Last year saw a turning tide for the energy sector. For the first time, renewable energy overtook fossil fuels as the largest source of UK electricity for a full year, with renewable energy from wind, solar, water and wood contributing 42% to UK electricity, compared to 41% for gas and coal derived energy. The EU also had a record-breaking year, with renewable energy overtaking fossil fuels for the first time. Less energy consumption over lockdown, combined with one of the mildest winters on record, led to reduced demand on the national grid. Similar effects were seen in the oil industry, with the price of oil plummeting over the course of the pandemic due to reduced demand and oversupply. BP is now predicting that renewables could make up as much as 60% of the world’s primary energy needs by 2050, depending on the scenario.
Commodities markets thrive on volatility, but the last year has been particularly unstable and there are many variables that could influence the market again – economic stability, post-pandemic habits (e.g. transport and travelling), and new legislation. The market is also becoming more varied and more competitive, with more players, more varied commodities, and more focus on decarbonisation. Then there’s the balance between those countries focused on climate change and reducing emissions, and the rapidly growing demand for energy in developing countries. With the market sliding decisively towards renewable, energy trading has also had to adapt. In this blog, I explore how the sector is changing.
Decarbonisation
Last year saw a more aggressive approach to tackling climate change from government officials. In November, the government released a 10-point plan for achieving the government’s net-zero by 2050 target, and in December announced a goal to reduce carbon emissions by 68% by 2030. Meanwhile, the EU moved forward with setting its 55% by 2030 reduction target as part of its journey to net-zero emissions by 2050.
While the pandemic pressed pause on many projects, the lifting of restrictions will see the creation of more renewable energy sources – with the government planning on doubling subsidies for onshore, offshore, solar, wind and tidal schemes in 2021, amid a host of targets – such as generating 40GW from offshore wind farms by 2030. Many energy companies have already sensed this shift and adapted accordingly, with key players like Shell and BP committing to net-zero emissions by 2050 targets.
Diversification
Energy trading has always been volatile, but in recent years – enabled by digitisation and globalisation – trading markets have become more fast-paced and reactive. Increasingly, energy markets are interconnected, with global gas and power markets often linked to each other in trading circles, and influenced by events on the world stage.
Commodity trading has become more competitive, with industrial companies buying directly on wholesale markets, independent companies offering services for smaller buyers, and energy companies expanding into new markets and going toe-to-toe with niche suppliers on new commodities.
Meanwhile, improvements in connectivity have enabled trading in real-time, advances in artificial intelligence have supported automation and algorithm-based trading for day-ahead and intraday trades, and early-stage blockchain technology is being used to improve transparency for transactions and support peer-to-peer trading.
Against this backdrop, the future of renewable energy trading is interesting. Natural energy sources can be less reliable and energy trading businesses will need to bake in optionality and scenario plan in order to protect profitability as they diversify their portfolios.
Democratisation
Thanks to improvements in small-scale, cutting-edge green technology (such as solar panels), today people from all over the world can find a foothold in the energy market, generate their own energy and access power off-grid. This is leading to democratisation in the energy network.
Historically, energy was transacted along one-way lines – flowing from the centre to the grid edge and controlled by a handful of key market players at a national level. But with more people empowered to take their energy needs into their own hands, and growing networks of connected devices, controlling energy supply is becoming harder. Democratisation will level the playing field and carve up the power and monopolisation of energy providers, but it also presents some challenges. Multiple different players trading could open up inefficiencies, cut-off value chains and inhibit larger scale upgrades.
However, democratisation will create new opportunities for energy providers to work across boundaries. For example, Energy-as-a-Service (EaaS) moves the focus from buying assets, generating power, and selling, to providing an end-to-end management service. By creating ‘energy communities’, providers could merge markets, make improvements to the grid, implement smart technology and deliver predictive load balancing.
Digitisation
For change to happen, technology will be key. Building on the Internet of Things (IoT), digital twin technology and automation will be invaluable for balancing and optimising smart grids, bringing more visibility and accountability to energy trading, and ensuring that power is distributed fairly. Artificial intelligence (AI) will also play an important role in predicting trading decisions, using real-time data gathered from IoT to optimise energy supply and help traders make informed decisions.
These technologies will also map environmental change and record the effectiveness of different climate change initiatives, including optimising processes like shipping routes and logistics that can contribute to emissions. As a result, demand for data will remain high in energy trading.
Meanwhile blockchain will facilitate trading by creating a safe, transparent trading environment, with immutable, real-time contracts, which will lower the barrier to entry and enable peer-to-peer trading. This will break up the monopolisation of the energy market, enabling individuals to understand their personal usage, create and trade energy directly, and have more optionality about where and when they buy power.
What does this mean for the future?
Creating this future will mean experienced hands. But this isn’t without its challenges. The renewables market is still relatively young, and the tech skills that are needed for digital transformation are increasingly tough to find due to their high demand across all industries. Nearly half (48%) of businesses in the UK are currently hiring for data skills, for example.
As the energy market becomes more digitised, democratised and diversified, having the right talent in place will be critical for staying ahead of the curve. Working with a specialist technology and digital talent solutions provider, like Lorien, will be key for reaching niche pockets of tech talent. With over ten years’ experience in ETRM and CTRM, we’ve been part of the energy sector’s digital transformation journey since the beginning – enabling us to understand your requirements and translate your opportunities with precision. We have one of the largest and most established ETRM and CTRM networks in the industry, and we’d love to introduce you.
Reach out to me – chris.barton@lorienglobal.com – for more information on how we can help you prepare for the future of energy trading.
