On the fast track
The current invasion of Ukraine by Russia has clearly shown Europe the shortcomings of the last few years, during which the strong dependence on gas imports from Russia was not taken into account.
As a result, current EU policy makers are envisaging a strong acceleration of the energy transition, with a view to reduce dependency on fossil imports by significantly increasing renewable capacities.
Even elsewhere in the world the current high gas prices push policy makers towards technologies not impacted by the fossil fuel price increases. The other side of the story is the expectation that power generation by coal-fired power plants will reach record highs by the end of this year, which will cause very high emissions overall. While economics for renewables have significantly increased amid current high power prices, as the willingness to pay for clean energy has never been higher on the corporate side, the expected strong acceleration in the short term is currently slowed down by supply chain issues and lacking work force.
Short term drawbacks
The rebound in demand after Covid and the steep increase in prices for natural gas led to the expectation that global coal deployment in 2022 will in all likelihood match the annual record set in 2013, and that coal demand will increase even further next year to a new all time high. This is bad news for the planet and leads to a significant setback in progress towards the goal of climate neutrality. Emissions have to be seen as cumulative and not year by year, unfortunately, making the need to decrease future emissions even more inevitable. This remains a risk at least in the short- to mid-term as the renewables sector fights with supply chain issues and potential work force shortages. This is currently leading to a delay in expansion of renewables due to unavailability of parts as well as increased costs.
Over the past months, policy makers have picked up the pace with multiple initiatives being promoted, such as the proposed Inflation Reduction Act in the US, the Energy Security Strategy in the UK and the EEG 2023 in Germany. The latter is targeting an increase in today’s RES capacities in Germany by a total of 230 GW by 2030 and 480 GW by 2040, mainly driven by solar, quintupling todays capacities.
The European Commission has also not missed out on the recent developments by publishing RePowerEU, which forms the latest EU energy strategy with the overall target to reduce dependency on Russian gas and increase the rate of clean energy expansion. The main pillars of the strategy are decreasing approval times for clean energy projects to one year, while quintupling the rate of investment in clean energy by 2030 aims to more than triple the installed base of clean power by 2030.
This means that the pace of new RES installation is set to be significantly accelerated across Europe, but only if national targets are adjusted to implement the EU goals.
Improved market conditions
In general, the economics of renewables have drastically improved over the last few months with record high power prices allowing renewables traders to negotiate higher PPA rates or sell power at record high prices through the energy exchanges. Due to the current European power market design, technologies such as renewables and nuclear that are not impacted by current rising fuel prices are set to earn record windfall profits. As it is unclear when power prices will normalise again, bringing the asset online as soon as possible is one of the highest priorities for the players in the market in order to have strong negotiation power to reflect current high prices in the long term PPA price.
From the perspective of corporates, the current alternative is to buy power from the exchange, which shows prices that are currently up by around 700% compared to a normal year. For example, the German 2023 contract was traded at around EUR 50 / MWh in the beginning of 2021 and is currently traded at over EUR 370 / MWh. It is in the interest of the corporates to be able to stretch these costs over a longer period of time. AFRY's PPA benchmark therefore currently shows 10-year PPA prices to be traded south of EUR 100 / MWh, leading to a current win-win situation for both sides: for RES developers and operators, who can secure financing due to long term commitments with very high IRR expectations, while corporates are able to spread out their costs over a longer period of time. This is reflected in this year's CPPAs closed deals numbers, which have been the highest across the past years while utility PPAs are on decline.
What will be the back up technology?
An energy system with a high share of renewables will need a tonne of flexibility on both sides, demand and generation. While demand side flexibility is due to come significantly from sector coupling, generation flexibility has become a mystery amid recent developments. Before Russia's invasion, most countries planned to increase their gas-fired capacities in order to secure enough flexibility to ensure supply security even in hours when the sun is not shining and the wind is not blowing. The question is now: Who is currently still investing in gas-fired power plants? The answer is predictably that it is not happening much. Currently roughly 10GW of new gas-fired power plants are planned, with AFRY's Central Scenario showing the need for around 55GW of additional gas capacity by 2030. What can fill the gap if this target is not met? Well, it is likely that planned coal phase outs, most prominently by Germany, will not be solvable. The only suitable long term solution seems to be hydrogen fired power plants. To improve this, the EU plans to invest around EUR 200 million in hydrogen projects. However policy makers will need to act swiftly as this is quite an infrastructural task.
There is light at the end of the tunnel
There is hope that once the supply chain issues are resolved, there will be no obstacles to a strong expansion of clean energy projects. Popular acceptance of renewable energies has never been higher, as current high energy bills make it painfully clear to everyone that relying heavily on fossils exposes the power sector to extreme price shocks. Even with power prices reverting back to a more normal level, the need for clean energy through PPAs will remain high as the fear of potential future price shocks will further increase demand for long term price certainty amongst corporates. This, combined with strong regulatory support, will hopefully be enough to make up for the increased emissions that seem inevitable over the next few years.