Investments in renewable energy will become inherently riskier for institutional investors without an appropriate increase in energy storage, according to EDHECInfra.

The benchmarking and analytics provider argues that, as intermittent green energy sources, such as wind and solar, become central to power systems, they increases the volatility of power prices and therefore the risks faced by investors in the sector.

Its latest report finds that “a rapid switch to intermittent renewable generation that is not accompanied by a commensurate rise in energy storage, has non-negligible consequences for investors”.

The report said: “Renewable energy may be enjoying record profits, but risks are also increasing as a direct result of it becoming more a prevalent source of power. This in turn should ultimately have an impact on the returns required by investors to hold such assets.”

EDHECinfra has highlighted a raft of challenges brought about by the growing share of intermittent renewable energy in the generation mix:

  • Rising development and construction costs;
  • Higher volume volatility;
  • Increased market price volatility as rising exposure to intermittent wind sources adds to the variance of power prices, particularly at peak times;
  • Cannibalisation in the form of the average price captured by renewable installations becoming lower than the average wholesale price over the year;
  • Renewables are intermittent and so it is more difficult and costly to balance the electric grid, creating grid instability.

EDHECinfra also concluded that, because greater renewable energy production leads to more volatile energy systems, the option value of gas must increase.

“Hence a key beneficiary of the transition to a higher share of renewable energy generation, until enough low carbon storage capacity is available, is gas power, a readily dispatchable source of power,” it said. “Gas may in fact be the best hedge against more volatile green power.”

Authors Laurence Monnier, Frédéric Blanc-Brude and Leonard Lum added that political risk was also increasing, with recent announcements from the UK and EU on capping renewable profits showing that renewables are not exempt from the type of intervention more commonly seen in the oil industry.

“Supportive regulation has been a cornerstone of the renewables’ success story and we argue that current market challenges cannot be solved by emergency fiscal measures,” they said.

“In effect, regulatory support in the form of price stabilisation for renewable and energy storage could benefit both investors and consumers.”

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