Demand for renewables in Europe is changing, thanks to an over saturated grid. Can independent power producers continue to compete at home, or is the only choice to pursue new markets?

In recent years, the European energy market provided open grounds for developing renewable energy projects — renewable penetration was low, and ambitions were high in many progressive, western European nations. As such, there was a gold rush of independent power producers (IPPs) who arrived on the scene to stake their claim in a bounty of PPAs and FITs. 

Today, we see many European IPPs struggling. Opportunities seem more elusive for those still scraping by in the Wild West of renewable development. With the exception of a modest rebound this quarter, Europe has been on a steady decline in investment attractiveness. The reason for this decline is, simply put, a saturated market. However, the market is not saturated due to a lack of demand — buyers want more green energy. European PPAs and feed in tariffs are drying up because the grid is saturated. With a saturated grid, true market demand for renewables is irrelevant.  

In China, we get a good glimpse at what happens when incentives do not match the realities of grid limitations — investment numbers appear impressive, but many projects are left operating at well below their capacity factor (if at all). Germany is finding itself in a similar situation, and smart European buyers and regulators are taking note by rolling back offerings to renewable developers. While this is a brutal reality for today’s IPPs, it will be in the best interest for renewable growth in the long term. What we are seeing is the end of the Wild West era, and the beginning of an age of forced innovation.

So how does a European IPP survive this shift? A popular choice is to look at markets outside of the EU, where the pinch of grid limitations has not taken hold. Developers like Enel and First Solar are increasingly looking for the next bull markets, such as the Middle East or South America. In these markets, there is still room for the large, utility-scale projects that can be built domestically. These markets are even more attractive because their grids are not as developed, which means more modern grids (which are capable of receiving more renewables) may be seen in the developing world before they get going in Europe.

Developers that want to stick with the European market can do one of two things. First, they can try to keep doing what they have been doing — taking on smaller projects and a more diversified portfolio, while trying to find dark corners of the grid that have yet to be saturated. This fruitfulness of this, of course, is finite. The second choice involves requires more innovation.

The elephant in the European room is, of course, the grid. Smart European developers are already taking note. Enel has recently committed 47 billion to the digitization of the grid in anticipation of an “internet connected era”. Such innovation may allow the sharing of renewable resources across distances not previously considered to be possible. This would, in turn, vitalize a new rush in renewable development in Europe and beyond. Of course, great reward often requires great risk, and this is no exception.          

While many developers are struggling, advocates of renewables can certainly choose to see this as a success — we have finished picking all the low hanging fruit; now it’s time to see who can adapt. Whether the next step is foreign markets, smaller projects, or new grid technologies, the developer’s business model is about to get much more complex. For this reason, maintaining portfolio integrity, pipeline visibility and accurate reporting will be necessary, and having a quality solution to manage these processes and the overall investment lifecycle will be key in ensuring the success of market expansion.