By Susanna Twidale, Isla Binnie and Kate Abnett
(Reuters) – Europe’s plan to roughly double renewable energy production by the end of the decade to reduce its emissions and dependence on imported Russian fuel is under threat from market turbulence that has shaken the economy of the shift to low-carbon energy.
Russia’s war on Ukraine and the disruption of gas supplies that Europe has relied on have made the European Union’s transition to carbon-free energy urgent.
It is negotiating a legally binding target to produce 45% energy from renewable sources by 2030, up from the current target of 32% and about 22% renewable capacity in 2021.
But even if the bloc’s 27 member countries reach an agreement on the plan, to implement it they must overcome rising costs and uncertainties related to electricity market reforms triggered by soaring prices linked to the war in Ukraine.
As energy prices have increased all costs, including those of the materials needed for renewable infrastructure, investment models based on low prices for electricity generated from renewable sources are being challenged.
“It completely changes the dynamic because you have to sell your electricity at much higher prices, which could have a derailing impact on the whole energy transition,” said David Swindin, managing director of Cubico Sustainable Investments, an investor. and developer of renewable energies.
“This era of cheap electricity that people have become accustomed to is changing, especially after Ukraine.”
Last week, the Paris-based International Energy Agency (IEA) predicted that reduced Russian fossil fuel exports would boost green investment, but it also said increases in the costs of clean energy technologies ” mark a clear break with the steady, and sometimes dramatic, reductions seen in recent years.” years”.
The cost of building wind farms has risen 15% in some parts of the world over the past year, developers say.
Portugal’s utility EDP calculates that the cost of developing renewable energy projects has increased by 5% to 15%, reflecting rising prices for raw materials such as steel and aluminium, the manager told Reuters. General Miguel Stilwell d’Andrade.
Turbine makers considering the prospect of strong global demand raised prices to bolster their margins.
Denmark’s Vestas said in financial reports that it sold onshore turbines in the third quarter at more than 30% more than the same period last year.
The challenge for European projects has also increased after the US $430 billion Inflation Cut Act was signed into law in August, granting state aid to factories that build renewable energy components – this which EU officials say could hamper attempts to expand European domestic industry.
RECORD PRICE, EXTREME UNCERTAINTY
Widespread inflation, fueled by expensive energy, has led governments to seek to cap wholesale energy costs and consider reforming markets after years of stability.
Germany’s benchmark wholesale baseload electricity price for the previous year reached a record high above €1,000 per megawatt hour (MWh) on August 29. Prices have since fallen to around 370 euros, but remain more than double the same period a year ago.
Ricardo Piñeiro, co-head of infrastructure at sustainable investment manager Foresight, said commodity price movements could be managed using scenarios and modelling.
“It’s when every variable is subject to change that it creates more of a challenge,” he said.
The Bruegel think tank estimates that governments have spent more than half a trillion euros trying to cut household and business bills.
To help fund these measures, EU countries agreed last month to temporarily skim off any excess revenue generators earn above 180 euros per megawatt-hour (MWh) by selling their electricity on the market.
The European Commission, the EU’s executive, said the move was designed to ensure producers would still be profitable and have cash to invest in new projects – given that the cost of running wind farms and solar energy is well below the ceiling of 180 euros/MWh.
Even with the cap, the Commission said the business case for investing in renewables was strong.
But the provision also allows countries to set their own cap levels, which the industry says could be much lower, potentially jeopardizing new projects.
“Investors will have to wait and see at what level governments set their national caps and we don’t know how long that will take,” said Christoph Zipf, head of press and communications at industry group WindEurope.
Ignacio Galan, executive chairman of Iberdrola, one of Europe’s largest renewable energy developers with a €75 billion investment plan for 2020-2025, said the company would continue to invest in Europe but aspires to certainty.
“We need to get funding from the equity and debt markets, and in complex times like this, investors need clarity and stability,” he said.
FIT FOR A LOW-CARBON FUTURE?
Beyond short-term solutions, the EU is planning a major overhaul of its electricity market to decouple the price of electricity from the price of gas.
Under the current system, the cost of generating electricity from gas-fired power plants generally sets the wholesale price of electricity, which means that renewable energy generators with lower running costs have been able to benefit selling electricity at high prices without having to buy expensive fuels.
European Commission President Ursula von der Leyen said in a letter to EU country leaders in October that by the end of the year the Commission would present its ideas for making “our market more ‘electricity adapted to a more carbon-free future’.
It’s too early to tell if all the uncertainty has derailed specific projects.
European electricity industry body Eurelectric, however, said the combination of market reform, inflation and soaring margin calls – the cash deposits companies owe to secure their electricity sales – would deter much-needed investment.
“It scares investors away and asks them this tricky question: am I investing or am I waiting?” said General Secretary Kristian Ruby.
(Reporting by Susanna Twidale in London, Isla Binnie in Madrid and Kate Abbnett in Brussels; Editing by Simon Webb, Veronica Brown and Barbara Lewis)
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