The growth of renewable energy is creating challenges for traditional electric utilities

Renewable energy generation 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 renewables has also led to challenges for the energy industry as the underlying profitability of the sector declines and an increasingly competitive energy landscape emerges.

Apart from hydro, the operating performance of most renewable energy assets is determined by a combination of weather and consumption patterns, meaning they cannot be “market optimized” to generate when prices are high, so as can, for example, gas power assets. This affects solar plants in particular, as they typically generate power in the middle of the day, when, although cooling systems are at full capacity during the European summer, there is not enough generation demand, leading to low realized prices. Additionally, solar panels do not generate any power at night, when prices are often higher. An increasingly popular solution for asset owners is pairing intermittent renewables with energy storage capabilities such as batteries. However, they only partially compensated for the deficiency. As a result, capture rates (prices achieved compared to average market prices over time) for solar energy are decreasing with increased deployment of the technology.

Although initially masked by the energy price response following Russia’s invasion of Ukraine and Europe’s subsequent divestment of Russian gas, wholesale energy prices across Europe are increasingly under pressure from hybrid renewable projects with near-zero marginal costs, which in turn undercuts the revenue potential of the region’s energy market.

Meanwhile, government support for renewable energy is changing. Renewable projects are supported through government support mechanisms such as contracts for difference (CfD) and feed-in tariffs, which guarantee predictable revenue streams for renewable energy producers. However, as the costs of renewable energy technologies have fallen, these support schemes may 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 renewable energy developers and utilities, but is now seeing new entrants such as oil and gas companies, energy traders and innovative players in energy demand management. Similarly, new types of demand are emerging, such as data center players who require a constant, high-volume, 24-hour power supply.

The solution to today’s challenges lies in diversification and innovation, driving balanced portfolio generation profiles and enabling market optimization. Beyond building and harnessing the full flexibility of a diversified portfolio of solar, wind, storage and thermal generation, more customer-centric strategies are emerging. Octopus Energy is a UK software and energy trading company working to balance energy supply and demand through smart devices such as electric vehicle (EV) chargers, lighting systems and heat pumps. Similarly, integrated oil and gas players such as TotalEnergies are using the knowledge gained in the business-to-consumer markets through the gasoline and retail segment of the business to enter the on-demand electricity market, mimicking their success in oil and gases.

The integration and interconnection of systems along the entire value chain of the electricity market, together with the efficient processing of large data sets and the automation of energy dispatch, are becoming essential for modern energy companies. Software and intelligent systems will be central to this, emphasizing advanced technical capabilities and data analytics over the traditional supply-to-market business model that utilities have traditionally subscribed to. By embracing these changes, energy companies can better position themselves for success in a rapidly changing energy industry.

Of Rystad Energy

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