The future of energy procurement and energy trading: change, trends and the role of IT service providers

The Ukraine crisis in 2022 has turned the electricity market upside down: new price records and extreme price spikes have since become reality and have also fuelled public debate about so-called ‘extreme prices’. But that's not all: energy procurement and energy trading will also face far-reaching changes in the coming years. Driven by the energy transition and the associated necessity of decarbonisation, increasing digitalisation and the phasing out of state subsidies for renewable energies, the energy market is becoming ever more complex and dynamic. At the same time, price volatility continues to increase due to the rising share of renewable energies and the decentralisation of generation, especially in short-term markets. The traditional processes of energy procurement and trading, which were long characterised by long-term contracts, rigid price structures and stable market conditions, have changed fundamentally.

Energy trading is increasingly shifting from long-term fixed-price contracts to short-term and dynamic forms of trading. Spot and intraday markets, which are based on short-term trading decisions, are becoming more important in order to balance price volatility and fluctuations in supply and demand. However, this new flexibility requires the use of advanced digital technologies to process data in real time and automate trading decisions. Energy companies must adapt to these new market conditions in order to remain competitive in the years to come.

The biggest drivers of change in the coming years

A number of factors are accelerating change in energy supply and energy trading, including in particular the following:

• Expansion of renewable energies
• Increasing price volatility in the markets
• Regulatory changes such as the discontinuation of EEG funding
• Network congestion management

1. Expansion of renewable energies

According to the Renewable Energy Sources Act (EEG), 80 per cent of gross electricity consumption in Germany is to be covered by renewable energies by 2030. This important and no less ambitious goal requires appropriate measures. Above all, this means change – and quickly. In the first half of 2024 alone, renewable energy plants with a capacity of 9.3 gigawatts were added in Germany. At the same time, demand for electricity is increasing, for example due to the switch to electric mobility and the increased use of heat pumps.

Wind and solar energy are currently the fastest growing energy sources, leading to an increasing decentralisation of electricity generation. While this has positive effects on climate protection, the volatile generation from weather-dependent sources poses new challenges for the markets. The fluctuating share of wind and solar energy is leading to increasing volatility in the electricity markets and increasing the demands on grid operators and traders to efficiently balance these fluctuations.

2. Price volatility in short-term trading

Price volatility in the short-term markets (day-ahead and intraday markets) will continue to increase due to the growing share of renewable energies. Short-term fluctuations in power generation, for example due to weather-related changes, lead to increased uncertainty in pricing. In particular, the intraday market, where deviations between PV and wind forecasts on the one hand and load forecasts on the other are primarily balanced, is experiencing more and more extreme price fluctuations – both positive and negative. Energy traders must be able to react quickly to these fluctuations in order to maximise profits and minimise losses.

The war in Ukraine in 2022 also had a significant impact on electricity prices. For example, higher gas prices due to the lack of gas deliveries from Russia caused prices on the day-ahead market to rise enormously. Although electricity prices have fallen again since the energy crisis peaked, they are still significantly more volatile than before the crisis.

Overall, it can be assumed that phases of high and low prices will increase significantly. This is reflected in the continued strong price spikes and prices of over 100 euros per megawatt hour, as well as in the development of recent years in terms of the number of negative prices on the market (day-ahead: 301 hours in 2023 vs. 69 hours in 2022) .

3. Discontinuation of EEG funding

With the planned expiry of EEG funding for older renewable energy plants in Germany, many operators will enter the free market. These plants will have to be competitive without state funding, which will further increase the pressure on energy trading. Operators and traders will have to develop new business models to operate these plants economically. Overall, these plants are forced to sell at market prices, which can tend to lower market prices, especially in times of high renewable feed-in. In the long term, this will further increase market volatility.

4. grid congestion management

With the increasing share of renewable energies, the challenges in grid congestion management are also growing. Renewable energies are often generated in geographically isolated locations, which can lead to capacity bottlenecks in the transmission grid.

Grid congestion and volatile prices also increase the need for storage solutions and flexible power plants. The use of battery storage, flexible load control and load management for industrial customers will become more important as a result. In energy procurement, energy traders will need to include such flexibilities in their portfolio in order to be able to react to grid congestion in a targeted manner.

The biggest needs: scalability, automation and integration capability

In order to respond to the challenges mentioned, companies and energy traders need to further develop their IT infrastructure and invest in digital solutions that are geared to three key requirements:

• Scalability
• Automation
• Integration capability

1. Scalability

The ability to flexibly adapt IT solutions to demand is crucial to responding to the increasing complexity of the energy market. The energy industry is changing due to the increased use of decentralised, often very small, generation plants. This multitude of generation sources brings with it a high degree of complexity and requires the ability to grow with the operation and management of the plants. In order for these to participate efficiently in the market, they often have to be bundled and aggregated. This bundling is necessary to make small plants attractive for trading and to use them competitively in the electricity markets.

2. Automation

Automation is key to increasing efficiency in energy procurement and trading. The use of algorithms, artificial intelligence and machine learning can optimise trading processes and make decisions in real time. This is essential, especially in the context of increasing trading volumes. Automation solutions enable faster processing of large amounts of data, leading to more precise trading decisions and reducing human sources of error. In particular, the use of robotic process automation (RPA) and AI promises efficient automation of standard processes.

3. Integration capability

The integration of systems and data sources is another critical success factor. Companies must be able to incorporate data from various areas, such as weather forecasts, grid capacities and consumption behaviour, into their trading and procurement processes. Specialised solutions for the seamless integration of these data sources are essential to ensure more precise control and optimisation of the processes. The link with trading and energy markets and the collaboration with third-party providers and service providers also requires a high level of integration capability in order to make the systems used as open and flexible as possible for the connection.

Conclusion: the energy market of the future – flexible, digital and automated

The energy market will be characterised by far-reaching changes in the coming years, due to the expansion of renewable energies, the increasing volatility of electricity prices and regulatory changes. Energy companies must automate their processes in order to be able to react flexibly and efficiently to these new challenges. IT service providers can offer centralised support by providing and developing digital solutions that focus on scalability, automation and integration capability. Energy trading will be increasingly data-driven and automated, while energy procurement will become more flexible and dynamic. Companies that address this change early on with the right IT strategies will be successful in the energy market of the future.

Would you like to learn more about exciting topics from the world of adesso? Then take a look at our blog posts published so far.