A Business Case: Leveraging Renewable Energy to Reduce Costs and Enhance Efficiency through Decision enabling tools.

In an era where climate change is at the forefront of global concerns, carbon dioxide (CO2) pricing has emerged as a pivotal strategy for reducing greenhouse gas emissions. This economic mechanism, which imposes a cost on emitting CO2, aims to incentivize cleaner energy production and consumption. While CO2 pricing has been effective in curbing emissions, it has also led to increased energy prices. However, the transition towards renewable energy sources offers a silver lining, demonstrating the adage “make hay while the sun shines”—capitalizing on free resources like sunlight and wind to secure a sustainable energy future.

The Business Case for Sustainability

According to a new report from the International Energy Agency (IEA), the world is on course to miss its target of tripling renewable energy generation by 2030, but efforts are increasing to achieve doubling the current output of electricity from renewable sources. The release of the report coincided with a new survey from Morgan Stanley which concluded that “the vast majority of companies view sustainability as a value creation opportunity, with more than three-quarters anticipating potential benefits ranging from higher revenues and profitability to lower costs of capital.”  The study also found that 23% reported that climate change impacts their business model already today.

The Impact of CO2 Pricing on Energy Prices

CO2 pricing, through mechanisms such as carbon taxes and cap-and-trade systems, captures the environmental cost of carbon emissions. By making it more expensive to emit CO2, these policies push industries towards cleaner alternatives. However, this shift comes at a cost. The increased expenses for fossil fuel-based energy production are often passed on to consumers, resulting in higher energy prices.

The rise in energy prices can be attributed to several factors:

1. Operational Costs: Fossil fuel power plants face higher operating costs due to CO2 pricing, which are reflected in electricity prices.
2. Investment Shifts: As investments flow from fossil fuels to renewables, the transitional period may see increased costs due to the initial higher capital expenditure for renewable infrastructure.
3. Market Adjustments: Energy markets adjusting to new pricing mechanisms may experience volatility, contributing to short-term price hikes.

Emissions Reduction Through CO2 Pricing

Despite the increase in energy prices, CO2 pricing has proven effective in reducing emissions. By making carbon-intensive energy sources more expensive, it encourages the adoption of cleaner technologies and fuels. Countries with robust CO2 pricing mechanisms have reported significant declines in emissions, showcasing the effectiveness of this strategy in combating climate change.

Renewable Energy: High Initial Costs but Zero Procurement Costs

The financial sector is starting to recognize the economic viability of renewable energy, which capitalizes on the principle that “no one ever paid for wind or sun.” While the initial capital expenditure for infrastructure like solar panels and wind turbines is high, the procurement costs are zero. This makes renewables a financially attractive option in the long term.

Investments in renewable energy are now surpassing those in fossil fuels, as reported by the International Energy Agency (IEA). This trend is driven by:

• Policy Support: Governments worldwide are offering subsidies and tax incentives for renewable energy projects.
• Technological Advancements: Innovations have reduced costs and improved efficiency, making renewables more competitive.
• Environmental and Social Governance (ESG): Investors are prioritizing ESG criteria, recognizing the long-term value and stability of sustainable energy investments.

Navigating the Challenges of Renewable Energy – how do I manage and benefit.

While renewable energy is the path to reduced energy costs and increased energy efficiency, it introduces volatility due to the intermittency and unpredictability of win and solar resources. This necessitates the integration of backup capacity and innovative solutions around energy storage, smart grids, and demand response technologies to ensure a reliable energy supply. As a result, the challenges associated with renewable energy also introduces new markets and business models, that also present significant opportunities.

Energy Risk, a news, analysis, and data provider, commented as part of its annual energy software rankings survey, that “it is vital for firms to have excellent visibility and understanding of their positions and risk exposures”, and “the impact of secular trends such as climate risk and the advance of artificial intelligence potentially requires new thinking around data gathering, analysis and the software systems being used, to ensure firms have the most robust, integrated system for analyzing and forecasting risk holistically not just in real-time but years into the future.”

Specialist software systems and services are essential to allow market participants to make better decisions, manage risk effectively and capitalize on market opportunities and thereby enable them to leverage renewable energy to reduce cost, enhance efficiency, and to remain competitive and profitable in a rapidly evolving industry.

As Chartis Research observed in its recent Energy50 report, “increasingly, the energy sector is more analytics-driven in every aspect of its business: operational, financial, supporting activities, and more”, and “its data-driven nature of many segments of the operation and trading areas makes data architecture requirements a central concern for energy firms.”

Data and Forecasting

The integration of AI technologies with pricing solutions can deliver actionable insights to guide dynamic pricing in response to changeable customer circumstances or market shocks like pricing spikes or other unexpected disruptions. Traditional price information from future contracts often lacks the flexibility or granularity needed to manage risks for specific intervals, such as hours of the day or weekdays. Given that electricity consumption varies by time of day, day of the week, season of the year, and weather conditions, accurate price expectations are imperative. AI-powered forecasting solutions utilize machine learning algorithms to provide highly accurate price forecasts tailored to specific time horizons. These solutions apply techniques such as feature creation, input reduction, normalization, and auto-regression to generate reliable price forecasts with stochastic bands of potential risk.

Asset and Trading Optimization

Efficiently managing energy assets and optimizing trading strategies help balance supply and demand, maximizing the value of renewable energy. It requires critical insights to make operational and trading decision and constant adjustment in changing conditions. A reliable portfolio optimization tool delivers the foundation as decision support tool, starting from planning to trading to scheduling and balancing.

Energy Trading and Risk Management (ETRM)

The outputs of the portfolio optimization provide the optimal utilization for all assets with the goal of maximizing profit. However, given the constant changes, uncertainties and increased market volatility, no optimal market strategy can be assumed without risk assessment. For that reason, these outputs should be enhanced with capabilities for ‘what-if’ analysis, stress testing, risk management and hedging. This can be realized by tightly integrating optimization software with an ETRM, streamlining workflows that provide the trader with all required information on planning, allowing review on potential deal opportunities, and the risk associated with decisions. Implementing sophisticated ETRM systems is crucial for managing the complexities of the energy market.

A sunny future for renewable energy

The transition to renewable energy, underpinned by CO2 pricing, is paving the way for a cleaner and more sustainable energy landscape. Although consumers may face higher energy prices in the short term, the long-term benefits of reduced emissions and sustainable energy sources are there, enabled by specialist software and services that enable optimal decisions for market participants in planning, utilization and business operations.