The move towards renewables has pushed the energy sector to an inflection point and now forces retail energy providers to develop new products and services to maintain their market share, writes Daniel Cross, Senior Director of Load Forecasting at POWWR.
It is fair to say that the move to a renewable future has begun. Almost eight-in-ten (79%) business leaders say that they have either already entered into a renewable energy power purchase agreement, or plan to do so within the next two years. This is certainly to be applauded.
However, the move towards renewables does present issues for the energy industry due to the additional risks involved in supplying it. This has made it difficult for suppliers to keep costs down and revenues up. Keeping costs down is imperative. Cost remains front of mind for most business leaders (74%) when they are making decisions about their energy supplier. 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. The move to renewables has only exacerbated the issue.
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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. These margins can be squeezed by unpredictability in real-time prices, improper pricing, and incorrectly accounting for attrition as well as other causes. They can also be squeezed from the retail energy provider (REP) overpaying for the energy in the first place.
Volatility of supply
What a REP pays for energy varies massively, and so much more than ever before. Energy demand has always been linked to weather patterns. After all, air conditioning units need to work harder when it is hot, and gas heaters need to 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 the energy in the first place.
Solar and wind power generation, in particular, 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 – can freeze in the wintertime.
Of course, a REP is fiscally required to pay for the energy that their customers are using. Because of this, it is imperative that they price their contracts correctly to cover all eventualities, while still ensuring they remain competitive. This is easier said than done. Prices of wholesale energy change rapidly and are often 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.
Help is at hand
Energy cost and supply volatility presents REPs with both serious financial and operational challenges. Because of this, they are looking to proactively control energy sourcing and consumption through a diverse set of strategies. And for good reason. If a REP is incorrectly hedged or priced for any length of time during a price event, the ramifications could be catastrophic. They need to flatten the curve.
Luckily, help is at hand. Buoyed by recent advances in both artificial intelligence (AI) and machine learning, technology is better than ever at forecast load (analysing how much energy customers will require) and load generation (analysing how much energy will be produced at a premise).
The data required to produce accurate forecasts can come from a mixture of historic and live data points within the supply chain and sourced through a multitude of Internet of Things (IoT) sensors. Once AI and machine learning is used to unlock this data, REPs can become empowered to know what energy they need to purchase or push onto the grid, and when. This enables them to mitigate the risk of falling foul of a future extreme price event by being able to hedge more effectively.
The tide is changing
The energy industry is at a critical inflection point. With over one-third of the world’s largest public companies making net-zero commitments and much of the private sector following suit, REPs require new products and services to maintain their market share. The tide is changing. 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 time for REPs to give the market what they want. To do so effectively, though, they need to flatten their risk curve by better utilising AI and other emerging technologies to obtain more 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 ever closer towards a more renewable future, it will only increase the volatility of supply. 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.
