Decades of delusion on European energy security were shattered on 24 February. As the world woke to Vladimir Putin announcing his “special military operation” in Ukraine, it was immediately clear that the economic relationship between the West and Russia would have to drastically change.
The EU responded to the invasion with a plan to reduce Russian gas imports by two-thirds by the end of this year. Russia itself has proven surprisingly willing to help Europe achieve this target. It has stopped exports to several countries, and reduced gas flows to Germany, in an apparent effort to punish and pressure Europe over its support for Ukraine.
The result is that Europe finds itself scrambling to secure new sources of energy supply. Even countries that were not dependent on Russian energy before the war now have an incentive to move away from gas, given the massive price increases of the past year.
Investing in renewables appears to be the obvious way out of the crisis. Wind and solar were already competitive on cost with fossil fuels before the war, and now generate electricity much more cheaply. Decarbonising energy systems is also, of course, a vital step towards achieving net-zero carbon emissions and keeping global temperature increases within 2 degrees Celsius of pre-industrial levels.
In practice, however, there are numerous bumps in the road. To overcome these will require a significant amount of investment, and time.
Europe doubles down
Although triggered by the war in Ukraine, the energy security crisis also reflects the reality that many countries have neglected their energy infrastructure and failed to plan for the long term. Peter Schümers, co-head of investments at Energy Infrastructure Partners, says that the crisis stems from “a lack of investment during the last few decades and an overreliance on imports”.
“This investment backlog is not only a European phenomenon, but applies for investments into energy infrastructure all over the world,” he adds.
The positive news is that most European countries are now determined to shift as rapidly as possible towards renewables. The REPowerEU plan commits the bloc to generating 45 percent of its power from renewable sources by 2030, up from around 22 percent today. The EU also supports the scaling-up of green hydrogen, which can potentially replace natural gas in heating systems.
For Europe, one of the obvious advantages of renewables is that they allow electricity to be generated from within the continent.
“In general, renewable energy is the only energy source in Europe that we can source from our own lands,” says David Daum, managing director for private infrastructure in Europe at Partners Group. “We’ve exploited most of the conventional fossil fuel sources, so it’s only renewable energy that really gives the security of supply.”
The wind sector, in particular, seems poised for rapid growth. The REPowerEU plan calls for wind capacity to increase from around 200GW today, to 510GW by 2030. The UK has also raised its ambition, aiming to boost offshore wind capacity to 50GW by 2030, up from a previously announced 2030 target of 30GW. “We definitely see increased demand,” says Daum. “Policymakers are declaring more areas open for offshore wind auctions. We believe the crisis will accelerate the offshore wind market.”
Alternatives in short supply
One factor in favour of renewables is the lack of viable alternatives. There is some risk of backsliding towards greater reliance on fossil fuels as an emergency measure during the crisis. But steps such as extending the lifespan of coal-fired power stations – or even bringing mothballed facilities back into production – do not require new investment that would lock fossil fuels into energy systems.
Perhaps the most serious low-carbon alternative to renewables comes in the form of nuclear energy. The nuclear industry received a boost in July when the European Parliament agreed to classify nuclear (along with natural gas) as transitional activities in the EU Taxonomy under certain circumstances. This will allow nuclear projects to receive investment from funds classed as Article 8 under the EU’s Sustainable Finance Disclosure Regulation.
“The main problem with nuclear is it just can’t deliver fast enough”
But many analysts are unconvinced that new nuclear facilities can help solve the energy crisis. “The main problem with nuclear is it just can’t deliver fast enough,” says Chris Rosslowe, senior analyst at energy think-tank Ember. “The European power system needs to be decarbonised by 2035 to get Europe back on track for the Paris Agreement… we’re already 12 and a half years from that point, and recent evidence shows that large nuclear takes longer than that to build.
“For me, it’s an issue that gets a lot more oxygen in the debate than it deserves for a technology that’s not going to help us in the transition on the timescales that we need.”
Few easy wins
Yet the ability of renewables to significantly improve the energy supply situation in Europe in the short term is also limited. “Quick fixes, particularly in the energy space, are hard to come by,” points out Chris Archer, co-head of EMEA for Macquarie Asset Management’s Green Investment Group. “New generation and storage capacity takes time to come online, and there are typically lots of moving pieces which need to fall into place.”
At least for the rest of 2022 and for some time afterwards, with renewables only able to play a limited role in compensating for Russian gas, Europe will remain in a state of acute vulnerability. Efforts to keep the lights and heating on will focus on managing demand and increasing imports of LNG, particularly from the US.
Significant relief, however, could come from renewable energy technologies that can be deployed on a small scale. “One of the fastest ways to scale up renewables would be small-scale solar – putting solar on roofs of residential buildings and commercial buildings,” says Rosslowe. “This is something that can happen in a matter of months, rather than the years that it would take to go through the process for a large-scale solar farm or wind farm.”
Spain has achieved particularly impressive growth in rooftop solar. Installations more than doubled in 2021, according to data from a Spanish solar industry association, and media reports suggest that the trend has accelerated even further this year. A study by Ember found that solar accounted for 12 percent of EU electricity generation in the summer of 2022, up from 9 percent in 2021.
“Scarcity of materials for renewable energy has always been a concern”
Global Infrastructure Hub
Nevertheless, labour and supply-chain constraints are slowing down the pace of rooftop solar installations. “The main bottleneck in the solar industry is actually a lack of a workforce of installers,” says Rosslowe. “If there were more installers available then there would have been more solar deployed this year.”
Rising costs and challenges in sourcing materials are set to be a long-term challenge for investors in renewables. A spokesperson for WindEurope, an industry body, tells Infrastructure Investor that the cost of producing a wind turbine has increased by around 30 percent in 2022. Turbine manufacturers are locked into deals agreed before the price spike, meaning that none of the five European wind turbine manufacturers were profitable in the first half of this year.
“Scarcity of materials for renewable energy has always been a concern,” says Marie Lam-Frendo, CEO of the Global Infrastructure Hub, an initiative established by the G20. “There is a rapidly increasing demand for materials that enable the clean energy transition – in particular, non-ferrous metals such as aluminium, lithium, copper and cobalt. They are now all in high demand, and are expected to become increasingly scarce over the coming two decades, leading to shortages of supply and a higher carbon footprint as more energy is required to extract them.”
The key question for renewable energy generation, then, is not whether it will increase, but how quickly it can scale up. “The competitive environment has changed, and you have seen some investors moving further down the risk curve – from operations and construction into earlier-stage development – in response,” says Archer. “Not everyone is going to be able to do that, as bringing new projects into the market takes time, is complex, and requires deep industrial relationships and expertise.”
“The competitive environment has changed, and you have seen some investors moving further down the risk curve”
Green Investment Group
Indeed, the largest and most frustrating obstacle for investors seeking to accelerate the roll-out of renewables throughout Europe and in many other parts of the world is the permitting process, which can often delay developments for many years.
Proposed changes to EU rules would require member states to limit the permitting process for renewables to one year in certain circumstances. Whether this will be a game-changer remains to be seen, however, given that member states routinely fail to respect the current two-year limit, which has been in place since 2018. Research published by Ember in July found that the permitting process for onshore wind takes 40 months in Germany, 108 months in Sweden and 120 months in Croatia.
A large part of the problem with wind is the need for detailed environmental studies to assess impacts on biodiversity. The EU’s plans to designate certain areas as open for wind development, based on environmental studies carried out in advance, should help to improve the process. “At some point, policymakers need to find a better balance between the protection of certain species and being more pragmatic about permitting to facilitate a faster build-out,” says Daum.
But while biodiversity is clearly an issue that needs to be treated with care, features of the permit regime in certain countries appear to reflect bureaucratic inertia in failing to modernise regulations. “In France and Germany, you need to permit the type of turbine, which is not that easy because you only order the turbines later in the development process – and by then newer turbines are available,” Daum says. “Not only are you losing negotiation power with the supplier, but sometimes you cannot upgrade to the latest technology – you need to build the wind farm with old technology, which makes no sense.”
It is vital to bear in mind that supporting the energy transition does not only mean investing in generation from wind, solar and other renewables. Archer emphasises the value of investing in other technologies that will help replace fossil fuels: “There is a tangible and growing opportunity set in more nascent elements of the energy transition ecosystem, such as utility-scale batteries, EV charging infrastructure and services, and clean fuels like hydrogen.
“These are the technologies that are going to play a central role in a net-zero economy, but accessing the right opportunities requires a very specific set of skills. A lot of opportunities are there for the right investors.”
Strengthening battery storage capacity will be particularly important in enabling renewables to provide something more akin to baseload power. Investing in transmission and distribution networks, and increasing the interconnections between the grids of different countries, is also key.
“Transmission infrastructure – for electricity and molecules – is inseparable from renewable generation. Being the indispensable condition for the operation of all these assets, it will remain highly attractive,” says Schümers. “Significant high price spreads between European countries, and even within those countries such as in the Nordics, are an unmistakable sign that transmission capacity is lagging behind demand, thus inhibiting exchange of energy and mutual assistance in times of crisis.”
Achieving a rapid roll-out of renewables in Europe and around the world is easier said than done. Investors seeking to participate in the greening of the global energy system can expect to face many hurdles. Their ability to find solutions and accelerate developments will be crucial in restoring energy security in Europe and putting the world on a path to net zero – as quickly as possible.