Complex Made Simple

Is the Middle East ready for a profitable trade in renewable energy?

By Ben Lovell-Viggers, Senior Writer at FXTM

The world of energy teeters on the precipice of enormous change. As corporations and governments around the world come to terms with climate change, peak oil and rising prices, suppliers and the markets are being disrupted by a proliferation of technologies and schemes that aim to wean the world off fossil fuels.

From Aachen to Abu Dhabi, whether it’s wind, solar or hydro, renewable energy is the word on everybody’s lips, writes FXTM Senior Writer Ben Lovell-Viggers.

The amount of energy generated by renewable means has increased steadily since the oil crises of the 1970s; in 2016, renewable energy comprised just under 20% of humanity’s global energy consumption. Countries such as Denmark have even committed to being entirely dependent on renewables by 2050.

Nonetheless, the rise of renewables raises an interesting question: investors have traded oil and other unrenewable commodities for decades; is there similar scope for a market in renewable energy?

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A platform for change: PPAs

The trade in renewable energy is gathering pace around the world as business and even individual households gravitate away from the grid, and towards local suppliers.

Global technology companies like Amazon, Google and Apple are among the standard-bearers for the adoption of renewable power in the United States.

This is due largely to the federally-subsidised construction of renewable power plants across the country, with a large number of solar and geothermal projects located in California – extremely convenient for Silicon Valley’s tech giants and their power-hungry data centres.

Power plants – and the energy companies that represent them – trade renewable energy with corporations in the form of PPAs (Power Purchase Agreements). These agreements, last from 5 to 20 years and allow firms to offset their carbon emissions with a renewable source of electricity, and in some cases, even re-sell surplus energy back to the supplier.

PPAs are usually the domain of large multi-nationals who wield both the funds and legal resources to deal with such complex arrangements; but what about the little guy?

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Little big impact

In 2016, software company Open Utility teamed up with UK-based renewables provider Good Energy to release Selectricity, a peer-to-peer flexibility trading platform. The core concept behind Selectricity and competing platforms is simple: businesses are matched with local providers of renewable energy at favourable rates. This gives them the freedom to reject mainstream vendors and choose not only where they get their electricity from, but also the means by which it is generated.

PPAs and energy trading platforms like Selectricity are playing an increasingly important role in the transformation of the energy industry.

Trading renewable energy helps businesses make a positive impact on the environment whilst adhering to international regulations governing carbon emissions.

At the same time, the decentralisation of the energy industry opens space for an increasing number of renewable energy providers, as well as novel means of supply and payment.

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Renewable diplomacy

The emergence of renewable energy trading isn’t just limited to commercial activity, however. In 2012, the UK Government published a ‘Call for Evidence on Renewable Energy Trading’. This document was intended to explore the potential for trading renewables with EU member states. It concluded, among other things, that “physically importing renewable electricity has real potential”, but that further work was needed to establish viability.

In fact, the framework for trading renewables between EU member states already exists with EU Directive 2009/28/EC ‘on the promotion of the use of energy from renewable sources…’.

Built into this directive is a mechanism known as Statistical Transfer. This allows governments to purchase renewable energy from other member states in order to help them meet energy targets. Such a mechanism means that a country with limited renewable resources could still meet EU targets by importing its renewable energy quota from elsewhere.

Hussein Sayed, Chief Market Strategist at FXTM, a global, award-winning broker, argues that “the capacity for trading renewable energy offers a whole raft of benefits for everyone from governments to individual consumers”.

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These benefits include:

– Reducing nation states’ carbon footprints and limiting the emission of greenhouse gases

– Meeting EU targets on renewable energy regardless of domestic resources

– Enabling more efficient energy use, particularly in times of shortage and surplus

– Driving down wholesale energy prices, with increased value for businesses and homes

– Encouraging the development and implementation of renewable energy solutions across the industry by lowering the cost of technology r&d

– Fulfilling ethical obligations in the eyes of the public

One factor limiting the adoption of solely-renewable means of energy production is intermittent supply. It’s impossible to guarantee or predict the amount of energy generated by renewable resources such as wind, solar and tidal, making it difficult to match supply with demand.

This leads to unpredictable hikes and falls in the price of energy.

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Looking to the future

According to Mr. Sayed, “the trade in renewable energy is currently limited to the US and Europe; nations with abundant domestic fossil fuel resources like Russia, Saudi Arabia and the Gulf States are being slightly slower to catch up. That’s all set to change, however.

KSA recently announced that it is seeking a $50 billion investment in solar and wind energy, while the United Arab Emirates are looking to renewables as a means to keep up with an increase in industry, population, and the associated energy costs of marine desalination. Similar projects are being carried out around the world, from China to South America.”