Amidst the perfect storm of the pandemic, war in Ukraine, and extreme weather events, Bruce Douglas at Eurelectric urges us all not to lose focus on our decarbonisation targets. Energy savings, electrification and renewables are more important than ever to help reduce dependence on fossil fuels. Douglas explains that Europe’s electricity sector remains totally committed to the drive towards clean energy, citing examples. He summarises the unprecedented price rises we are all going through, and the consequences for households and industry. The market is under intense strain, and though the current market design is under review, policy-makers must not forget that the root cause is Europe’s dependence on fossil fuels and that is where the focus of intervention should be, explains Douglas.
***This opinion piece is published as a briefing for TODAY’s high-level panel discussion in Brussels: “Wind of Change, Change of Wind”. You can register to attend in person or online via this link (password: WIND) from 15.00. Taking part are Małgosia Bartosik, Deputy CEO, WindEurope; Wanda Buk, Vice-President for Regulatory Affairs, PGE Polska Grupa Energetyczna; Anca-Iulia Cimpeanu, Deputy Head of Unit, Infrastructure and Regional Cooperation (ENER.C.4); Bruce Douglas, Director Business & Communications, Eurelectric; Jurga Kasputienė, Deputy Permanent Representative of Lithuania to the EU. It will be moderated by Energy Post’s Matthew James. [Promoted by PGE]
Some may say the ‘Age of permacrisis’ is upon us. They might be right.
As we struggle to put out one fire, another one emerges. Climate change, the pandemic, war in Ukraine, the energy crisis and all their ripple effects are scarring Europe’s economy, environment, and society.
While the current reality is harsh, a carbon neutral, energy independent future is still possible and more essential than ever.
Sticking to the plan: carbon neutral electricity before 2040
Despite these trying circumstances, the electricity industry has not backpedaled on its commitments to decarbonise and power a carbon neutral European Union. On the contrary. Because we believe that the energy transition is the key solution to tackle the ongoing crises, we have stepped up the efforts and built synergies beyond our sector.
Three recent projects stand proof of our commitment to sever Europe’s addiction to fossil fuels.
First, the Power Plant project shows how renewable energy installations can protect Europe’s biodiversity and even contribute to nature restoration.
Second, the 24/7 Hub seeks to facilitate round-the-clock clean and renewable electricity matching, helping businesses cut their carbon emissions. 160 corporate buyers, suppliers and service providers are already part of this initiative.
Third, EVision brings together key energy and automotive players to facilitate the uptake and expansion of e-mobility across Europe.
With the Power Barometer 2022, we have seen that all these efforts are bearing fruit, the electrification of transport and heating are making significant progress. Last year the electric powertrain represented 18% of new vehicle sales, and heat pump sales grew by 25% to reach 2 million units.
Accelerating this electrification is now critical to wean ourself off imported fossil fuels and reduce carbon emissions – the transport sector alone is responsible for 63% of imported oil, and buildings and industries represent 57% of gas demand.
The perfect storm
The European power sector is caught in the middle of a perfect storm.
The conjunction of extreme weather, technical unavailability of power plants and throttled gas flows have led a reduction in generation capacities. While during the first half of the year, wind and solar produced respectively 24 TWh and 17 TWh more than in 2021, their contribution is offset by the lack of supply in hydro, nuclear and gas.
Russia’s brutal and unjustified invasion of Ukraine, coupled with the bullish constriction of gas supplies, wreak havoc in the energy markets bringing tariffs to historical levels. EU day-ahead prices reached €405/MWh in August 2022 – 532% higher than in January 2021, amid a scarce gas supply and extreme market volatility. Within months, natural gas went from being a quiet consumable to a loud inflationary force.
Climate change and the scorching temperatures registered this year have dampened the agricultural yields and the electricity generation. The need to maintain the crops alive pushed South-Western European countries to draw significantly high quantities of water from their hydropower reservoirs. As a result, hydropower has produced 37 TWh less than in 2021.
Rivers have also been heating and drying up. This lowers their ability to cool down the nuclear reactors, thus forcing some capacity shutdowns. Additionally, it impacts inland navigation which in turn has affected the transport of coal across the continent.
Energy savings, in both gas and electricity, are now essential considering this historical pressure on generation assets with repercussions on power prices.
Customers are seeking relief
Households are facing higher bills, as retail tariffs mirrored the trend in wholesale markets. While last year the average retail price rise was of 8.2%, new contracts concluded in capitals cities were 84% higher in June 2022 than in January 2021.
Industrial consumers are also feeling the pinch. The aluminium sector, which is a big electricity consumer, is taking a hard hit. The record high electricity prices have led Aluminium Dunkerque, Europe’s largest smelter to announce a 22% curtailment of its production.
Multiple solutions to alleviate the pressure on consumers exist. One is to reduce the taxes and levies on electricity, which currently represent 41% of the bill. Another is to support the uptake of electric solutions for transport and heating, which are significantly more energy efficient than the fossil fuelled options.
Electricity markets in distress
Policymakers in various EU Member States have resorted to ad-hoc market interventions in attempt to control the price increase. While their impact on the final customer bill has not been significant, they have certainly affected the market functioning.
Taxes on alleged windfall profits have reduced the revenues of fossil-free generators, without preventing major excess profits for oil and gas companies.
Liquidity in the forward market is down 40%, amid the increase in collaterals which reflect the skyrocketing prices. More and more companies are now turning to their governments for credit lines to overcome the liquidity squeeze. Without changes to the current legislation enabling other collaterals than cash and gold, more generators would risk bankruptcy. Some have even warned about a Lehman Brothers effect.
While there is certainly room for improvement in the current market design, we should not forget that the root cause of the crisis is Europe’s dependence on fossil fuels. Gas imports are the root evil and if any intervention is authorised, it should initially be focussed on the gas market.
In parallel, policymakers should incentivise the growth in domestic generation capacity. 753GW of renewable energy, the equivalent of 80% of the current installed capacity must come online by 2030 to enable an affordable and secure energy supply in Europe, according to REPowerEU. Yet, the out of date permitting procedures are delaying renewable energy projects and current attacks on the electricity market are jeopardising investors’ confidence and reducing their ability to invest.
Let’s not allow this crisis destroy all the benefits which stem from an integrated electricity market and efficient power sector.
Bruce Douglas is the Director for Business and Communications at Eurelectric