How to Compare Renewable Energy Investments

Traditional electricity markets are undergoing rapid changes as countries push ahead to decarbonize and reduce dependence on fossil fuels. Often referred to as the ‘energy transition’, this shift towards renewable energy has rippling effects over an entire economy from new jobs creation, to new investments, policy optimization, electricity market pricing,  new competition, and much more. The shift also creates opportunities for investors entering economies that are either at a mature stage of the energy transition or where renewable energy is something new. In both cases, a thorough market comparison can help to strengthen investment goals, minimize risks, and boost profitability while guaranteeing grid security to balance demand and supply.

Building blocks of energy markets. Source: Ecorys

In this article, we will look at some ways smart investors can compare renewable energy markets.

Create a risk map to assess all the factors that contribute to total risk

Factors that contribute to energy market risk. Source: Berger, et al (2007)

Wind and solar energy have specific technical requirements that define project outcomes, power generation, and the ability to be seamlessly integrated into the grid without compromising energy security. Wind and solar are intermittent energy sources, where energy output is closely tied to weather conditions. Without storage and demand-side management, this limitation creates grid security issues that affect network stability, reliability, and availability. To avoid these scenarios, energy shortage is capped with energy from incumbents. Understanding the risk totality of wind and solar and whether the available renewable energy data accurately forecasts energy yield under specific weather conditions is crucial to minimizing risks while accurately comparing different market possibilities from each energy source. 

A risk map is a strategic decision-making tool that assesses risk totality. Having this detailed overview of where and how risks arise mitigates some of the restraints of intermit renewable energy sources. A risk map also clarifies risk input, increases predictability, and helps with making smarter, data-driven, investment decisions when comparing renewable energy markets.

Fill information gaps with accurate data modeling

Accurate renewable energy market modeling requires high-quality data and correct assumptions for missing information within the system boundaries. On the demand side, data related to historical load with appropriate time resolution are used. In contrast, on the supply side, the generation capacity based on weather forecasts (for short-term modeling) or long-term development of installed capacity at specific prices are considered. The benefits of both demand- and supply-side modeling become more relevant with scenario-based modeling where particular aspects that affect an outcome are changed to assess implications. This approach highlights the weakest link and eventually, the risk associated with it to provide a thorough comparison of renewable energy markets at the level of production capacity, pricing, and ability to meet historical demand.

Market data modeling brings various issues to the surface that are not easily seen with superficial comparisons of renewable energy assets. It identifies how the current market can grow or collapse, the current owners of solar and wind assets, respective capacities, information barriers that can create further risks, and forecast expansion possibilities.

Understand the effect of renewable energy on negative pricing

Negative pricing and price volatility are common occurrences with the addition of renewable energy into the energy mix. For example, in the Netherlands, negative pricing on the day-ahead wholesale energy market for more than six hours triggered a non-payment of incentive clause that resulted in lost revenues for solar energy plants with an energy capacity of more than 500kW and wind energy plants with capacity of more than 3MW.

The “six-hour-rule” as it is called also affected renewable energy producers in Germany and other European countries when demand is low and coincides with the high, inflexible supply of renewable energy. In this scenario, the generator ends up paying the user to consume the energy produced. This phenomenon caused by renewable energy injection into the grid, highlights the importance of storage to more flexibility in the power grid. 

When comparing energy markets, the aspect of negative energy pricing should be factored into operational risks based on the contractual terms for energy production. In the example mentioned above, the contract’s negative pricing restriction meant that generators are not paid an incentive during the affected period. However, negative pricing can also have advantages, such as greater diversification in the types of renewable energy connected to the grid in transmission-constrained areas and transparent curtailment measures.

Assess market power dynamics

The electricity market distinguishes itself from other markets due to the homogeneity of the product it offers and needs to match demand and supply instantaneously. These unique features can create non-competitive markets in countries where a monopoly or specific market participants dominate energy supply. This dominance not only creates barriers for renewable energy but also makes it more difficult to accurately compare different scenarios. In cases where a monopoly exists, specific policies and legal frameworks should prioritize renewable energy input into the grid and provide the necessary financial incentives to stimulate new investments.

Market competition is an essential driver for renewable energy uptake due to the various value-grab opportunities it provides to investors. When comparing the competition, it is essential to study the market segments that each market participant dominates, including the prospects for new wind and solar power plants, understanding how each will compete.