For electric utilities, an investment in renewables is a wise hedge against fuel sourcing volatility
Commercial Senior Specialist, Sales Analytics
Published on November 29th
The world needs electricity. It’s both as simple and complicated as that. We can’t just stop producing it and we’re going to need more of it in the future. But tomorrow’s electricity production is looking chaotic. Recent geopolitical conflicts have only emphasised the need for utilities to rethink their sourcing. To bring a level of predictability to a volatile market and deliver on locked-in prices, renewable energy can provide much needed stability in fuel sourcing cost.
Layer in renewables
The last few years have shown that it is possible for utilities to hedge against fuel procurement price fluctuations but not against global catastrophes. The first increase in fossil fuel prices was brought on by an unexpectedly rapid post-covid recovery, which was only intensified by the following geo-political unrests, combined causing highly unstable prices for fossil fuels. Amidst the already tumultuous landscape of fluctuating fossil fuel prices, the added layer of currency risk only serves to amplify the challenges further, especially when procuring fuels denominated in USD from local currency revenues. From a fuel cost perspective then, it makes sense for utilities to hedge their bets by layering in more renewables to offset these increases and uncertainties.
Finding the sweet spot
Put simply, a utility’s business model is to produce electricity for its customers at both household and industrial levels. They need to deliver electricity and must source it from somewhere. The utility wants the lowest production cost – which are renewables, but still needs some conventional production sources if the wind doesn’t blow or the sun doesn’t shine. The sweet spot they are seeking is how much they can get from renewables, while still being able to fulfil their delivery obligations.
Reduce production costs
Renewables are the best way to reduce the average production cost of MWh that utilities need. The impact is greater, the higher the cost for oil, gas and coal. Because with a wind turbine plant, for example, once the installation costs have been paid, the fuel is essentially free, with only operational costs to consider. This is what makes wind energy increasingly attractive – and by choosing wisely, these benefits can be significantly increased.
Higher capacity factor provides better insurance
For utilities, it comes down to installing MW. But what they need to deliver to the end customer is MWh. Every MWh they produce from renewables, they do not have to produce from expensive fossil fuels – and a higher capacity factor means they get more MWhs from every MW installed. This is an important consideration for utilities who are looking to maximise their wind park investment. If a utility is looking to use renewables as a hedge or insurance against fossil fuel price fluctuations and increases, then the value of that insurance is greater if they get more MWh out of their installed capacity, which is directly linked to a higher capacity factor of the wind turbines. It’s a good protection. The hedging value is higher.
Long term benefits
Is this state of affairs temporary – high volatility in prices? Probably yes. Geopolitical energy challenges – and governmental incentives to decouple from fossil fuel will likely mean higher and unstable fossil fuel prices for the foreseeable future. An investment in a wind power plant is therefore one of the wiser avenues to get there. The relatively minimal marginal generation cost from a wind farm after its installation contributes to an absolute upside to the project economics. Every MWh that utilities produce from renewables they don’t have to produce from expensive fossil fuels. And to maximise MWhs for utilities when using renewables as insurance, one of the best options is to deploy high capacity factor wind turbines.