Energy Security Concerns to Drive Renewables Investment Surge

Energy developers and storage companies in focus as demand for renewables is set to increase across Europe, says new research. 

Renewables could account for nearly 70% of electricity production across the UK and European Union by 2030 as the region’s geopolitical crisis accelerates plans to replace fossil fuel imports, according to a new report. 

Much of the responsibility is set to fall to companies that can deliver major upgrades to electricity grids and significantly increased storage capacity, given the intermittent nature of wind and solar power. 

High wholesale gas and electricity prices across Europe, combined with Russia’s invasion of Ukraine, have accelerated energy security proposals in the EU and UK, which build on existing plans to reduce exposure to fossil fuels. 

“We expect strong long-term growth in European renewables driven by an increasingly favourable regulatory environment,” said the report by investment research and advisory firm Edison Group.  

The combined impact of the REpowerEU package of measures and the British Energy Security Strategy could lead the EU to produce more than 65% of its electricity from renewables by 2030, and the UK about 80%, the research found. 

Although these measures aim to accelerate the renewables transition to minimise reliance on Russian oil and gas, other new research suggests the invasion of Ukraine has slowed the switch from fossil fuels in the short term. According to the Renewables 2022 Global Status Report, wind and solar’s share of the global energy mix has only risen slightly over the past decade.   

Costs of wind and solar generation to fall 

For the rest of this decade, wind and solar energy are set to see growth rates of 23% and 12%, respectively, said Edison Group, and will make up the bulk of renewables. The costs of this energy generation are set to decrease while those of gas remain high. 

As a result, renewables developers should generate enhanced returns on capital, with some value also spreading to renewable-equipment manufacturers and to a lesser extent the component and services providers, the group said. 

Grid and energy storage companies are also in focus due to the huge investment required to ensure that electricity systems can cope with a significantly higher proportion of renewables, along with companies involved in stationary battery storage, hydrogen electrolysers and grid infrastructure. 

Renewables made up 22% of energy consumed in the EU in 2020, more than double the share in 2004, with Sweden achieving by far the highest share at 60%. Wind and water provide most renewable energy, while solar is the fastest growing energy source. 

The European Green Deal aims for the region to become the world’s first climate-neutral continent by 2050 and the REpowerEU plan, set to be implemented by the summer, looks to diversify gas supplies, 90% of which are imported, and reduce dependence on fossil fuels. 

In the UK, renewables made up just under 40% of electricity generation by the country’s major power producers in the last quarter of last year, matching generation from gas, with nuclear at just under 17% and coal at 2.5%.  

The country’s energy security strategy aims to generate more than enough wind capacity to power every home in Britain by 2030, but received a mixed reception due to its focus on nuclear energy. 

Renewable energy business models vary 

As part of the transition to cleaner energy, significant sums will need to be invested to support an increasingly intermittent, decentralised and digitalised power system. In the UK alone, regulator Ofgem last year approved £40 billion in grid investment for the five years to 2026. 

Storage companies are poised to build on this investment, and in particular those that provide the short-duration storage solutions that are required for grid resilience due to the intermittent nature of wind and solar power, the report said. 

In the UK, the largest battery storage developer is renewable energy infrastructure fund Gresham House Energy Storage, while the global leader is Fluence, a Nasdaq-listed company majority owned by Siemens and AES Corporation. 

Within the renewables sector, business models differ widely, with varying degrees of capital return, the research also found. 

Among renewable developers, for instance, developing from greenfield and keeping the operating assets captures the most value, but is also the most capital-intensive model. Sometimes, more value can be realised by selling to a utility or selling pre-construction, a model adopted by Eco Energy World. 

Increasing appetite for corporate power purchase agreements (PPA) outside of the highly competitive auction process is also supporting the sector, said the report. A corporate PPA is a long-term contract under which a business agrees to purchase electricity directly from an energy generator. 

“We expect structurally higher wholesale electricity prices, driven by structurally higher gas prices and an increasing EU carbon price. This, combined with a long-term trend of decreasing levelised cost of renewables and increasing appetite for corporate PPAs, should drive value into the sector, with renewables developers being the primary beneficiaries,” the report said.  

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