Green transition & strategic challenges in power market

The green transition influences power market, which is in the shift from fossil-fuel dominated system into based on renewable energy sources and carbon-free solutions. By 2050 renewables will produce more than 90% of energy being dominant power producer in the global power system. Biomass and the waste will surpass fossil fuels as energy sources. Storage of green power and electricity production based on green hydrogen will operate as pick-power producers replacing gas power plants. Power companies have to rethink the role of non-emitting technologies in their portfolio: nuclear, geothermal, hydro. Next important issue is demand flexibility. Power companies used to operate previously in market characterized by predictable and inflexible demand. The application of RES, electric vehicles, power storage systems and e.g. heat pumps starts to change the demand’s pattern. On other hand these new elements of power system can offer some flexibility in demand side management. Electric vehicles and heat pumps are manageable concerning time of power consumption. Therefore, electric vehicle can be treated as power storage system element as well (vehicle-to-grid). It seems that the required direction of strategy development is set - the necessity of adjustment to green transitions demands, right infrastructure investments and business model changes, securing decrease of costs on the other hand. Constantly updated regulations create new dimensions for strategy directions backed by new technological models. Power companies have to find strategic answer to the appearance of new complex business environment of energy system created during green transition. Power companies should develop new business models being climate neutral, adjusting operational activity to challenges of green transition. Strategic response should define what has to be changed and to what extent in order to protect future profitability. Changes of regulatory standards and technological solutions creates new risks that have to be managed.

Renewable energy sources, as mentioned before in the blog, shall be basic power producers until year 2050, what requires not only to finance necessary investments, but to provide security and flexibility of power supply – e.g. large scale power storage, decentralized power supply, peer-to-peer power trading, high flexible power plants. The acceleration of windfarms’ construction in Europe became in 2022 the determinant of the future security of supply. Hence, power companies face the radical changes of profits drivers. Technology maturation of RES and market innovations require changes both in business strategy and business model of power companies. The main factors influencing power companies’ strategy are green transition, customers expectation and regulatory changes. 

These factors create following strategic challenges, facing the power companies:

1) Renewable energy sources are already competitive to coal and gas power plants, becoming target power sources.
2) Necessity to determine the right definition of pace at which the green transition will progress.
3) The development of green finance and green taxonomy stopped to finance investment related to fossil fuels.
4) The reallocation of capital to green industry will spur booming demand for climate-friendly products and services, produced using green power.
5) New competitors outside the energy sector entered the power market, taking over customers of power companies based on innovative offer, supporting reduction of coal footprint. These competitors are well prepared to new conditions of functioning in green transition and digitalized energy market.
6) Customers aim to decarbonize industrial processes, minimalize carbon footprint and climate change. The energy intensity is the determinant of a positive image of power companies’ image that is backed by reduction of GHG emission. Hence, the power companies shall respond the needs of industry.
7) Renewables will create challenges in balancing power system, supporting development of power storage and new sources of power production.
8) Dominant role of renewable energy sources in power system will force to change the characteristics of transmission and distribution grids towards more bidirectional.
9) New value chains shall be considered based on development of renewables, green power storage, green hydrogen, recycling and waste utilization both in products perspective and geographical, e.g. import of green hydrogen from regions with surplus of cheap renewable power.
10) High volatility and significant market risk following the changes in production volumes of renewable power (local) or flows of green hydrogen (global).
11) Necessity to rethink the elements of value chain in power market as a result of erosion of the traditional barriers between energy sectors and development of new products and services. Customers become the value chain partner, helping to work out products better serving their needs.