Concerns over Russian supplies underscore need to accelerate Europe’s transition to renewables.
The Russian invasion of Ukraine has undeniably unleashed many fears.
Economic sanctions have so far failed to shake President Vladimir Putin’s resolve. Even Germany’s decision to permanently shelve Nord Stream 2, the partial ejection of Russian banks from Swift, and oil and gas majors exiting equity partnerships with Russian companies in recent days have been ignored by the former intelligence officer.
As well as prompting short-term actions, Putin’s war on Ukraine has added momentum to longer-term realignments. With Russia responsible for supplying 40% of the EU’s gas, industry experts and European policymakers are calling for an accelerated transition from fossil fuels to renewable energy.
“Regardless of geopolitical developments, decentralised energy systems based on renewable energy sources increase energy independence and security, while lowering costs for end-consumers and contributing towards the decarbonisation of economies,” says Marco van Daele, Co-CEO and CIO at SUSI Partners, a Swiss-based infrastructure fund manager.
The EU has been making slow progress to date in its renewable energy transition.
In 2020, Eurostat reported that renewable energy made up 22.1% of the EU’s total energy consumption, above the original 20% target, although this was inconsistent across Member States. While 60% of Sweden’s energy consumption was renewable, it made up just 11% of Malta’s, Eurostat said.
The International Energy Agency’s (IEA) roadmap to 2050 estimated that 90% of global electricity generation needs to come from renewable sources. Renewable electricity contributed to 37.5% of the EU’s gross electricity consumption in 2020, said Eurostat, of which two thirds was produced by wind and hydropower.
Last summer, the European Commission launched a raft of climate-related legislation – ‘Fit for 55’ (Ff55) – to reduce net EU emissions by 55% by 2030 from 1990 levels. It includes a proposal for amending the 2009 Renewable Energy Directive to increase its target for renewables to 40% of its overall energy mix by 2030. The Commission also has ambitions for offshore renewable energy production to reach 61 gigawatts (GW) by 2030 and 300GW by 2050.
Europe isn’t transitioning fast enough to meet these targets, according to experts and MEPs.
The EU only built 11GW of new wind farms in 2021, with plans to expand this by 18GW a year over the course of 2022-26, according to a report by WindEurope, a Brussels-based association. But the EU needs to add at least 30GW a year to meet its 2030 renewables target, WindEurope said.
With its decision to include gas in the taxonomy and plans to potentially interfere with the EU Emissions Trading System (ETS) as energy prices soar, the EU is struggling to let go of its fossil fuel-dependent past and embrace a renewable future.
The IEA roadmap estimates that global annual clean energy investments need to reach more than US$4 trillion by 2030 to achieve carbon neutrality by 2050. Policymakers in Europe therefore need to be doing everything they can to incentivise investors to back the transition, experts say.
The successful establishment of an upscaled, renewably-powered energy infrastructure in Europe depends on realising the ambitions of the Ff55 bloc.
However, it currently faces a five-year implementation gap, according to Allianz research. Most notably, Ff55 policy scenarios depend on electricity generation from coal being phased out by 2030.
“This looks highly unlikely,” Allianz said, with Germany still lacking a hard line commitment, and the remaining ‘coal countries’ (Poland, Bulgaria, the Czech Republic, Romania and Slovenia) making commitments to phase out coal after 2030.
Also undermining progress, the EU’s state aid guidelines continue to allow for the provision of subsidies to climate-harming projects, according to environmental law charity ClientEarth.
“Energy laws in the EU currently don’t do enough to incentivise renewables take-up on the ground,” says Eleni Diamantopoulou, Energy Lawyer at ClientEarth. “This is confusing for investors, who know the future is not in fossil fuels and are seeking alternatives.”
A proposed expansion and reform to the existing EU ETS may be watered down following EU countries’ calls for intervention due to the energy crisis.
“But investors largely want to see a widening and deepening of the EU ETS so it provides a price signal to the largest players involved in hard-to-abate sectors like cement and aviation,” says Andros Florides, Senior Portfolio Manager for Natural Resources Strategies at KBI Global Investors. “This is one of the key ways of getting companies to start their transition and decarbonise more aggressively.”
While revisions to the Energy Performance of Buildings Directive (EPBD) have been welcomed, they also highlight the limited action EU countries have taken so far to reduce the emissions of buildings and promote renewable energy. On average, member states renovate 1% of buildings per year to save energy; the EPBD will only increase this to 3% of buildings owned or occupied by public bodies each year.
The process for granting permits for renewable energy project sites is too complicated and slow to enable an accelerated transition away from fossil fuels, European lawmakers have warned.
To accommodate an increasing number of applications, EU countries must “urgently simplify the relevant procedures and coordinate their efforts”, the lawmakers said. For example, they could introduce time limits for issuing permits.
In a letter to the Commission, WindEurope explained how low volumes of permitted projects have impacted Europe’s wind turbine manufacturers and wider supply chain.
“The rules and procedures that public authorities use to permit wind energy projects are too lengthy and complex. Europe is simply not permitting anything like the volumes that [national governments] want to build,” it said.
Germany among others are reducing the burden of securing permits, Florides notes. “This could be significant and free up potential for further development of renewables,” he says.
Member states should be “legally bound” to the EU’s renewables targets to make sure every country is taking action, says ClientEarth’s Diamantopoulou.
Climate Action Network (CAN) Europe, an NGO coalition, has called on the EU to combine national binding targets for member states with the Ff55 to “ensure accountability” and “provide the right signal for accelerating action and investments related to climate overall and specifically related to energy efficiency and renewable energy in all sectors”.
Fossil energy crisis
Soaring energy prices in recent months have further exposed the extent to which Europe is still dependent on gas. According to Markus Zimmer, Senior ESG Economist at Allianz, “this isn’t an energy crisis, but a fossil energy crisis”.
“It’s clear Europe has been neglecting its energy security and that wind and solar generation can’t possibly replace the exposure to Russian gas anytime soon,” says Paul Jourdan, CEO at Amati Global Investors.
Further, the economic case for transition to renewables has grown. The breakeven costs of solar and wind power generation globally have declined by 90% and 70% respectively over the past decade. This is largely because renewable power generation, once the infrastructure is in place, has no ongoing fuel costs and fewer operating expenses.
Investors are reaching their own conclusions. As geopolitical tensions have added to the volatility of fossil fuel prices, European renewables companies have rallied, with shares in Nordex, Vesta Wind, Siemens Gamesa, Orsted and EDP Renovaveis increasing between 5-12% as investors seek out increased exposure.
With mounting concerns that Russia’s gas tap will be turned off, EU countries are going to be re-assessing their energy policies, says Jourdan, as their focus shifts from decarbonisation to energy security.
This is beginning to happen. Germany’s economy ministry said this week that it needs to reduce its reliance on gas and speed up renewables’ projects. The ministry plans to accelerate the passage of its Renewable Energy Sources Act (EEG) for a 1 July implementation deadline. The act will bolster onshore wind and solar energy capacity so renewable sources account for 80% of Germany’s electricity needs by 2030 and 100% by 2035.
But the EU isn’t turning its back on gas.
“Natural gas will remain an important fuel source to meet total energy demand for the time being, decreasing by only 13% in 2030 (from 2015 levels), until hydrogen, e-gas and biogas are ramped up,” the Allianz report noted.
“As coal retires, political leaders and investors seem to be turning to fossil gas as a ‘diet’ alternative to coal,” ClientEarth’s Diamantopoulou says. “Increasing gas infrastructure must be avoided to avert dangerous climate impacts and stranded assets.”
Late last year, the EU crumbled under the pressure of corporate lobbying and concerns from some member states when it announced the inclusion of gas in its taxonomy of environmentally sustainable activities through a complementary delegated act, as a “bridge technology” that is still needed to reach net zero emissions by 2050.
The lobbying efforts of Europe’s largest gas companies, including Shell, BP and TotalEnergies, have been outlined by think tank InfluenceMap.
Nathan Fabian, Chair of the Platform on Sustainable Finance (PSF), the Commission’s official advisory body, said the decision undermined the “integrity” of the taxonomy, while accepting the role of gas in the transition to a low-carbon economy.
By including gas, the EU is “giving the false impression that gas is ‘green’, which might lead to the wrong investment decisions” and potentially “delay the large-scale investments we need into renewables”, says Diamantopoulou.
However, investors have previously told ESG Investor that the inclusion of gas won’t change their perceptions of what constitutes sustainable investing.
Investing in a renewable future
The rising cost of fossil fuels presents an opportunity for the EU to establish more energy independence and for investors to shift capital into renewables. “Many European renewable infrastructure projects are, in principle, very attractive for asset owners that have long-term horizons attached to their investments,” says Zimmer.
“For these projects to actually qualify as investments for institutional investors, the EU must find ways to limit the downside risks, to ensure that these investments are compatible with the interests of pension fund beneficiaries or insurance firms’ clients, whose money we are ultimately investing,” he adds.
To stay in line with the 1.5°C warming pathway, a front-loading of annual investments of €40.8 billion is needed until 2030 for the European power grid and €44.7 billion for Europe’s power plants, according to the Allianz report.
Removing coal from Europe’s energy mix also requires investment. “The coal phase-out will require an additional €131 billion across the EU, which should be broken down to €83 billion (63%) going towards wind, €30 billion (23%) towards solar and €19 billion (14%) towards new gas plants,” it said.
Over the medium-term, there will be a vast investment opportunity in Europe as more renewable projects look to get off the ground, experts say.
KBI Global Investors already has exposure to the renewables space in Europe, both through “pure play renewable companies” and utilities in transition that are heavily involved in the existing electricity grid, says Florides.
Nonetheless, it’s important investors remain diversified and don’t wholly depend on wind and solar power.
“Wind and solar have relatively low energy density, so take up huge amounts of space, and if scaled up too far could have a large negative impact on biodiversity. They also currently require significant use of hydrocarbons in their manufacture and construction,” Jourdan says.
Investment opportunities in carbon capture and storage (CCS) and hydrogen-based technologies are increasingly popular alternatives, even though doubts remain over their effectiveness and sustainability at scale.
The Commission’s 2020 Hydrogen Strategy aims to expand Europe’s capacity for green hydrogen production to 40GW by 2030 to help drive down cost and kickstart investment. The EU is predicting hydrogen will make up 13-14% of its energy mix by 2050. To meet this target, the EU needs between €180-€470 billion of investment in green hydrogen by 2050 and €3-€18 billion for blue hydrogen, the strategy notes.
Although politics has been controlling the pace of the transition to renewables, and may now accelerate the process, this week provided a reminder of the global existential threat, via the latest report on climate impact, adaptation and vulnerability by the Intergovernmental Panel on Climate Change (IPCC).
Speaking at the press conference launching the IPCC’s latest findings, António Guterres, Secretary-General of the United Nations, fittingly said: “As current events make all too clear, our continued reliance on fossil fuels makes the global economy and energy security vulnerable to geopolitical shocks and crises.
“Instead of slowing down the decarbonisation of the global economy, now is the time to accelerate the energy transition to a renewable energy future.”