‘The days of energy market monogamy are over. Now it’s all about open relationships’
For clean energy operators, the days of sticking monogamously to one route to market for power production from your asset are ending. Now it’s all about open relationships.
This is partly a result of fundamental market changes. Long-term feed-in tariffs are a relic of a time when wind and solar needed subsidy support to reach commercial maturity. Now they have. And owners have spent recent years trying to replace this previous financial ‘certainty’ with power purchase agreements (PPAs) and contracts for difference.
Yet, these models are starting to show signs of fraying. Corporates want shorter PPAs that give operators less long-term stability, and competitive auctions have been driving strike prices too low for operators to make enough margin on their investments, meaning mainly that they will have to strive to compete in the open market to profit from new pools of ‘value’, especially with volatility becoming The New Normal.
This will also fundamentally transform the way clean energy companies use software: if they want to be more flexible in how they sell their electricity and/or power, they’ll need to invest in building the right digital partnerships. They may not want to commit to one commercial route to market for 20 years, but they want a technology ally that gives them the flexibility to take part in emerging balancing markets and other energy transition plays as they emerge.
This month, we signed a 20-year software-as-a-service (SaaS) contract with Ylem Energy, an energy generation and storage specialist. Naturally, we’re proud to say that it’s one of the longest software contracts ever signed in this industry; but I mention it more because it’s only the beginning of a much bigger trend.
As our energy systems continue to transform, commercial agility will be more valuable than perfect foresight
Ylem, just like the rest of us, doesn’t know exactly what the market is going to look like in five, ten, or indeed 20 years’ time. Instead of nestling under the wings of long-term PPAs to shelter from that unforeseeability, it is investing in the flexibility that comes from a powerful software system, with the aim of being ready to take part in whichever markets exist at that point in the future.
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The operators that will flourish in the next decade will be those that can draw on real-time power market data to see where the value exists – including the provision of demand response, energy storage and other balancing services – and put in place the technology infrastructure that means they can change direction at short notice. With super-fast data, analysis, and applications, they will be able to react in seconds.
Flexibility is crucial, and this means that current software systems, with their focus on asset monitoring and predictive maintenance, will not be fit for purpose in future. They must draw on market data too, combining physical and financial data in new applications.
The most obvious leaders of this revolution are IPPS (independent power producers) and ESCos (energy services companies), all of which have battery energy storage worked into their industrial worldview. These are the nimble innovators that will develop new business models, and some, eventually, will be acquired by the utilities that want them to stay at the cutting edge. In due course, this will lead to a wave of M&A.
As we all know, it is still early days in the transformation of the world’s energy systems from fossils to renewables; but momentum is building, fast. We are working with pioneers in the energy transition that are investing in the ‘software layer’ now, because they believe it will be central to the versatility and flexibility they will need later. Other operators, large and small, will doubtless soon follow suit.
Real-time data is the key to unlock profitability in today’s volatile power and energy markets. As our energy systems continue to transform, commercial agility will be more valuable than perfect foresight – and the technology provided through long-term SaaS partnerships aims to enable this.
The future is not about monogamy to one route to market; it is about being flexible and open-minded about the new routes to market that arise. Powerful modular software will help us ‘plug in’ to whatever we need as we move through a revolutionary period in the global energy transition.
· Peter Bance is CEO of independent energy technology company Origami Energy