The growth of renewable energy is creating challenges for traditional energy companies

Renewable energy production in Europe has increased by more than 280% since 2000 and now accounts for more than 50% of the continent’s total energy production. Solar energy has seen particularly strong growth in recent years due to significant cost reductions. However, the growth of renewable energy has also led to challenges for the energy industry, as the sector’s underlying profitability declines and the energy landscape becomes increasingly competitive.

Apart from hydropower, the operating efficiency of most renewable energy assets is determined by a combination of weather and consumption patterns, meaning they cannot be ‘market-optimised’ to generate when prices are high, in the way that, for example, gas-fired assets can. This is particularly true for solar plants, as they typically generate power in the middle of the day when, although cooling systems are running at full capacity during the European summer, there is not enough demand to generate the energy taken in, leading to low realised prices. Furthermore, solar panels do not generate any power at night, when prices are often higher. An increasingly popular solution for asset owners is to combine intermittent renewables with storage options such as batteries. However, this only partially compensates for the shortcomings. As a result, capture rates (achieved prices compared to average market prices over time) for solar have fallen rapidly as the technology is deployed.

While initially masked by the energy price reaction following the Russian invasion of Ukraine and Europe’s subsequent shift away from Russian gas, wholesale energy prices in Europe are increasingly under pressure from near-zero marginal cost hybrid renewable energy projects, which in turn is undermining the revenue potential of the energy market in the region.

Meanwhile, government support for renewable energy is also changing. Renewable projects are backed by government support mechanisms such as Contracts for Difference (CfDs) and Feed-in Tariffs, which provide predictable revenue streams for renewable energy producers. However, as the cost of renewable energy technologies falls, these support schemes could be phased out.

Added to this is the evolving nature of the energy landscape, which has intensified competition in the sector. Europe’s energy sector was previously dominated by specialist renewable developers and utilities, but now new players are emerging, such as oil and gas companies, electricity traders and innovative players managing energy demand. Similarly, new types of demand are emerging, such as data centre players requiring constant, high-volume power around the clock.

The solution to today’s challenges lies in diversification and innovation, driving balanced portfolio generation profiles and enabling market optimisation. In addition to building and leveraging the full flexibility of a diverse portfolio of solar, wind, storage and thermal energy, more customer-centric strategies are emerging. Octopus Energy is a UK-based energy software and trading company that works to balance energy supply and demand with intelligent demand-side devices such as electric vehicle (EV) chargers, lighting systems and heat pumps. Similarly, integrated oil and gas players such as TotalEnergies are using knowledge gained in B2C markets through petrol and the retail end of the business to enter the demand-side energy market, emulating their success in the oil and gas sector.

Integrating and connecting systems across the energy value chain, along with efficiently processing large data sets and automating energy dispatch, are becoming essential for modern energy companies. Software and intelligent systems will be key, emphasizing advanced technical capabilities and data analytics over the traditional “delivery to market” business model that utilities have traditionally followed. By embracing these changes, energy companies can better position themselves for success in a rapidly changing energy industry.

By Rystad Energy

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