By Daniel Cross, Sr. Director of Load Forecasting, POWWR
The move to a renewable future has begun in the public sector, with almost eight-in-ten (79%) business leaders saying they have either already entered into a renewable energy power purchase agreement, or plan to do so within the next two years. This is, of course, a good thing. However, it does present issues for the energy industry due to the additional risks involved in supplying renewable energy. This has made it difficult for suppliers to keep costs down and revenues up. Yet, it is imperative that they do. Cost continue to remain front of mind for three-quarters (74%) of business leaders when they are making decisions about their energy supplier. The well isn’t infinite.
As we know, 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. However, the move to renewables and the inherent unpredictability of them has only exacerbated the issue.
This supply volatility is something the industry has had to take seriously. After all, the main goal of an energy supplier is to supply energy to its customers. Margins have been squeezed by the unpredictability in real-time prices, improper pricing, and incorrectly accounting. Yet, they can also be squeezed by the retail energy provider (REP) overpaying for the energy in the first place.
A more variable climate
What a REP pays for energy can massively vary, and much more so than ever before. Energy demand has always been linked to weather patterns. After all, air conditioning units are needed more when it is hot, and gas heaters are needed more when it is cold. However, as we move towards an era when renewable energy makes up a higher proportion of the energy mix, climactic variables also impact the ability to produce that energy in the first place.
Solar and wind power generation can be particularly volatile. Solar farms only work optimally when the sun is out. Wind farms are unreliable in a light breeze and can even freeze in the winter.
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 remaining competitive. This is easier said than done. Prices of wholesale energy change rapidly and are 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.
The importance of accurate forecasts
Energy cost and supply volatility presents serious financial and operational challenges for REPs. Because of this, they are looking to proactively control energy sourcing and consumption through a diverse set of strategies. 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 artificial intelligence (AI) and machine learning, technology can be used to accurately forecast load (how much energy its customers will require) and load generation (how much energy will be produced) better than ever before.
The data itself can come from a mixture of historic and live data points within the supply chain, buoyed by the proliferation of the Internet of Things (IoT) sensors. Once AI and machine learning is used to unlock this data, REPs have the insight they need to know what energy they need to push onto the grid, and when. This enables them to hedge more effectively and mitigate the risk of falling foul of a future extreme price event.
Don’t get left behind
The energy industry is at a critical point. With over one-third of the world’s largest public companies making net-zero commitments and much of the private sector following suit, new products and services are required. It is important that they don’t get left behind. 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.
REPs need to provide the market with what they want. To do so effectively, though, they need to flatten their risk curve by better utilising AI and other technology to obtain accurate forecasts and pricing. Only then can they offer reliable, renewable energy that keeps the lights on whatever the circumstances.
This article appeared in the May 2024 issue of Energy Manager magazine. Subscribe here.
