How Utilities can meet the challenge of a rapidly evolving landscape

European energy utilities are navigating a rapidly evolving landscape, facing both policy-driven changes and market shifts that challenge traditional operations. Since the 2022 energy crisis, wholesale energy prices have dropped significantly, ICIS price assessments showed, but volatility has remained a key factor due to the rapid changes in supply patterns.

While gas prices have become more reactive to global liquefied natural gas (LNG) dynamics and geopolitics, electricity prices have instead responded to a rapid renewable supply growth that often overcame the current grid and energy storage capacity, resulting in more frequent negative power prices and in production or grid interconnection curtailments.

In line with European energy transition targets, the phase-out of fossil fuel assets would also determine a major change in the energy landscape. Some European countries are experiencing negative clean spark spreads (CSS) and clean dark spreads (CDS) for baseload power generation, meaning that some gas and coal power plants are already not profitable for most baseload hours, according to ICIS data. The intermittency of the rapidly growing renewable capacity will require investment in energy storage, grid balancing, and demand response solutions, while some of the fossil fuel capacity could potentially be decarbonized using carbon capture and storage technologies or converted to operate with green fuels.

As renewable sources grow, the demand for effective energy storage (batteries, pumped hydro, hydrogen) becomes crucial for grid stability and for an efficient realization of the energy transition goals.

Growing electrification of sectors like chemicals and transport, and increasing consumption from data centres as the artificial intelligence (AI) revolution kicks in, would also shape future energy demand in Europe, becoming an even more important driver for energy prices.

Power purchase agreements (PPAs) and guarantees of origin (GOs) will play critical roles in the European energy sector too, as utilities seek to use PPAs to hedge against price volatility while certification of renewable sources can simplify sustainability reporting and boost green investments.

Natural gas is likely to remain critical in the energy transition – as recently underpinned by long-term appetite for gas investments² - and it plays a key role in carbon reductions for power generation.

However, advancements in battery storage technology and decreasing costs could help reduce the reliance on gas-fired power generation in the coming years.

Negative power prices can incentivize the use of battery storage, according to experts, suggesting stakeholders should capitalize on this opportunity and invest in battery storage technology, even though it is still evolving.

Nevertheless, the advantages of using battery storage capacity may vary depending on the specific power supply mix and consumption patterns, while a key but often overlooked aspect of decarbonization, is the development of robust interconnection lines to maximize the utilization and management of intermittent renewable energy sources.

Although many believe uncertainty remains for investors, with high costs and difficulties predicting revenues, large investments in battery storage are still necessary, at least until seasonal energy storage - the “holy grail” of the energy transition - is fully developed.

Negative power prices, lack of long-term liquidity and a slow, inefficient process to conclude renewable power purchase agreements (PPAs) and match buyers and sellers are key challenges the PPA sector is dealing with. Addressing these hurdles would have a positive impact on the energy transition too, as more PPA deals would support the construction of additional renewable power generation capacity.

Scarce liquidity on forward wholesale power contracts could also slow PPA growth as it limits hedging. According to some PPA experts, the challenge is that there is not enough demand for long-term wholesale power products and that we are currently seeing a transition period.

Other industry specialists have indicated to ICIS that the lack of power liquidity on far-dated contracts could challenge PPA hedging, while alternative strategies like ‘stack-and-roll’ (where the traders’ exposure is stacked and hedged, with residual exposure being rolled over into new contracts when shorter-term products expire) bear some risks too.

More transparency on PPA prices and valuation would help traders feel confident and increase activity, but experts also highlight that regulation and uncertainty on energy transition targets are key drivers for PPAs as investors face high costs and a risky environment.

As the energy transition unfolds and sources of power such as wind and solar come to the fore, energy markets are transforming rapidly. European utilities need to navigate complex challenges in a rapidly evolving sector, where insight on key price trends, regulatory developments and renewable capacity growth can guide decision-making and investments towards the energy transition.

ICIS covers a wide range of energy commodities, including power and renewables. To find out more, please visit ICIS Energy.

Utilities can stress test trading and investment strategies and balance risk with reliable short, medium and long-term power forecasts, including wind and solar energy output, but also gain a complete picture of European power with expert analysis of the policy, regulation and macroeconomic factors influencing the market.

With the increased use of intermittent renewable solar and wind, this can help them turning uncertainty into opportunity. They can also find additional value in predicting complex price movements with forecasts for wholesale and renewable capture prices, which are regularly used by electricity producers and consumers to negotiate Power Purchase Agreements (PPAs).