How renewable energies remain a lucrative business despite falling wholesale prices

Are renewables in Europe in danger of becoming a victim of their own success? That can't be allowed to happen, of course, but falling wholesale prices point in that direction. Lower revenues and expiring subsidies make investments look less attractive. Sector coupling offers a solution to this problem, as it enables the electricity industry to tap into additional sources of revenue.

While the corona pandemic caused global energy demand to drop, 2020 was a record year for renewable energy expansion. According to the International Renewable Energy Agency, global installations totaled 260 GW of capacity, with wind and solar power accounting for the lion’s share.

The share of renewable energy in electricity generation is expected to rise to nearly 30 percent, the highest share since the beginning of industrialization, in 2021. Despite this outlook, the drop in CO2 emissions in 2020 resulting from subdued energy demand is expected to be short-lived, and a recovering global economy will also demand more energy again.

This is not just about electricity: while wind and solar energy are redefining the power sector, the next challenge is to harness their potential to decarbonize other sectors, namely heating, transport and industry.

Sector coupling: challenges and opportunities

Emissions from heating, industry and transport must also be avoided in order to achieve the climate targets. The obvious approach is to rely on electrical energy from renewable sources, this isn’t always possible, however. Battery-powered vehicles will certainly be the future in the passenger car and van sector, but this type of drive is reaching its limits for heavier commercial vehicles (at least at present). Similar problems are arising in industry: In iron and steel production, the traditional process requires coal not only as an energy source, but also as a reducing agent. Replacing today’s heating systems with electric alternatives will take time.

One solution that can address these problems is green hydrogen, i.e. hydrogen produced electrolytically from renewable electricity. Internal combustion engines can be converted to hydrogen and could power heavy-duty commercial vehicles, or fuel cell propulsion could be used. Hydrogen-based direct reduction could replace coal in the blast furnace process. With comparatively minor modifications, hydrogen could also be burned in conventional gas-fired heating systems. Another advantage is that once hydrogen has been produced, it can theoretically be stored indefinitely. This offers the possibility of creating a balance between summer and winter months.

From a power generator to the integrated energy company

Sector coupling also offers electricity producers the opportunity to generate additional sources of revenue via green hydrogen. This is particularly interesting against the backdrop that subsidies are expiring and wholesale prices for renewable energies are falling. On the one hand, these falling prices are good news, but on the other hand, they could result in a lack of investment. We cannot allow this to happen, however, otherwise government intervention would again become necessary, which we should avoid as far as possible. An energy turnaround that comes across as a business case is likely to be more successful than an energy turnaround that looks like a forced measure.

In 2019 and early 2020, the general global trend of lower and lower auction prices for both solar PV and wind power (onshore and offshore) continued, with government auctions for solar and wind capacity increasing. Across Europe, more than 14GW of new wind power capacity was awarded, comprising 7.6GW onshore and 6.8GW offshore, via auctions in 2019 (WindEurope). In 2019, Europe’s recorded onshore wind bids ranged from €37.71/MWh ($44-84/MWh), at the lower end (Poland) and €66.5/MWh ($79.13/MWh) at the high end (France) according to Wind Energy in Europe in 2019 Trends and Statistics (WindEurope).

In early 2021, Spain auctioned a total of 3GW of renewable energy capacity, the first tender under the new Spanish auction design based on Contracts for Difference. Solar PV secured just over two thirds of the capacity (2.04GW). The auction resulted in the lowest prices for new wind energy in Europe ever, with the lowest wind bid awarded at a price of €20/MWh ($23.77/MWh). The highest was €28.89/MWh. The lowest bid for solar was €14.98/MWh ($18/MWh), while the highest was €28.90/MWh (WindEurope and PV Magazine).

As said, this trend is actually to be welcomed, as cheap renewables should lead to further penetration of wind and solar power. But on the other hand, there is a risk that wholesale prices for the electricity generated will no longer be able to cover the investment costs alone. This is where sector coupling comes into play by offering various attractive fields of activity for energy companies. On the one hand, this could be the production and marketing of green hydrogen, but also other “flexibility resources.” These resources could be battery storage systems that compensate for short-term fluctuations in the grid. Grid operators pay compensation for this on the balancing energy market. Another way to bring flexibility to the grids is through smart or bidirectional charging stations. Smart charging stations can adjust a vehicle’s charging cycle so that charging takes place preferably during periods of surplus electricity. With bidirectional charging stations, unused cars could even feed power back into the grid.