As we pointed out in our November Deep Dive on hydrogen, it took 17 years from the time then-European Commission president Romano Prodi highlighted hydrogen as “the focal point in the energy revolution” in 2003 to the body developing an actual policy on the matter.
Given this, perhaps last week’s developments shouldn’t be too surprising. The European Union’s Sustainable Finance Taxonomy was an opportunity for a regulator to end industry debate and formally determine what is and isn’t a “green investment”. In its own words, it was an opportunity for the EU to become a “leader in setting standards for sustainable finance”. However, as lobbying intensified from different member states on the positions of natural gas and nuclear in the framework, the EC kicked the can down the road, saying last week it will rule later this year whether natural gas is, indeed, a green investment.
The EU insists support will only be given to such projects provided they are consistent with being a transitional activity, helping countries move away from oil and coal. Now, there’s a policy more appropriate for 2003. Market economics such as the costs of gas and renewables means that coal has largely been displaced anyway. In fact, last year, coal accounted for just 16 percent of power generation in the EU (including the UK), according to the International Energy Agency.
Regardless of the eventual outcome, last week’s decision by the EU was a damaging one for the energy sector, the energy transition and the climate crisis. Should it later this year decide natural gas is indeed green, it breathes new life into a sector that is already falling out of favour. But should natural gas be ruled out in the eventual decision, it would have been a delay that is of little benefit to anyone.
As Reynir Indahl, managing partner of Summa Equity, wrote for affiliate title New Private Markets, the EU has ambitious climate goals and “investors need clarity on where funding is most needed and be incentivised to provide it”.
Proponents of the EU Taxonomy argued the framework was needed because the market could not be relied upon to lead on the issue. Yet last week’s decision is only hurting those in the market trying to effect change and, arguably, increases stranded asset risk.
According to a report from the Global Energy Monitor this month, about €5 billion-worth of European gas projects were cancelled or shelved in 2020, while another €25 billion-worth of projects have been delayed as sponsors struggled to obtain funding from a climate-aware market.
But this is not just affecting greenfield projects.
“If you find somebody who is ready to offer a good price for our gas plants in Spain, then we are ready to sell,” José Ignacio Sánchez Galán, chief executive of Spain’s Iberdrola, told Bloomberg this month. “We are not finding people.”
If the EU’s decision later this year does burnish the green credentials of gas, Iberdrola might well find buyers in a confused world of green investment. For now, a framework designed to deliver investor certainty on climate solutions is threatening to do anything but.