The last few weeks have felt like an earthquake has hit European energy markets. Deep shockwaves have rippled out from central government offices, sending markets across the continent into disarray. As a former energy trader, I must confess that I felt a little queasy trying to absorb how the different proposals would quell the current volatility.
The regulatory uncertainty is unlike anything we’ve felt before. Discussions are ongoing in Germany over windfall taxes on energy companies, and Italy recently imposed a 25% windfall tax on energy companies, including renewable energy producers. In the UK, the government is currently consulting on the biggest reforms to its electricity market seen since its creation. That is not to mention the current energy politics playing out in Belgium, France, Hungary and Spain.
While all market and price signals have indicated strong opportunity to re-invest profits, the rules of the game for renewable energy trading are changing, placing pressure on Independent Power Producers (IPPs) and funds to monitor and hedge their revenues and build the trading capabilities needed to adapt to market and regulatory changes quickly.
Market challenges run deep
Renewable energy portfolio owners have enjoyed abundant revenue and good profitability in recent years. This has been driven by Europe’s commitment to accelerate its energy transition and the recent political momentum for stronger, bloc-wide energy security. Gains across the sector can be seen in asset values, which have been rising since late 2021.
Nonetheless, the current situation requires new levels of energy trading sophistication from investors. On the one hand, utilities that are buying renewable energy are facing a liquidity squeeze as they struggle to come up with the cash for collateral requirements. Soaring prices of electricity and increased volatility have made many future positions fall deep into the red, prompting exchanges to request hundreds of millions of pounds or euros overnight to cover margin calls.
On the other hand, IPPs and funds, which don’t have the extensive trading capabilities and expertise of utilities, are struggling to find strategies to effectively deal with uncertainty.
While short-term PPAs are being used with increasing frequency to hedge renewable energy revenues, shifting regulatory goalposts are generating uncertainty around this strategy. It’s therefore becoming more important for IPPs and funds to effectively monitor revenues and understand the possible challenges and opportunities created by eventual regulatory changes so that they can close these deals effectively.
Renewables portfolio owners must protect revenues
To protect profits and revenues amid current market conditions, renewables portfolio owners must rapidly increase their understanding of their revenues at risk and baseload equivalent exposures. This comes down to employing actual and forecasted production data, as well as reliable historical and forward capture prices that help with calculating risks.
Renewables portfolio owners cannot afford to delay their ‘coming of age’.
Furthermore, the short-term PPA is an essential tool that can be optimised to improve hedging and risk management. Advanced portfolio management software and trading services can plug the gap in the capabilities needed to structure and manage short-term PPAs, helping IPPs and funds to execute short-term trades and level the playing field with utilities and professional traders.
Longer-term, these capabilities must become ingrained in the structure of renewable energy businesses. Amid challenging market conditions and mixed signals, renewables portfolio owners cannot afford to delay their ‘coming of age’ as they evolve from financial investors into energy companies.
Today’s uncertainty will drive funds and IPPs to equip themselves with the tools and capabilities they need to protect their revenues and succeed in a new world of energy trading. This should be some cause for optimism as we wait to hear what our governments have in store.
Michael Waldner is CEO & co-founder of Pexapark
