Profiting from renewables: Economic shifts and flexibility gains in short-term power trading

For our world to be powered entirely by clean energy in 2030, investments in renewable energy must triple in the coming years. At the same time, the business case for renewables faces significant challenges. Although the cost of producing green power has decreased, the expenses associated with integrating it into the grid are rising. Moreover, volatility and negative prices are spreading to new regions.

On the short-term trading floor, these changes are experienced through spikes, such as those seen in the Dutch balancing market between April 1st and 16th, 2024. Traders generally follow the day-ahead price (in green) in their decisions, only to be exposed to the ups and downs (in blue).

How can we, in this context, not only sustain, but accelerate the energy transition by continuing to invest in renewables? And how can short-term power traders maximize their profits? This article breaks down the problem of falling revenues from renewables and explores strategies to help producers and traders stay ahead.

Energy supply and demand

Renewables accounted for over 30% of the global electricity mix as of 2023, according to Ember. Wind and solar power are expanding faster than any other sources, with solar growth surpassing all projections – a development covered from multiple angles in a recent edition of The Economist. In the EU, wind energy has become the second-largest electricity source at 17.5%, overtaking natural gas.

As the graph below suggests, this progress is starting to resemble a hockey stick.

With more renewable energy entering the power grid, the economics change. Solar assets produce energy simultaneously – when the sun shines – and often behind-the meter. Wind power is generated when the wind blows.

Furthermore, solar production is highly concentrated in specific periods with significant monthly variations. For instance, Julien Jomaux’ analysis ‘Germany under the sun’ found that 62% of solar energy since 2020 was produced in just 15% of the total number of hours.

On the demand side, the same Ember report indicates a decrease last year, due to lower consumption in OECD countries. Although demand is expected to grow again – driven by the expansion of EVs, heat pumps, data centers, air conditioning, and electrolysers – this growth, much like electrification, will be slower than the surge in production.

The dynamic between supply and demand impacts wholesale and imbalance electricity prices; the surplus of energy during peak solar and wind periods drives prices down, especially during low-demand times. As we will see, this leads to price cannibalization and balancing costs challenging further renewable integration.

Drivers behind falling solar energy revenues

In analyzing the changing economics of renewables, we identified three main factors leading to lower revenues for market players. We will illustrate them with data from the Netherlands, focused on solar energy.

Low and negative day-ahead prices

The box plot below shows day-ahead prices over the past eight years from the 25th to 75th percentile. The whiskers, which are the lines extending from the box, indicate price variations: small whiskers show the 10th to 90th percentile, while large whiskers represent the minimum and maximum prices. Noticeably, average wholesale prices increased during the energy crisis but are now steadily declining.

Take a closer look at the whiskers on the lower part of the image. Although average prices are gradually decreasing, volatility remains high. Dips in day-ahead prices are becoming more frequent. Since renewable energy is more variable than demand, it is fair to conclude that these low prices are a direct result of grid oversupply due to wind and solar. Let’s delve deeper into this market behavior.

The ‘duck curve’

Spot prices nowadays regularly enter negative territory during solar peak season and hours, forming the so-called ‘duck curve’ shape. The curve, represented in the Netherlands during typical sunny quarters, shows:

• Overall prices decreasing;
• The difference between the day peaks and the morning and evening valleys increasing; and
• Valleys becoming lower each year.

Negative prices

Another way to quantify this challenge is by counting the negative price instances per year. As you can see below, by the end June, we were almost catching up with the entire 2023 (in the meantime, we’re at 290, reports energy trendwatcher Jan Willem Zwang). Where will the count stand at the end of the year?

And, while our analysis focuses on the Netherlands, an insightful webinar with Jean-Paul Harreman at Montel showed that negative prices are expanding to new regions. For example, 2024 is the first year with solar-based negative prices in the Nordics.

This year-on-year trend also tells us that the relationship between the increase in solar production during the day and the price reduction is non-linear. Incremental increases in solar lead to extreme decreases in price. The same applies to wind production during strong wind periods or storms.

In other words, not only are you likely to earn less euros/MWh, but you can potentially also lose money, all the more so because of the following factor.

Subsidy loss

Negative day-ahead prices have been manageable with the support of subsidies for renewable energy production. Decreasing day-ahead prices are, however, making it harder for producers to obtain this subsidy.

One scenario of subsidy loss concerns the Dutch Sustainable Energy Production and Climate Transition Incentive Scheme (SDE++). If the day-ahead price is negative for six consecutive hours or more, no SDE++ subsidy is not granted for any of those hours. In Germany, a similar rule applied for four hours. For both countries, power produced during negative prices will no longer be reimbursed as of next year.

Unfortunately for solar asset owners, negative prices are now more common, especially during peak production months, triggering subsidy losses more frequently.

Decreasing capture rates

Due to decreasing day-ahead prices during peak hours, solar power producers are experiencing lower than average profits. This is reflected in their capture rate – the revenue per  MWh of electricity sold – which is on the decline, putting pressure on Power Purchase Agreements (PPAs).

To determine the capture rate of PV systems in the Netherlands, we divided the average annual earnings of a 1MW solar profile by the average annual earnings of a 1MW baseload profile. This metric is normalized by the actual amount of electricity produced. If we compared total revenues instead, the difference would be more significant.

The conclusion is that, on average, solar assets earn less than baseload assets due to producing energy during less favorable hours. In other economic terms, solar producers face higher profile costs – and these are not the only costs they are exposed to.

Increasing balancing costs

Renewable energy production is heavily weather-dependent, making it difficult to predict accurately. The exact output from solar and wind sources is uncertain until the energy is actually delivered.

Increased volumetric imbalances caused by more intermittent renewables are a key factor driving the widening price spreads between the day-ahead and the balancing market.

Subsequently, balancing costs are rising. Below, we calculated the balancing costs for a 1MW solar park, outliers excluded.

The trend is also applicable to wind power. In general, based on our research, balancing costs in the EU are rising by a staggering 40% year-on-year.

Although in some countries, such as the Netherlands, the SDE subsidy reimburses the (average) balancing costs, portfolio-specific balancing costs are priced within PPAs. So, they may still hurt your business.

The impact on revenues from solar power

As a consequence of the drivers outlined above, the difference between revenues in the 12 months of 2021-2022 and the last 12 months is striking.

We compared a 1MW baseline with a 1MW solar profile and converted the figures from EUR/MWh produced to percentages. Initially, the profile cost for a 1MW solar park was 22%, with balancing costs at 8%, resulting in a 70% capture rate. Today, the profile cost has increased to 31%, while balancing costs have risen to 19%.

Therefore, the revenue of a solar energy producer is now only 50% of the average day-ahead price – which is also declining. If you hold the merchant risk for solar, you have every reason for concern.

Mitigation strategies to protect trade profits

The shift towards a decarbonized power system requires a blend of large-scale battery energy storage, expanding cross-border grid connections, and altering power consumption habits. The latest report from SolarPower Europe highlighted the particularly important role of flexibility in navigating the solar-led oversupply.

However, these developments will take a lot of time and money, while the current financial pressures explained above are urgent.

Batteries will certainly have a significant impact on managing both profile and imbalance risk; promising projects are coming along, such as those announced by Fluence and Lion Storage. Yet bringing large BESS projects online remains an uphill battle, mainly due to permits, development time, and the lack of connections to the high-voltage network. Furthermore, transmission tariffs are increasing, as forecasted by Dutch TSO TenneT, challenging the creation of business cases.

So, how can we mitigate risks, protect profits, and create new revenue streams today? Over the next sections, we look closer at the short-term trading setup, where flexibility has also become critical to success. Because, while a lot of traders see batteries as the solution to flexibility, wind and solar assets are also perfectly equipped to offer it. Here are our recommended strategies.

Active trading of flexibility

The first and central mitigation is, in our view, extending revenue models from only selling energy (MWh) to also selling flexibility (MW) on the intraday and balancing markets.

Often, grid imbalances and renewable portfolio imbalances correlate. If there is an oversupply of solar energy and your solar park is among the causes, the exposure can be significant. Nevertheless, these moments can also present opportunities if you can adapt to or anticipate them.

When ‘flexing’ renewable assets, consider two use cases.

Curtailment

Renewable assets are sometimes scheduled to produce less than possible from a meteorological or operational perspective, an action is referred to as curtailment. One example is ramping down in real-time due to negative imbalance prices. Imbalance volumes and spreads have increased year-on-year, making curtailment on the passive balancing market an excellent opportunity, in countries where it is possible.

By curtailing, you are deviating from your day-ahead or intraday positions. Yet in doing so, you are helping to balance the grid (by curtailing during oversupply) and earning revenue (by buying the energy back at negative prices). In other words, you are getting paid twice without producing power.

Do you recall the image showing the spikes on the Dutch balancing market from the beginning of this article? Curtailment becomes a way to profit from the negative prices (framed in orange).

For more details on this approach, see our recent article, in which my colleague Pedro explains the components of a robust curtailment strategy on the Belgian passive balancing market.

Reverse curtailment

Curtailing at negative prices is familiar to many renewable players; the reverse action is less well-known.

Due to negative day-ahead prices, many market participants place limit orders to avoid being cleared below their opportunity cost. If the energy is not sold, they halt production to avoid balancing costs. Consequently, they miss the opportunity to capitalize on spikes in imbalance prices, as shown below, because their asset is idle.

What if we switched our mindset? Reverse or de-curtailment – ‘releasing’ your asset in the intraday or balancing market – is a strategy to resume energy production when the intraday or real-time imbalance prices exceed a predefined strike price. It is worth considering in the future, and we would love to discuss it if you are interested.

Algorithmic bidding strategies

As a short-term trader, you will likely have a surplus or deficit on the balancing market, resulting in financial penalties that could have been (partially) avoided or overturned by deviating from the forecast. Price risks can become financial opportunities with solid algorithmic bidding strategies on the day-ahead and intraday.

At Dexter, we offer a Trade Optimization solution based on power price forecasts and multiple external data sources. We offset these against internal models based on more than a hundred internally developed features. If you reach out, we can tell you more about it.

Accurate generation forecasting

Finally, consider using a reliable power generation forecast. Advanced, machine learning-based predictions of your assets’ production over the coming days should inform your bids in the day-ahead or intraday.

Generation forecasting helps traders minimize imbalance volume, thus reducing the risk of open positions on the balancing market. The main feature of this forecast is accuracy: the closest possible match between the predicted energy production and the actual volume produced. As a recommendation, read our dedicated white paper for a deep dive into evaluating metered-point generation forecasts.

If you are not using a forecast yet, do not hesitate to contact us. We provide a 0-96 hours ahead metering-point Generation Forecast, built on over ten weather models and multiple machine learning models combined internally.

Watch out for market impact

Many short-term power traders overlook market impact in their strategies. Especially when using flexibility as outlined above, it is crucial to consider how your actions, and those of other participants, will affect the market — and, consequently, your own performance.

What are the mechanics? Again, it comes down to the clearing price being determined by the intersection of supply and demand. For example, a sell decision on the day ahead shifts the supply curve, pushing prices down. Fast-forward to the balancing market, and buy-back activates more volume, making prices go up.

In the Netherlands, this impact may lead to dual pricing. When both upward and downward regulation volumes are required in one PTU of 15 minutes, the TSO splits the settled imbalance prices to penalize all contributions. It is, nonetheless, possible to manage these occurrences with an imbalance settlement price forecast.

Flexibility as the win-win strategy

This year, we celebrated the increased penetration of renewables but also clearly realized the pressure this growth creates on the business model for renewable energy production.

For many of our customers across Europe, attractive trading profits are still achievable with a solid generation forecast and smart strategic bids on the day-ahead and intraday. Yet actively ‘flexing’ renewables on the balancing and intraday markets is what truly moves the needle.

Flexibility is a win-win situation: lower balancing costs for the TSO, CCGTs losing their polluting advantage, and higher profits for traders. Our analysis shows that a strong flexibility strategy can increase revenues by 19 percentage points, offsetting profile and imbalance risk. Our Flex Optimization users – such as Scholt Energy and Enius, part of the Topwind Group – speak highly of the revenues we helped them generate.

There are still plenty of good economic reasons to invest in renewable power production, trade wind and solar power, and drive the energy transition. Get in touch to find out how much added revenue your short-term trading unit can achieve.