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New research by Discovery Green reveals the risks of over-investing in solar

 

New research by Discovery Green reveals the risks of over-investing in solar
19-06-24 / Tommy Jackson

New research by Discovery Green reveals the risks of over-investing in solar

Johannesburg - Discovery Green released insights today from an analysis of over 300 connection points, 58 companies and various renewable energy generation facilities that shows current approaches available to businesses for procuring renewable energy are short-sighted and risky. The key reason being that businesses are procuring too much solar, alongside an alarming growth rate of the solar energy industry in South Africa, and could end up increasing their total energy costs by more than 50% in the long-run.

Given the pressures of a recent year marked by unprecedented load shedding, a surge in electricity costs that doubled the rate of inflation, and looming global penalties on imports with high carbon footprints, businesses are increasingly prioritising the procurement of renewable energy. The urgency for businesses to secure renewable energy from the market is notable, especially as South Africa possesses some of the finest renewable energy resources globally. However, it is critical to question whether the current strategies are appropriate and scalable.

Andre Nepgen, Head of Discovery Green explains, "While with traditional largely coal-generated electricity, you pay for what you use; with renewables, you pay for what was generated, regardless of whether your business uses the energy or not. This is the fundamental difference between the procurement of renewable energy and utility-supplied electricity - the point of payment. This is why it is critical to optimise the mix of renewable energy and match it to a business' consumption patterns up front.

"Our research shows that no industry has an electricity consumption profile that perfectly matches the solar generation profile. It also explains why businesses shouldn't assume they can solve for the remainder of their renewable energy needs in the future – it is more complicated than that," says Nepgen.

The research paper provides a technical review of the five most common renewable strategies (such as rooftop solar, wheeled wind generation, trading etc.) and which provide the best long-term financial benefit and protection for businesses against uncertainties. The analysis is conducted for seven industries, from mines, to agriculture, to shopping centres. Each of the five strategies are also tested against the most likely futures such as a national oversupply in solar generation; or high local or international carbon taxes; and against their ability to withstand volatility in generation and consumption.

A strong caution against excessive solar procurement

It is often the case that decision-makers must navigate inherent behavioural biases when considering solutions with long-term consequences. Nepgen says, "We believe there is currently a pronounced bias towards solar energy, and while the immediate financial benefits of solar energy are clear, there is a tendency to overlook the long-term consequences, opting instead for short-term gains."

Typically, after replacing 45% of their energy needs with solar, businesses face a 77% premium to fulfil the remaining 55% with renewable sources. This is because businesses must find a supply of renewable energy only for their leftover nighttime consumption, which is an extremely expensive product to offer for any renewable energy supplier. As a result, businesses tend to settle for a low level of renewable energy coverage after procuring solar, but there is a cost to this too. With only a small portion of their total energy demand covered by renewables, businesses remain heavily exposed to high utility-price increases in future years, projected to be well above inflation. These long-term costs are frequently omitted during the sales process and decision makers are not yet equipped to understand all these dynamics.

It is dangerous to assume that the sun will shine and the wind will blow as expected, or that business consumption will be stable

Moreover, the extent of the variability in renewable energy generation is often under-appreciated by businesses, as is the extent of variability in businesses' electricity consumption. Many businesses base their decision-making on historical averages without accounting for the risk of extreme events that could impact generation or consumption.

"Our analysis shows that output from a single solar facility can fluctuate by more than 14% between consecutive months, and by up to 33% for wind plants, and that's if the sun was to shine and the wind was to blow as expected. This can increase to as much as 72% when considering the potential variability within a single time-of-use billing period, which is what ultimately drives a business's financial savings," says Nepgen.

In terms of variability in businesses' consumption, the data shows a stark difference between industries, as much as a 6.5x multiple in certain cases. Failing to consider this variability means that the perceived value of renewable energy may not materialise as expected.

The solution lies in traditional insurance principles of risk pooling and diversification.

The analysis shows that the solution to these challenges lies in diversification, both in terms of energy generation and consumption. "While the market views variability negatively, we see it as a unique opportunity", says Nepgen. "By pooling together renewable energy from various sources, you have the ability to create a diversified energy portfolio that is more resilient to fluctuations in generation. This diversification helps to smooth out the variability inherent in renewable energy sources, such as solar and wind power, ensuring a more stable and reliable energy supply and a less risky product proposition to businesses. "

In terms of consumption, the financial and risk benefits of a diversified business portfolio are even more effective. A portfolio of diverse business consumption profiles can create an ecosystem that achieves a higher percentage of renewable coverage, with a negligible risk of wasted generation. The results show that where a single business can achieve a 49% renewable energy coverage level before energy becomes wasted, a portfolio of five businesses from different industries acting together can increase this coverage level to 78%.

"Importantly, businesses can use this model to replace at least 90% of their energy consumption with renewables in a single transaction, eliminating the risks presented by low coverage solar-focussed strategies" adds Nepgen. The results show that under this model of renewable energy procurement, the financial savings for businesses were the highest for all but one industry."

"The purpose of the analysis is to provide businesses with clarity to inform their decision making in the face of uncertainty. It is also clear that the cost of inaction is significant," he concluded.

The white paper can be downloaded here.

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