Energy Mix in the Age of Renewables: An Overview
13 Sept 2022
Alexander Reinhold, CEO
Energy has become an increasingly hot topic in recent years. While global warming and rising energy prices make headline news on a daily basis, few understand that energy trading lies at the very heart of our world’s energy transition.
Before we zoom in on how energy — and particularly power — is bought and sold in Europe, it’s necessary to have a look at some of the energy basics.
Energy at a Glance
We virtually consume energy either in the form of power, as heat or in traffic.
Power refers to electric power that can charge the device on which you are reading this article
Heat refers to non-electrical sources of heat that can warm your apartment in winter
Traffic comprises non-electrical sources of powering mobility, such as fuel-powered cars
Europe’s primary energy production comprises fossil fuels (e.g. oil, coal, gas), nuclear energy and renewables (e.g. wind, solar, hydropower). While most heating is dependent on gas production and most traffic is dependent on oil production, power is usually subject to a complex mix of all of the sources mentioned above.
The focus of this article and our entire insights section will primarily be on power, though we will be making continuous references to oil and gas markets to keep a comprehensive perspective.
Let’s take a closer look.
Renewables vs. Fossil Fuels — the Game is Changing
Unlike gas or oil, power cannot be stored on a large scale, despite recent advancements in battery technology. However, in order to keep our lights on, the amount of power produced and consumed must be balanced within the grid at any point in time (i.e. be kept at a frequency of exactly 50 Hertz). In other words, physical supply in the grid must equal physical demand.
That's why the three big fossil fuels — oil, gas and coal — are “convenient” energy sources as they are stored for an indefinite period of time before being burnt for power production. As a result, using fossil fuels has allowed us to make power generation predictable and extremely manageable.
However, the big downside of these energy sources is their catastrophic impact on our environment. Particularly oil and coal are releasing extremely high amounts of carbon dioxide and other harmful materials into the atmosphere.
As a result, governments have rightfully incentivized the growth of CO2-neutral and renewable energy in recent decades, with the aim to become “climate-neutral” by 2050.
One avenue for progress is nuclear energy, which is CO2-neutral but not renewable and therefore disputed by many. A more prominent approach towards carbon neutrality is a renewable-focused energy mix while electrifying heating and traffic so that our society will no longer be dependent on fossil fuels.
In our striving towards a net-zero future, most European policies promote renewable energy sources, the most important being water (hydropower), wind (wind power) and the sun (solar power).
Peculiarities of Renewable Energy
Let’s start with hydro. Per se, hydropower plants are great given that their production doesn’t fluctuate — i.e. an uninterrupted energy supply is warranted. Just like fossil fuels and nuclear, hydro is therefore considered a dispatchable source of energy as it can be counted on when needed. However, hydroelectric production is highly dependent on how much water one has available at a given location. In short, it takes a big natural supply and a favorable topography to be able to convert water into energy.
In contrast, wind and solar energy sources are much more flexible in terms of location. However, the produced output is subject to great levels of volatility given the weather dependency, making wind and solar non-dispatchable. In short, predicting the exact amount of energy that will be produced on a given day by a solar farm is impossible.
Why is this relevant? Remember, to maintain a balanced grid, overall production of power needs to equal consumption. This gets significantly harder as the amount of non-dispatchable sources is growing. As a result, we need to have the means in place to buy and sell power quicker and more frequently than ever before to account for the production volatilities associated with wind and solar.
This is where power trading comes into play.