This article is the second in a series exploring changes to our electricity and broader energy systems—and the implications for consumers and governments—that will arise from the massive shift to electrification and variable renewable energy needed to achieve our net-zero emission ambitions. In the first article, “Why Your Company Needs to Be an Electricity Trader,” we examined how this transformation of our electricity systems and markets will offer a competitive edge for companies that can be more flexible in the way they consume electricity. In this one, we explore the impact of renewables on price volatility in electricity markets, how this can be managed, and the implications of greater volatility for governments and electricity-intensive users.
STRATEGIC INSIGHTS PARTNER
The world is observing an extreme political and humanitarian crisis in consequence of Russia’s invasion of Ukraine. The war has had severe flow-on effects for regional and global energy markets and prices. These have, in turn, amplified the push for greater energy security and price stability. Yet in some electricity markets, we are also starting to observe periods when electricity is free or even negatively priced. Could electricity ever be free? That is one of the aspirations for the growth of renewable energy—large blocks of time when abundant solar and wind resources will generate zero marginal-cost electricity. Over the last year, we have been investigating the effect of high penetration of renewable energy on electricity markets: how it leads to volatility and, during the transition, how it increases the exposure of electricity markets to shocks in upstream gas markets as seen in Europe.
High penetration of variable renewable energy (VRE) generation (principally solar panels and wind turbines)—will drive price volatility in electricity markets. This is already apparent in front-runner markets like South Australia and California. Learning to live with volatility will be increasingly important as governments decarbonize their economies. But the relationship between variable renewables penetration and price volatility is not an obvious one and warrants further investigation.