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'More volatility expected' in energy sector amid transition to renewables: ING

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·3 min read
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There is “more volatility expected” in the energy sector, with price moves in both the short and long term as a result of the global energy transition to renewables, according to a report released by ING (ING).

“The energy transition will increase the long-term costs of the energy system and power prices could rise by 2050 as a result,” the report read. “But more wind and solar will push prices lower in the short term.”

Energy prices today are contingent on factors such as commodities markets (coal, gas, and carbon, for example), weather conditions, market circumstances, storage and flex markets, power grids, and supply and demand.

The rise of wind and solar has shown no signs of faltering—the coronavirus pandemic has ultimately had little impact on the rise of renewable energy. Corporations continue to lead the charge in adopting and purchasing renewable energy, with Amazon (AMZN) now the largest corporate renewable energy buyer in the world. However, some argue that labor supply shortages as well as disruptions in material supply chains may cause a delay in the energy transition.

HAMI, CHINA - JUNE 16: Aerial view of heliostats at a 50 MW molten salt solar thermal power plant, operated by China Energy Engineering Group Planning and Engineering Co., Ltd (CPE), on June 16, 2021 in Hami, Xinjiang Uygur Autonomous Region of China. (Photo by VCG/VCG via Getty Images)
HAMI, CHINA - JUNE 16: Aerial view of heliostats at a 50 MW molten salt solar thermal power plant, operated by China Energy Engineering Group Planning and Engineering Co., Ltd (CPE), on June 16, 2021 in Hami, Xinjiang Uygur Autonomous Region of China. (Photo by VCG/VCG via Getty Images)

“Wind and solar power have grown massively in recent years across Europe,” the report states. “In Ireland, 40% of power generation is expected to come from wind turbines and solar panels in 2021, compared to around 30% in Spain, Germany and the UK. Shares are considerably lower in France, Belgium and the Netherlands, but the trend here is also upwards.”

Price cannibalization

In the short term, ING cites “price cannibalization” as being one of the main causes of wind and solar driving power prices down. Cornwall Insights defines price cannibalization as the depressive influence on wholesale electricity price at times of high output from intermittent, weather-driven power generation such as solar, onshore and offshore wind.

“The swing effects are highest for wind energy: a 50% increase in the share of wind power causes weekly prices to drop by -7% on average and monthly prices by -8%,” the report read.

Price cannibalization can occur intraday or over the course of several months. ING cited weather as being one of the main determinants of energy production and price. For example, high levels of solar production on a sunny day may cause intraday power prices to drop. However, issues arise for power production companies when demand is low and generation from renewables is high as wholesale and captured power prices can even be temporarily negative.

The long term, however, yields a different story—ING believes that power prices are likely to rise within the next several decades due to dramatic changes in energy systems in order to achieve carbon neutrality for countries and corporations around the world. According to ING, by 2050, energy systems will depend more on renewables, depend more on electricity, achieve more effective storage capabilities, capture and store carbon emissions, as well as have a more diversified and integrated grid infrastructure.

“All of these changes require vast amounts of investment in an already quite efficient, though fossil-based, energy system,” the report read. “The costs of the energy system will rise as a result.”

In light of rising oil prices caused by strong demand spurred by successful economic reopenings by the U.S., China, and Europe, analysts say demand continues to outpace supply as a weekly report from the Energy Information Administration (EIA) noted a drop in U.S. crude inventories of 7.6 million barrels for the week ended June 18. This was the fifth consecutive weekly decline reported by the EIA, with last week’s commercial crude oil stock standing at the lowest level since the week ended March 6, 2020.

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV

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