Legacy platforms in the evolving renewable energy trading market
In brief
- The energy market is undergoing rapid changes driven by increasing power demand and climate targets, presenting opportunities and challenges, particularly for legacy trading platforms
- Legacy platforms often need help addressing the specific requirements of power purchase agreements (PPAs). Discover how Luxoft can help your company effectively manage and capitalize on PPA benefits
- Renewables trading introduces diverse risks, including weather conditions impacting generation output and managing virtual power plants (VPPs). Discover how we guide clients through the uncertainty
Introduction
The rapid expansion of renewable energy sources in the commodities market has significantly transformed the energy landscape. In response to the global imperative to reduce greenhouse gas emissions and combat climate change, renewable energy technologies like wind, solar, hydro and geothermal power have gained considerable traction as sustainable alternatives to conventional fossil fuels.
According to the International Renewable Energy Agency (IRENA), an astounding 90% of the new global power capacity added in 2020 originated from renewable sources. This increasing emphasis on renewable energy has created a dynamic and evolving market, presenting many opportunities and challenges for legacy trading platforms. These challenges require legacy platforms to adapt and formulate new strategies to participate in the renewables market while addressing the complexities and uncertainties associated with these technologies.
Weather-driven generation and price volatility
Renewable energy generation (e.g., wind and solar) is highly influenced by weather conditions, which introduce an element of unpredictability. Traders must navigate volume and price fluctuations resulting from weather variations. Legacy platforms that rely on traditional forecasting models struggle to capture and analyze this volatility accurately, affecting risk management and profitability. Statistical data from the World Meteorological Organization underscores the significance of this challenge, revealing a threefold increase in weather-related events over the past 30 years.
Short-term trading and high volume
The transition to renewable energy sources has led to a shift toward shorter-term trading in the commodities market. Improved reliability in renewable generation forecasts for the immediate future reduces reliance on long-term contracts, resulting in increased traded volumes in the short term. Legacy platforms need to adapt with real-time data processing, robust connectivity and efficient trade capture to manage these high-frequency transactions.
Bloomberg NEF data shows that the share of short-term power purchase agreements in the United States (2017-2021) rose from 32% to 45%. Notably, the European market witnessed an average daily trading volume of 2.7 million MWh in renewable energy certificates (RECs) in 2021, reflecting the scale of short-term trading activities. These developments highlight the growing importance of short-term trading in the renewable energy sector and the need for legacy platforms to adapt to handle such high volumes.
Power purchase agreements
Power purchase agreements (PPAs) were introduced to address the volatility and short-term vision in renewable energy contract production, making them crucial instruments in renewable energy trading. PPAs enable the conversion of variable generating units into contracts that offer a certain level of price certainty, providing stability in pricing for market participants.
However, managing the complexities and risks associated with PPAs can be daunting for legacy trading platforms. These platforms can encounter difficulties due to their limited flexibility and lack of sophistication in handling various aspects of PPAs. Such aspects include accommodating variable volume adjustments, implementing caps and floors and incorporating pricing formulas that reflect the dynamic nature of renewable energy generation.
Legacy platforms often need help adapting to changing conditions and navigating agreement intricacies. Their inability to address the specific requirements of PPAs can hinder risk management strategies and impact the overall profitability of market participants. To effectively manage and capitalize on PPA benefits, trading platforms must possess the necessary flexibility, adaptability and advanced analytics capabilities.
Managing the data deluge in renewable energy and ESG integration
The transition to renewable energies brings a surge in data volume, particularly with the growing prominence of sustainability and ESG initiatives. Legacy platforms face challenges in seamlessly incorporating ESG data into their trading strategies. It is crucial to have accurate market data for environmental factors to meet regulatory requirements and investor demands for sustainable investments.
As the reliance on renewables like wind and solar power increases, so does the complexity of managing price and weather-driven volume uncertainty. Traded volumes are expanding, and shorter-term trading is becoming more prevalent, triggering thousands of trades automatically through price thresholds and complex algorithms. Accordingly, traders rely on energy trading and risk management software to analyze real-time data from vast data volumes, including ESG market data.
Power purchase agreements (PPAs) add another layer of complexity as they involve converting variable-generating units into contracts with associated risks and complexities. Additionally, the expansion of corporate counterparties and the certification of renewable energy units contribute to the need for capturing, understanding, valuing and risk-managing large amounts of data across various markets, encompassing energy, carbon, renewables and certificates.
Adapting to regulatory shifts: Compliance and clean energy policies
The renewables trading market operates within a dynamic regulatory environment that shapes the industry's direction and practices. Governments worldwide have set ambitious renewable energy targets, implementing supportive policies and incentives to encourage investment and development in the sector. These regulatory measures aim to promote clean energy sources, reduce carbon emissions and drive the transition toward a more sustainable future.
Legacy platforms in the commodities market face the challenge of navigating this evolving regulatory landscape to ensure compliance and capitalize on the opportunities presented. Key regulatory initiatives, such as the European Union's Sustainable Finance Disclosure Regulation (SFDR), require financial market participants to incorporate environmental, social and governance (ESG) factors into their investment decisions and disclose relevant information. The ability to adapt to changing regulatory requirements is crucial for legacy platforms to participate in the renewables market and align with global efforts to combat climate change.
Addressing diverse new risks
Renewables trading introduces a diverse range of risks that require effective management, including weather conditions impacting generation output and the complexities of managing virtual power plants (VPPs). The International Renewable Energy Agency projects that VPP capacity will increase significantly by 2030. Legacy platforms might lack the tools to evaluate and mitigate these emerging risks adequately. Market participants require comprehensive risk management systems capable of addressing the unique challenges posed by renewables trading. In 2020, a California heatwave led to decreased hydropower generation due to reduced water availability. This highlighted the risk of weather conditions impacting renewable energy output and the need for effective risk management strategies to mitigate such risks.
Conclusion
The energy market is undergoing rapid changes driven by increasing power demand and climate targets, presenting opportunities and challenges for market participants, particularly legacy trading platforms. Meeting these challenges requires innovative solutions, including managing weather-driven generation, optimizing short-term trading, handling complex PPAs, integrating ESG market data, mitigating risks and adapting to market developments. Embracing these solutions enables market participants to thrive in the evolving energy landscape.
In the commodities market, legacy trading platforms face the challenge of adapting to shorter-term trading and the high volumes associated with renewable energy sources. To manage these high-frequency transactions effectively, legacy platforms must enhance their data analytics capabilities and embrace automation. Leveraging real-time data processing, robust connectivity, and efficient trade capture capabilities allows legacy platforms to adapt to increased trading volumes in the short term. In turn, this enables improved decision-making and risk management in the fast-paced renewable energy market.
Luxoft has partnered with leading market solutions to address the new challenges of energy trading and risk management (ETRM) in renewables trading. We offer expert advice to guide clients on the best path forward.
Real-time visibility, seamless connectivity for trade capture and straight-through processing (STP), customizable modules, control over power purchase agreements (PPAs), simplified reporting with data analysis, portfolio exposure understanding, integrated environmental trading capabilities, scalability and reduced operational risk through automation are critical features of modern systems.
By leveraging these modern solutions, market participants can overcome legacy limitations, improve risk management, make better-informed decisions and achieve operational efficiency in renewables trading.
Find out more
Luxoft helps clients select the ideal systems for navigating the complexities of renewables trading. If you’d like to learn how we can help your company thrive in the evolving energy market, visit our website or contact us.
Ritu Suri
With over 14 years of experience in capital markets, Ritu has worked as an interbank trader, gaining valuable insights into both sides of the market. She has since held diverse roles, including SME in application maintenance, Murex pre-trade developer, and senior business analyst. She is leading the front office horizontal stream. Ritu is also dedicated to learning and development, contributing significantly to training and extracurricular activities in addition to her project work.
