Credit to Author: Darrell Proctor| Date: Mon, 01 May 2023 04:18:13 +0000
European countries have moved quickly to adopt new energy sources after Russia’s invasion of Ukraine in February 2022. Governments have reduced imports of Russian-produced energy, with demand for natural gas in the European Union (EU) dropping by 13% last year compared to average annual levels. The International Energy Agency (IEA) in March of this year said that was the largest annual decline in EU gas demand ever recorded.
Governments have pivoted to renewable energy, with additions of solar and wind power generation capacity across several countries. Fears of an energy crisis, driven by Russia’s actions in Ukraine, have accelerated policies supporting alternatives to coal- and natural gas-fired generation. But while policymakers recognize the need to take more control of their energy resources, there are many challenges to a rapid build-out of renewables, which means natural gas, coal, and nuclear power—which some consider “green” energy and important to decarbonization—will remain a part of the continent’s generation mix. Germany, in fact, said it will keep some nuclear plants online at least temporarily after promising a complete phase-out of nuclear power by the end of last year.
SolarPower Europe reported that the EU installed 41.4 GW of solar in 2022, up 47% from the 28.1 GW installed in 2021. Germany led the way with 7.9 GW of solar installed last year, followed by Spain with 7.5 GW. The group said the EU solar power generation fleet increased by 25% year-over-year, to nearly 209 GW. Energy think-tank Ember, in its recent “European Electricity Review 2023,” said solar and wind together generated about 22% of all electricity in the EU last year.
|1. The 25-MW/100-MWh grid-scale BESS in Ruien is one of the largest connected to the Belgian high-voltage grid as well as one of the first four-hour long duration BESS units in the EU. Source: Wärtsilä|
Energy storage also is making inroads across Europe. Technology group Wärtsilä in early March announced it had brought online a 25-MW/100-MWh battery energy storage system (BESS) in Belgium, in a collaboration with Japan’s Nippon Koei Energy Europe and Aquila Clean Energy EMEA, the European clean energy development platform of Aquila Capital. The grid-scale BESS (Figure 1), located on the site of a former 800-MW coal-fired power plant, is among the largest connected to the Belgian high-voltage power grid, and also one of the first four-hour-long duration BESS units in the EU. Officials during a launch ceremony in March said the project “highlights the importance of battery energy storage systems for the energy transition throughout Europe.”
Gabriele Buccini, general manager for Business Development Energy Storage at Wärtsilä, told POWER the company “is proud to deliver one of the largest energy storage systems in Belgium to date. Our energy storage technology is playing an important role in supporting the energy transition in Belgium and the surrounding Benelux region by balancing the grid and helping to integrate more renewable assets as the country phases out of nuclear power by 2025.” Buccini continued, “As Europe looks to reduce its use of fossil fuels and nuclear dependency, there is a growing opportunity for companies like ours to lead the way to a 100% renewable future,” which she said includes a focus “on delivering flexible solutions and power system optimization technology to make net-zero a reality.”
Officials acknowledge that energy storage becomes more important as the use of renewable energy grows, supporting integration of solar and wind, and stability of power grids. It’s among several factors impacting Europe’s electricity mix.
“The viability of renewable energy technology in Europe will depend on maturity and cost-effectiveness, availability of natural resources, infrastructure and regulation, among other factors,” said Neil Walker, director of Macro Modelling and Scenarios at Oxford Economics. “These conditions are different in each country. In general, the more-established technologies like solar PV [photovoltaic] and offshore wind are the most viable given their technical maturity and costs, which have come down over the past decade. But there are some exceptions; for example, hydropower is dominant in Austria and Latvia due to their rivers and high precipitation.”
Some countries that have relied on hydropower are concerned about a mild winter across much of Europe. A lack of snow and rainfall over the past few months, following heat waves in some areas last summer, mean there could be less water available for hydropower, which historically has been Europe’s second-largest renewable energy resource. The IEA said electricity produced by hydropower in Europe was down 18% last year. That could mean a bigger role for other generation resources.
|2. A European energy group said solar and wind power generation accounted for 22% of all electricity produced in the EU in 2022. Source: Envato Elements|
Said Walker, “For renewable technologies to take on a bigger portion of the energy mix, investments in storage solutions [batteries], upgraded grids, and transmission connections will be necessary. Government policy should also be predictable and supportive to encourage long-term private investment, for example, by cutting down bureaucratic red tape and accelerating the permitting process for renewable energy projects like wind.” Notably, investments in offshore wind installations in Europe declined last year, according to WindEurope, even as many new projects were announced. WindEurope reported that several offshore wind farms were expected to reach financial close last year, but final investment decisions were delayed because of inflationary pressures, market interventions, and uncertainty about future revenues.
Other sectors, though, are growing, including solar and onshore wind (Figure 2). Daniel Marhewka, co-head of Energy and Natural Resources at Fieldfisher in Munich, Germany, said, “It has been reported that investment in renewable energy in Europe declined last year and is continuing to slow, but this is not what we are seeing. Based on our current pipeline, we have not seen any dropoff in the volume of investment—we are still very busy particularly with wind and solar, and latterly hydrogen projects across Europe.”
Marhewka told POWER, “Recent examples of our M&A/JV [mergers and acquisition/joint venture] work in this area include advising Irish floating offshore wind developer Simply Blue Group on a JV with Eolus to develop the SeaSapphire floating wind project in the Baltic Sea, and advising investment and asset manager KGAL on a JV with Pfalzsolar to develop two solar parks in Greece with a total capacity of 176 MW. These deals are typical of the projects we are being asked to advise on—i.e., large wind and solar projects—and there are no indications yet of demand slowing down. Floating offshore wind is a particular area of interest for investors, as is hydrogen.”
Paul Stockley, head of Oil and Gas at Fieldfisher’s London, UK, office, said, “While renewable energy investment and deployment is expanding in line with the energy transition, it looks as though it may not be a straightforward growth story. One contributing factor to this may be the decision by oil and gas majors like BP to pivot back toward hydrocarbons and scale back their climate targets. The trend is likely to have also been partly driven by the incredibly high energy prices and fears over gas shortages we saw in Europe last year.” As an example, BP’s annual revenue for 2022 was about $249 billion, a nearly 52% increase from 2021, according to Macrotrends, an investment research group.
Emily Tetley-Jones, real estate director at Fieldfisher in London, said, “Another complicating factor for the growth of renewable energy generation in the UK in particular is the amount of time project developers have to wait for grid connections. The race is on to get more high-capacity cables in the ground but some developers are reportedly facing [years-long] waits to be connected to the grid. A lot of the growth in renewables will come from their co-location with mixed industrial developments, and this is putting a lot of pressure on an electricity network badly in need of upgrading.”
The EU’s moves toward renewable energy have been supported by the climate and decarbonization goals of several governments. Massimo Maoret, an associate professor in the Strategic Management Department at IESE Business School in Spain, said, “The EU has been committed since the 2007 ‘climate and energy package’ to increasing its share of renewable power production. Its 2020 targets have been met and greatly surpassed, such that the EU set even bolder targets for 2030 in its subsequent ‘Fit for 55’ package.” That package calls for at least a 55% reduction in EU carbon emissions by 2030.
Maoret noted, “The Russian invasion of Ukraine added even more strategic urgency to the European energy transition to make the continent more independent of key suppliers of fossil fuels [such as Russia], setting a plan to phase out Russian gas by 2030. A bet on green hydrogen as the main substitute for natural gas requires an even stronger focus on renewable power production, which is required at even greater capacity to reach the goal of 10 million tons of green hydrogen domestic production set by the block.”
Maoret told POWER, “While the direction is clearly set, a few roadblocks may impair continuing the installation of renewable power at the current pace. As macroeconomic conditions are changing and interest rates are increasing, utility companies struggle to refinance their high debt and finance their renewable projects. High interest rates may also lure away institutional investors toward more traditional low-risk asset classes [such as sovereign bonds] rather than keep investing in infrastructure and renewable power projects [which, in the past few years, guaranteed the stable yields that in ‘normal’ macro conditions are generated by bonds]. On the other hand, oil and gas companies are enjoying extraordinary profits due to the relatively high prices of fossil commodities; however, these companies seem more oriented in reinvesting their cash flows in fossil exploration rather than fully commit to renewable energy.”
Those who spoke with POWER about Europe’s energy situation said government support for additional power generation projects does not mean new installations are being fast-tracked. Said Maoret, “The other major barrier to renewable projects is securing land permits. As ‘easy’ locations [those with easy access and connection to the grid] have already been exploited, newer projects are more complex and often get slowed down by either conflicting multi-layered [government] administrations and/or the ‘not-in-my-backyard [NIMBY]’ syndrome, in which local communities strongly oppose the development of projects close to their homes. EU initiatives on ‘energy communities’ are oriented to overcome NIMBY resistances but may indeed generate even more complex governance problems.”
Anna Crosby, a banking and finance director at Fieldfisher in London, said, “In terms of the UK position around onshore wind, the recent reversal of the 2015 planning laws banning new onshore wind developments back in December 2022 is something that might mean there is an uptick in UK onshore wind investment this year and in the future. There are still some slightly tricky practicalities around investing in and developing an onshore wind project in the UK, and it’s something planning and finance lawyers in the renewables space are looking at so they can help guide clients.”
Those investing in European power generation projects likely are looking at more than just renewable energy, said David Lang, a partner in King & Spalding’s Corporate, Finance & Investments group. Lang told POWER, “There is more to discuss than just wind/solar. I think we are particularly well-placed to talk about the long-term role the U.S. will play in providing Europe with energy security, first in the form of LNG [liquefied natural gas] and increasingly in the form of hydrogen/ammonia, particularly with incentives in both the U.S. and Europe for green hydrogen/ammonia.”
Alex Harrison, a partner in law firm Akin’s London office who represents energy clients, told POWER: “From a pure cost perspective, solar and onshore wind remain very attractive. For renewables at scale, offshore wind is increasingly competitive. The next frontier is the decarbonization of our hard-to-abate heavy industry, heavy transport, maritime, and aviation sectors. For that, we will need solutions relying on biofuels and power-to-liquid technologies.”
Harrison said hydrogen likely will increase in importance. “Hydrogen can play a critical role as a fuel in its own right and as a feedstock for the production of synthetic or e-fuels or green ammonia. The key challenge is securing a very-low-cost electricity supply that is not subject to wholesale market volatility. The market for clean hydrogen and derivative fuels remains uncertain, which makes securing a long-term offtake for a price reflecting the true cost of production difficult.”
Natural gas remains important to Europe’s energy mix, which means alternative sources for gas are needed absent imports from Russia. “The EU has seen increased demand for LNG imports from those countries without access to natural gas through a pipeline. There has been a rush to create new LNG import capacity in the EU to address that demand and there are fears that we may have an oversupply of LNG import terminal capacity in the near future,” said Harrison. “We have also seen a surge in interest in locally produced biomethane or green gas solutions, which can be blended into natural gas networks and which offer additional benefits in terms of reducing emissions and increasing energy independence.”
James Hill, CEO of Vancouver, British Columbia–based MCF Energy, told POWER he expects gas production within Europe will increase to offset at least some of the reduction in imports from Russia. “To reduce reliance and future dependence on imports of natural gas and oil from Russia, European countries have begun exploring a variety of options to help refuel economic activity underscored by energy, for the long term,” Hill said. “With that being said, the EU parliament has recently backed labeling gas investments, much needed for the energy transition, as ‘green.’ As a result, many communities are shifting their stance towards pro-development, given we are still decades away from full electrification.”
Hill continued, “According to IOGP Europe, natural gas produced within the European Union has a 30% smaller footprint compared to when it is produced outside the continent. Natural gas resource development is timely, given the urgent need, and is also a bridge for the energy transition taking place in Europe. We can expect growth in the area of natural gas production to increase over the next few years.”
—Darrell Proctor is a senior associate editor for POWER (@POWERmagazine).
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