curve: the need to eradicate energy supply volatility  

• a month ago (2024-03-17)
• Junior Isles

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Daniel Cross , Sr. Director of Load Forecasting, POWWR

The move to a renewable future has begun. Almost eight-in-ten (79%) business leaders say they have either already entered into renewable energy power purchase agreements, or plan to do so within the next two years. This is to be applauded. However, it presents issues for the energy industry due to the additional risks involved in supplying renewable energy. The move has made it difficult for suppliers to keep costs down and revenues up. Yet, somewhat unsurprisingly, cost remains front of mind for most business leaders (74%) when they are making decisions about their energy supplier, so the well isn’t infinite.

Unfortunately, energy costs are more volatile today than ever before. Much of this has been caused by the unpredictability of supply – whether due to geopolitical instability or climate patterns. But the move to renewables has only exacerbated the issue.

This volatility is something the industry has had to take seriously. After all, the main goal of an energy supplier is to supply energy to end users while maintaining margins. Margins can be squeezed by unpredictability in real-time prices, improper pricing, and incorrectly accounting for attrition as well as other causes. Margins can also be squeezed from the retail energy provider (REP) overpaying for the energy in the first place.

Increased volatility

What a REP pays for energy varies massively, and much more so than ever before. Energy demand has always been linked to weather patterns. After all, air conditioning units work harder when it is hot, and gas heaters work harder when it is cold. However, as we move towards an era when renewable energy makes up a far higher proportion of the energy capacity mix, climactic variables are also heavily impacting that ability to produce that energy in the first place.

In particular, solar and wind power generation are extremely volatile. Solar farms only work optimally when the sun is out, and wind farms can – in addition to being unreliable in a light breeze – freeze in wintertime.

Of course, a REP is fiscally required to pay for the energy that their customers are using. This has made it imperative that they price their contracts correctly to cover all eventualities, while ensuring they remain competitive. This is easier said than done. Prices of wholesale energy change rapidly and are difficult to predict. Plus, they are more volatile than ever before. We used to see an extreme pricing event only every few years, now we see them almost seasonally.

Mitigating the risk

Energy cost and supply volatility presents REPs with serious financial and operational challenges. Because of this, REPs are looking to proactively control energy sourcing and consumption through a diverse set of strategies. If a REP is incorrectly hedged or priced for any length of time during a price event, the ramifications could be catastrophic. They, therefore, need to flatten the curve.

Luckily, help is at hand. Buoyed by recent advances in artificial intelligence (AI) and machine learning, technology can be used to forecast load (analyse how much energy customers will require) and load generation (analyse how much energy will be produced at a premise) to a greater degree of accuracy.

Accurate forecasts can come from a mixture of historic and live data points within the supply chain through the likes of Internet of Things (IoT) sensors. Once AI and machine learning is used to unlock this data, REPs become empowered to know what energy they need to purchase or push onto the grid, and when. This enables them to hedge more effectively and mitigate the risk of falling foul of a future extreme price event.

Keeping the lights on

The energy industry is at a critical point. Attitudes toward energy are changing. With over one-third of the world’s largest public companies making net zero commitments and much of the private sector following suit, new products and services are required for REPs to maintain their market share. Almost three-in-five businesses (59%) say they have either already engaged in the process of securing flexible green energy tariffs or plan to do so within the next two years.

It is, therefore, imperative that REPs provide the market with what they want. To do so effectively, though, they need to flatten their risk curve by better utilising AI and other technology to obtain accurate forecasts and pricing. Only then can they offer the market reliable, renewable energy that keeps the lights on whatever the circumstances.

As the world moves more towards a more renewable future, it will only increase the volatility of supply more. Persuading customers to use more energy during off peak hours will only go so far. To be profitable, REPs will need to develop a holistic strategy for the future that centres around using the latest digital technology to optimise the operating model, so that they can pivot towards new product and service delivery capabilities.