© 2018 European Generation All Rights Reserved

© 2018 European Generation All Rights Reserved

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The Changing Landscape of the European Power Sector

December 15, 2018

 

 

 

At the Paris climate conference (COP21) in December 2015, 194 states and the EU agreed to take steps to limit their carbon emissions, in a collective effort to limit a rise in global temperatures to 1.5 degree Celsius and overall, well below, 2 degree Celsius to avoid dangerous consequences of global warming. EU agreed to cut its green house gases by 40% from 1990 levels. You may wonder why 1990? Well, in 1990, a Swedish report had suggested that warming above 1 degree Celsius was not advisable. They knew that it was too late to limit it to that number and suggested the next upper limit of 2 degree Celsius instead. EU was quick to adopt that number within six years of the report. It took another 22 years before the rest of world could also understand its urgency.

 

Flash forward to 2018, EU now produces more than 30% of its electricity from renewable sources. This is a dramatic rise from just 12% in 2000. If this rate of growth continues then, it may well be at 50% in 2030, enough to achieve EU’s target of 27% renewables in total energy portfolio. While there has been incredible rise in energy transition to renewable sources, there has been a rise in demand for electricity too. Which, in the backdrop of low hydro and nuclear production, is met by burning fossil fuels. Overall, greenhouse gas emission in power sector in the EU rose by 1% in 2017.

 

Clearly, wind dominates when it comes to renewable energy source and this reflects a 19% rise in its installation in 2017 against Solar’s 14%. Thanks to EU’s integration, it is possible for countries to exploit North-Sea’s good wind condition to produce electricity and during less favorable days, trade solar or hydro-energy between them through inter-connectors (electricity highways). Some countries like Denmark, Sweden and Germany export their excess renewable energy to Norway to pump water up in country’s largest reservoir and then use it to produce electricity when needed. This is an innovative means of storing energy.

 

Producing power is not enough because as economy improves, people will demand more energy. In order to be sustainable, EU in its 2016 directive, set a 30% energy efficiency target by 2030. It has been observed that EU, despite rising efficiency, will fall short on its target due to higher energy-intensive economic growth than normal. There’s also a meteoric rise in electricity demand from increasing number of server farms which serve services that arose from digital revolution- like video streaming. As electric vehicle market picks up, we may see further increase in demand.

 

The area of concern is that more than half of the growth in renewables is coming from only two members – UK and Germany. Though the effort is laudable, they account for only 30% of EU’s electricity production. Moreover, Germany, which has been consistently phasing out nuclear power, is still Europe’s largest consumer of coal and ignite and uses it to produce 37% of its electricity. UK has reduced that figure to just 7%. Interestingly, Denmark, which started its journey for energy independence about 40 years ago, has achieved renewable share of 74% today including days when only renewable power satisfied consumer demand. Iceland, on the other hand, is harnessing geo-thermal energy to directly supply heat to 87% of its homes. Amidst this, what is worrying is that less than 10 EU states have definite plans to switch to renewables beyond 2020.

 

It is important to understand the economics of renewables. Globally, the industry rides high on subsidies. Generous feed-in-tariffs (FITs), financial incentives for installing solar, made Germany the world’s largest solar market by around 2010. Germany’s rise in solar world was supported by cheap imports from heavily subsidized Chinese manufacturers. If subsidies can quickly build up the market then, their withdrawal can tear it down equally fast. 3 years later, Germany lost the title to China due to Euro crisis. Everyone loves subsidies but, only when they get paid. The world is now moving towards a sustainable solution - reverse auction. Here, the developer that offers to build and run projects most cheaply wins. The price they bid is what they will charge in long term PPAs for the electricity they generate.

 

It is in the financial interest of the companies to adhere to the efficiency and emission norms. Private sector is committed towards renewable energy which is aided by rapid rise in technological advancement and sharp fall in per unit cost of producing & transmitting it. Today, renewable energy is cheaper than traditional form of energy. It is increasingly becoming independent of the government subsidies. Last year, a Dutch and a German company became first to offer schemes, free of government subsidies, that rely on market prices in 2024. Netherlands will have a massive off-shore wind farm by 2022, also free of government subsidies. UK companies are predicting viable subsidy free renewable projects by early 2020. However, there are plenty of assumptions in these calculations and investors are cautious to move forward.

 

Spain, Portugal, Italy and Greece were all leaders in renewable energy a decade ago. Today, along with Germany & UK- France, Netherlands, Finland, Ireland and Lithuania are setting new records for renewable power installations. However, unforeseen changes in regulations, like that of Poland’s directive on the proximity of a wind turbine from a building, can have negative consequences for the industry.

 

In the end, one thing is clear, there will be many different solutions to sustainably power our needs. They will challenge the traditional energy giants that have dominated Europe’s power landscape for so long, forcing them to adopt to the changing times.


 

 

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