Renewable energy trading 101: Definition, market overview, trends, benefits and challenges

The rise of renewables, sped up by the volatility of fossil fuel markets after the pandemic and the full-scale invasion of Ukraine, created a shift in power markets. Globally, the renewable energy production capacity year-on-year increase was 50% higher in 2023 than in 2022. This shift is turning solar and wind into the winners.

Morgan Stanley went so far as to predict that renewable resources are to completely replace coal in the U.S. power grid by 2033. Solar power is, by far, the king and queen of renewables. Its share in total global energy production rose from a mere 0.8% in 2010 to 12.8% in 2022 and is expected to reach 22.2% by 2027, outpacing hydropower:

This shift in power capacity composition creates incentives for renewable energy trading as investors seek to diversify their portfolios and minimize risks. Here’s everything to know about trading renewable energy, from market overview and benefits and challenges to trends, opportunities and risks.

Energy trading, as you may already know, refers to the exchange of energy commodities in financial markets. The said energy commodities include crude oil, natural gas and electricity.

Renewable energy trading, in turn, is the trade of electricity produced using renewable means and other renewable energy commodities like biofuel. Renewable energy includes solar, hydro-, wind and geothermal power, as well as bioenergy (biofuels) and marine energy.

Renewables are a sustainable means of electricity generation that don’t produce greenhouse gas emissions as fossil fuels do. That’s why governments around the world incentivize renewable energy production and hence the rise of renewable energy production volumes and the price decrease.

Renewable energy sources differ from fossil fuels in two key ways:

• Variable operating costs are extremely low as there’s no fuel consumed for energy production. The only costs worth taking into account concern maintenance.

• The most common renewable sources, solar and wind, can’t provide stable energy production as the output depends on the weather. That complicates forecasting output in the long run and ensuring it’s enough to satisfy the demand.

Power trading and renewable trading, while significantly overlapping, aren’t the same. Power trading encompasses all types of electricity, whether it is produced in a coal power plant, nuclear plant or solar farm. Renewable trading, in turn, includes buying and selling commodities like biofuel.

Global renewable energy production capacity reached 3,372 GW by the end of 2022, showing a 9.6% year-on-year increase. Solar and wind accounted for 90% of new renewable capacity. Asia is in the lead by renewable capacity and accounts for 48% of global production capacity, with Europe as the runner-up:

Global energy production volumes coming from solar and wind are projected to triple by 2030. Such fast growth is explained by the regulations already put in place to incentivize renewable energy production.

For example, the European Union plans to increase its renewable capacity to 45% by 2030, according to the REPowerEU energy transition plan. In the United States, the Inflation Reduction Act of 2022 heavily incentivizes renewable energy development, as well.

According to McKinsey & Company, while the expansion of the renewable energy sector is a sure bet, historically, the market has been quite volatile. Several factors are to blame for this volatility, from frequently shifting regulations to significant fluctuations in raw material costs.

For instance, the rising demand for wind energy and pandemic-induced supply chain disruptions led to a 2-3x increase in steel, copper and aluminum prices. These materials are key to wind turbine production.

The renewable energy trading market consists of two types of markets, based on the buyer type.

Compliance wholesale markets cater to buyers who are required to purchase renewable energy to comply with regulations.

For example, in the United States, electric service providers have to maintain a minimum amount of renewable energy in the supply, as proven by a renewable energy certificate (REC). They can purchase excess electricity produced by individual consumers (e.g., from solar panels on a residential house) or commercial producers.

Voluntary energy markets allow buyers to acquire renewable energy supply beyond what is mandatory. They may choose to do so because renewable energy can be cheaper than that produced using fossil fuels.

While the global energy commodity price index was showing a significant increase post-2020, the global weighted average levelized cost of electricity fell for all renewable types in 2022 . For example, while onshore wind energy was 95% more expensive than that produced by the cheapest fuel in 2010, it became 52% cheaper in 2022.

Renewable energy trading comes with these benefits:

• Lower costs. As mentioned above, renewable energy costs are falling below those of the cheapest fuel-fired electricity production. Purchasing renewable energy to meet sustainability goals can be more affordable than kicking off renewable or carbon offset projects in-house or purchasing carbon credits.
• Favorable regulatory landscape. From the European Union and China to the United States, governments view renewable energy as the solution to attaining the 1.5-degree climate goal. This leads to a variety of favorable regulations, from tax incentives to government-backed investments.
• Reduction in carbon emissions. On a global scale, renewable energy production is considered vital for keeping global warming under 1.5 degrees. On the microeconomic level, purchasing renewable energy helps businesses comply with carbon emission restrictions without purchasing carbon offsets.
• Energy source diversification. Relying on a single energy source can be detrimental to energy security if the energy prices for the said source shoot up. Consider the increase in natural gas prices following the invasion of Ukraine.
• Greenified investment portfolios. Investing in renewable energy on a macroeconomic level creates jobs and promotes renewable projects’ development. On the microeconomic level, renewable energy investments improve investors’ ESG scores, which can be crucial for their reputation.
• New revenue streams. Enterprises that decide to venture into renewable energy projects can sell the excess of the produced electricity to generate an additional revenue stream. For example, solar panels can be installed on buildings’ rooftops.

However, renewable energy trading is not without challenges:

• Output variability. As renewable energy output volumes may depend on weather conditions (wind, solar power) or water levels (hydroelectricity), the output may be too low to satisfy demand. While it’s possible to predict the output in the short term, weather forecast reliability falls drastically several days into the future.
• Regulation complexity. Regulations vary drastically across the globe, leading to disparate certification systems and mandatory market rulebooks. As a result, trading renewable energy across the border can prove difficult to execute.
• Lack of standardization. RECs aren’t standardized worldwide, making certificate verification and comparison a laborious undertaking. This contributes to the complexity of cross-border renewable energy trading.

Here are the green energy trading trends to keep an eye on.

1. Solar and wind growth continues to outpace other renewables: According to the International Energy Agency, solar is in the lead in net renewable electricity capacity additions. PV-utility and PV-distributed technologies accounted for roughly two-thirds of additions in 2022. Wind, dominated by the onshore segment, takes up another quarter of new additions — however, wind expansion encounters persisting challenges like rising turbine production costs.
2. Blockchain is powering record storing: As a distributed ledger is immutable by definition, it sparked the interest of providers looking to securely store, prove and transfer RECs. For example, the French energy leader, Engie, is using blockchain for trading RECs, as well as for peer-to-peer energy trading. Decentralizing REC issuance and tracking can also reduce operational costs and power greater traceability and transparency.
3. Renewables at the center of the EU’s response to the energy crisis: As the European Union is working towards reducing its reliance on natural gas from Russia after the invasion of Ukraine in 2022, it’s placing the bet on renewables. Its inventives accelerated the development of renewable projects as solar PV energy became increasingly more cost-efficient and attracted policy support in markets like Germany, Italy and the Netherlands.
4. China in the lead in renewable capacity installations: When it comes to both onshore wind and solar PV capacity additions, China outpaced the rest of the world in 2022. The country accounted for half of global renewable capacity additions, as well. It’s projected to continue championing renewable development in 2023 and 2024.
5. Peer-to-peer trading enters the picture: Blockchain and smart contracts paved the way for renewable energy trading marketplaces like SunContract. Such marketplaces allow customers to engage in renewable energy commodities trading without intermediaries, as the blockchain eliminates the need for a third party to verify the certificate, authenticate and execute the transaction.

Leveraging the opportunity that clean energy trading presents requires a comprehensive technology solution. Such a solution has to power risk management, output monitoring, straight-through processing and real-time execution.

At DXC, we have 14+ years of experience in developing technology solutions for energy and utilities organizations and 200+ successfully delivered projects on our track record. Our 500+ engineers leverage their deep domain expertise to deliver energy trading solutions that automate workflows and power demand-driven responses at scale.