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The rapid integration of renewable energy sources has fundamentally reshaped the European energy market.
A key phenomenon emerging from this transition is the cannibalisation effect, which refers to the reduction in capture prices of a technology due to its increased installed capacity and participation within the electricity market leading to a devaluation of electricity during its production periods. This devaluation can be observed especially with renewable energy sources like solar and wind.
Solar and wind energy output fluctuates depending on weather conditions, leading to periods of high generation coinciding with similar sources across the grid. This simultaneous generation, especially during sunny or windy periods, creates a surplus of electricity, exceeding demand and driving down prices. The more renewable energy is produced, the lower the market price tends to become, creating a negative feedback loop.
Revenue instability: Renewable energy generators face fluctuating and often lower revenues, making financial planning and investment strategies more complex.
Price volatiliy: Electricity prices become more volatile, making it difficult for both producers and consumers to predict costs and plan accordingly.
Investment barriers: Decreasing profitability can discourage future investments in renewable energy infrastructure, potentially hindering the transition to a sustainable energy system.
PPAs: By providing price stability and predictability, PPAs reduce the financial risks associated with the cannibalisation effect for renewable energy projects. They make renewable energy investments more attractive by ensuring a guaranteed revenue stream, even when market prices are low due to high renewable energy participation.
Energy storage: By storing excess energy during peak production times and releasing it during low production periods, energy storage can mitigate the impact of cannibalisation.
Grid management: Improving grid infrastructure to better balance supply and demand across regions can help stabilise prices and optimise the utilisation of renewable energy.
The strategies of energy storage, advanced grid management, and PPAs, form a comprehensive approach to mitigating the cannibalisation effect by ensuring a continued growth and integration of renewable energy sources.
Feel free to address us any concerns you might have with the cannibalisation effect regarding your portfolio.
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