Mitigating price volatility: How flexible investments can strengthen renewable portfolios

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Renewable energy is transforming the US electricity market, which is expected to grow from 25% to 45% of total generation by 2030. While this rapid expansion is critical to a low-carbon future, it also introduces new dynamics for investors – particularly in terms of price volatility.

Solar and wind energy, driven by different weather conditions, can result in differences between forecast and actual output, resulting in large price differences in day-ahead markets versus real-time markets. For portfolios with a high proportion of renewable energy, managing these fluctuations is crucial to ensure stable and resilient returns.

Furthermore, demand mismatches exacerbate this volatility. Solar production peaks around midday, often when demand is low, and tapers off in the evening when demand increases. In states like California, where solar makes up a large share of electricity, this mismatch can lead to significant daily price fluctuations. Complicating matters is that many renewable assets are located far from demand centers, leading to location-based price differences that can reduce profit margins.

In contrast, during periods of extreme wind or sunshine, renewable energy production can exceed demand, causing price drops that reduce revenues when production peaks. For portfolios with a high proportion of renewable energy, this “oversupply effect” highlights the need for stabilizing factors to ensure a steady revenue stream.

Flexible assets as a stabilizer

To counter the volatility caused by renewable energy sources, flexible assets have become a means to manage imbalances between supply and demand and stabilize returns. Battery storage, gas generation and demand response are leading solutions that help portfolios remain resilient in increasingly volatile markets.

U.S. battery storage capacity is expected to rise from 13 GW today to 110 GW by 2030, representing eight-fold growth, as investors respond to stronger demand for higher storage capacity. Batteries can be used to store excess energy when prices are low and release it when demand peaks. This creates new revenue opportunities and reduces exposure during times of lower prices. With their ability to respond quickly to price fluctuations, batteries are becoming an essential asset for stabilizing returns.

Gas generation remains a reliable option for supplying electricity on demand. While gas accounts for 43% of U.S. electricity generation, some investors are weighing its carbon footprint against its role in stabilizing portfolios focused on renewable energy. Gas-fired power plants can quickly adjust their output, ensuring reliable electricity supply when renewable energy production is insufficient and providing a hedge against price instability.

Demand response programs are seeing increasing participation and offer network operators the opportunity to encourage consumers to use less during peak periods. Demand response now covers around 60 GW of capacity across the country, helping to reduce strain on the grid without the need for new infrastructure. For investors, it offers a flexible and sustainable way to smooth out the fluctuations in renewable energy and enable a dynamic approach to managing portfolio risk.

Together, battery storage, gas generation and demand response provide a critical buffer against the risks associated with renewable energy, making portfolios more adaptable and financially resilient.

A strategic approach to building resilient portfolios

In addition to integrating flexible investments, a multi-pronged strategy is essential for long-term stability in portfolios with a high proportion of renewable energy. Acquiring flexible capacity through M&A can increase the resilience of existing investments. By investing in established battery storage or demand response facilities, investors gain immediate capacity and better risk control, without the lengthy timelines typically required for new energy infrastructure projects.

Integrated financial modeling gives investors a portfolio-wide overview of potential risks and returns. By simulating the performance of flexible assets and financial hedges under various market conditions, investors can optimize risk-adjusted returns and structure portfolios that balance risk appetite and stability.