Investors must be Smart... Energy Traders
How can investors gear up to navigate volatile power markets - now and in the future?
A fascinating question that Origami CEO & Founder, Peter Bance, tackled in August during a podcast episode with Luca Pedretti, COO and co-founder of renewable energy power purchase agreement (PPA) specialist Pexapark. Peter and Luca joined DLA Piper partner Natasha Luther-Jones on an episode of the law firm’s series The Climate Transition Podcast.
The discussion tackled many of the common questions that we hear about - how companies in the renewables sector should react to the growth of energy storage technology and the additional pressure to manage volatility as part of a greener grid. These included the importance of real-time data; the potential of intermittent renewables, such as wind and solar, to provide baseload power; and how asset owners should adapt.
However, the most interesting angle for us concerned the investment community, which is rarely discussed when it comes to managing power price volatility at wind and solar assets. But they should be, because institutional investors are directing billions into huge portfolios of renewables generation assets, increasingly with energy storage. But, can they adapt to a fast-changing world where they'll need to actively manage short-term power deals at their assets?
Historically, institutions and other asset owners have been able to win long-term power deals and let assets run without getting heavily involved in energy trading. The ‘new normal’ of greener grids will force institutions to think more deeply about their approach, and the technical solutions required to allow them to thrive.
Luca Pedretti warned that investors would lose out if they did not adapt to this new reality. He argued that their customers – the investors who put money into the funds run by the institutions – would place their money with other institutions if they did not get satisfactory responses which reflect the ‘new normal’ for the energy market.
These include questions about the diversification of their portfolios and where the financial returns are likely to come from. Essentially, he said these institutions will need to be more like energy traders as they are more exposed to power markets. Luca shared some of the questions that institutions would face.
“Can you show me how your portfolio is diversified and how you can guarantee the risk-return even in a world with short-term PPAs? Secondly, can you control the energy after you have done the deal? Can you manage balancing? Do you know your position? How do you trade? How much money are you losing, and how are you benchmarking this?” he said.
“If the new funds cannot answer those questions and don’t have solutions in place, over time, they will lose out to the funds that do have this infrastructure in place,” he added. The technology infrastructure would play a key role in this new world.
Peter Bance said institutions, like other asset owners and operators, needed access to “powerful, adaptive and agile” technology solutions. He said the “vast bulk” of the technology solutions that institutions need would come from third-party specialists, but that institutions would then add different elements based on their market assumptions.
“They’ll build some of the unique differentiated bits of ‘secret sauce’ themselves… I think companies will play to their own strengths and then access critical tools from third parties,” he argued. This would help institutions to profit as they add more energy storage capacity to their portfolios, while grid operators find new and resilient ways for commercial operators to sell power.
However, institutions must also be smart in the approaches they take. Luca said many investors were underestimating the amount of change that's needed.
“Investors are pouring money into technology to become ready for the system,” he said. “Some will do better, some will do worse, and I think what is very critical is that it takes time… This is not just investment but tapping into new value pools. You’re looking at the transformation process of 12-18 months, or even more. For many, that is not so evident.”
But Peter concluded that this investment will be essential for companies to secure the agility they need in an increasingly volatile market: “How it’s all going to pan out is anybody’s guess. I would trade agility for a crystal ball every time… and that is what technology can help green energy actors to do: adapt to the rapidly evolving and increasingly complex market changes without having to have a perfect view.” For many institutions, this will be a significant change.
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Origami is on a mission to help build a green energy world powered by smart technology. Origami is the leading independent energy data platform, providing advanced SaaS applications for asset owner-operators, energy services companies, and route-to-market providers, to help manage and commercialise growing portfolios of green energy assets.