The share of renewables in the power mix is on the rise and will increase more rapidly in coming years, as businesses and governments face European emissions reduction targets.
The European Commission proposed to increase the target of renewables' share in the power mix to 40% from 32% by 2030 in a bid to help the bloc achieve decarbonization goals.
In Western Europe, S&P Global Platts Analytics expects wind and solar generation to account for 47% of power demand by 2030, compared to an estimated 23% in 2021.
Renewable production revenues are becoming increasingly important, as early direct subsidy schemes expire and developers are starting to operate on a merchant basis in wholesale power markets.
Cannibalization and how it can affect capture prices
Power grids accept the most affordable form of generation available, which often ends up in periods of cheap supply influx during favorable weather conditions. Wind and solar assets have zero marginal costs, as they produce power when their source is available, meaning sun is shining or wind is blowing.
And priority dispatch now puts an obligation on transmission system operators to schedule and transmit electricity from renewable sources ahead of other producers, as long as it allows secure running of the system.
These are typically periods of low prices, meaning the value that renewable generators sell electricity at – the capture price – is on average below baseload power contracts.
Capture prices are expected to decrease as renewable capacity continues to grow, with sharp deviations from baseload prices registered during extreme weather periods. This often happens in the countries where renewables make up a chunky share in the power mix, such as Germany, Spain and the UK. For instance, in Germany renewables' share in the power mix accounted for 43% for the first nine months 2021, utility association BDEW said.
"We're seeing wind farms being built faster than ever before, particularly offshore wind farms, which influences the price cannibalization... It's certainly reasonable to expect, based on these development trends, that capture price will decrease even further over time," Duncan Dale, Statkraft vice president, Origination UK and Ireland, told S&P Global Platts.
Indeed, in isolation, the greater penetration of wind and solar means greater cannibalization risk and lower prices, according to Platts Analytics' Glen Rickson. That said, it needs to be stacked against the growing role of battery storage, hydrogen electrolysis and demand flexibility that could mitigate the cannibalization effect.
The period of low prices will be the perfect time to produce hydrogen, which can be stored and used later – when wind and solar are low.
During these periods, by tracking the value that generators receive for the power produced, capture price will help producers to measure how exactly cannibalization impacts renewable revenue.
Global stilling and how it modifies the market
This year wind power producers faced one of the least windy summers on record in decades, which – along with a rocketing gas market - drove power prices to new record highs.
In the UK, one of the last remaining coal-fired power plants had to be brought online in September to meet national demand.
The weak wind phenomenon is widely known as "global stilling".
"The recent episodes of low wind across Europe can be considered part of the trend we are observing now for at least 30 years," Matteo De Felice, scientific officer at the European Commission's Joint Research Centre - Knowledge for the Energy Union unit, told Platts.
The World Climate Research Programme's most recent climate change projections, CMIP Phase 6, suggest a reduction of wind speed in Central and Western Europe in the near- and medium-term 2021-2040 and 2041-2060 between 2% and 4%. The reduction will be more evident during summer than in winter.
It is still not clear if this trend is linked to global warming, with many studies and research groups investigating this phenomenon, De Felice said.
In wholesale power markets, low wind conditions incentivized customers fixing their prices more often than before.
"We've gone through a very strange period of trading where the prices have got so high that the markets are illiquid and have also moved away from the fundamentals, so it's been difficult to hedge risk when our customers have asked for their wind generated prices to be fixed," Statkraft's Dale said.
Traders can use the capture price values for market-to-market in their hedging, as the indices will help to identify risk and opportunities in renewable behavior.
Expensive electricity's impact on capture prices
Power prices across key European hubs hit record highs this year, with the day-ahead baseload price in Germany – the Europe's biggest market – jumping to over Eur344/MWh in December. To compare, the corresponding contract was trading around Eur50/MWh a year earlier.
"If you look at all the big players who have made their results public, they've all said that their earnings have decreased… At Statkraft, high power prices haven't entirely offset the weak wind during the last quarter but recently we're seeing wind production pick up and the prices are still high," Dale said.
Indeed, one of the region's biggest utilities Italy's Enel and Spain's Iberdrola recently reported a significant decrease in revenues in January-September.
Meanwhile, in the UK, a 1.7-million customer strong energy firm Bulb announced in late November that it will be put into administration. Bulb – the biggest UK's energy supplier to collapse yet – will be placed into a special bailout process that will rely on taxpayers' money.
Gradual coal phase-out – implemented by some European governments in a bid to meet climate targets – ended up in power prices being much more exposed to gas. This helped to lift power prices, from which many renewable generators – that are exposed to merchant prices – have benefited.
"At the same time, the coal closures meant that very low wind load factors over the summer fed back through to the gas price more than would otherwise be the case, as the power market was forced to rely on gas generation to meet the shortfall," Platts Analytics' Rickson said.
This in its turn, slowed down the rate at which European gas storages could have been filled during summer. Aggregate EU sites were about 75% full on Oct. 1 – the start of gas winter – compared with a three-year average of more than 91%, data from Gas Infrastructure Europe showed.
Power price spikes – with the UK hourly prices seen jumping as high as GBP2,500/MWh on a day-ahead basis in October and GBP4,000/MWh intraday in January 2021 – typically take place, when wind generation is very low. This means that significant flexible capacity – mostly gas – is needed, with wind generators not able to capture these prices.
"As a result, we expect the gap between the average power price this winter and the wind capture price – the price achieved by a wind asset if it was solely exposed to the wholesale market – to be wider than ever," Rickson said.
Indeed, a road to energy transition, with global stilling, extreme price swings and limited gas supply in the midst of coal phase-out is rocky and brings fresh challenges on a daily basis. However, capture price indices – laying out a transparent view on how renewable revenues are changing through time – will help to bring clarity to the debate and provide the industry with essential intelligence to reach climate targets.