European electricity: facing strong headwinds
The unprecedented squeeze in the European power market that took place during July-October 2021 might well be just a taste of things to come. It begs the question as to how reliable and sustainable the EU’s electricity supply is and basically where the electricity is going to come from over the next decade?
EU wind generation already reaching its limits
Investment in wind and solar generation capacity is lagging behind initial plans and might already be nearing its limit.
For instance, in Germany, which has been one of the leading countries in the development of wind power, the commissioning of fresh wind generation capacity has levelled off in recent years. Standing at just 12GW in 2002, it more than doubled to 26.8GW in 2010. It doubled again by 2017 to 56GW, with an average annual growth rate of 10.4% during the intervening period. Since then, capacity growth has fallen significantly, averaging just 3.3% during 2018-21. The construction of some wind turbines has been postponed due to COVID but this slowdown had already started before the pandemic.
Even more crucially, actual generation from wind and solar has remained below initial forecasts so far. Wind generation in Germany dropped by 13.6% last year compared with 2020, at 114.6TWh, despite a 4.1% (2.5GW) increase in capacity of 2.5GW.
The new German coalition government which came into power in November 2021 has a very ambitious new plan to have 80% of German electricity produced from renewables in 2030. Amongst other things, this would imply having 14,000 offshore wind turbines in the North Sea and Baltic Sea, up from just 1,469 in 2019. From an environmental perspective, this is already being challenged. Even assuming the project goes ahead, it would be a huge challenge to build so many wind turbines in such a short period of time and in such challenging locations.
The coalition also has ambitious targets for new on-shore wind capacity, which will have to be signed off at the regional level. It remains to be seen how much of this new wind on-shore capacity will be approved, given the number of existing turbines and increasing local opposition, as the philosophy of “not in my back yard “ gains momentum.
In France, too, wind generation is coming under intense scrutiny. On-shore wind farms have been spread across the country, based on the assumption that strong wind in some places would on average offset weaker wind in others. In fact, due to the relatively small size of the country, wind generation is performing more on an “on/off” basis at a national level. Meanwhile, the increase in numbers of wind turbines across the country is now attracting strong opposition from the local population, which makes the construction of new ones more complicated.
Projects for new offshore wind turbines off the French, Belgium and Dutch coasts are also meeting strong opposition.
At the beginning of the 21st century, wind generation in its modern form was presented as one of the cornerstones of the development of clean energies worldwide. The fact that after only 20 years it is already facing challenges is a serious warning signal.
In fact, once they reach a certain size, all energy sources face their own difficulties. Solar generation has escaped this problem so far, as at the global level it remains low, if not negligible. However, this industry will surely also face its own challenges (such as the recycling of batteries) once it reaches a certain size.
Germany to phase out nuclear capacity in 2022
To make matters worse, Germany is to phase out nuclear generation by December 2022. German nuclear generation has been falling gradually since peaking at 159TWh in 2006. It dropped to 102TWh in 2011 in the wake of the Fukushima disaster, with the hasty closure of the oldest nuclear plants, as part of the “Energiewende”.
German nuclear generation was still at 61TWh in 2020 and in fact recovered to 65.3TWh in 2021 (up 6.9% y-o-y) due to the lack of wind generation and the uncompetitiveness of gas. One can only imagine how high European power, coal and gas prices could have gone in October 2021, had Germany already shut down its entire nuclear fleet.
To put things into perspective, we estimate that 65TWh of coal-fired generation require 23.1mt of imported steam coal. Assuming that just 20% of the 65TWh of nuclear generation which is slated to disappear from the end of 2022 were replaced by coal-fired generation, this would create additional steam coal demand of 4.6mt, on top of existing demand.
In fact, it is hard to envisage right now how lignite, gas, wind, solar and hydro combined could account for 80% of the lost nuclear generation, as all these sources are facing their own challenges. Therefore, we think it more likely that hard coal could account for up to 40% of lost nuclear generation, which would represent additional imports of 9.2mt. In other words, German steam coal imports could rebound to 30-35mtpa during 2022-24 from their 2020 low of 19.4mt.
Mounting doubts about EU energy transition policy
Most countries outside the EU, which have started their own journeys towards decarbonisation, have probably been watching the recent market developments within the EU with a great deal of doubt and anxiety. Indeed, the very ambitious targets set by the EU for a very rapid energy transition have backfired badly.
The European Union has lost significant chunks of its heavy industry since 2000, due to spiralling electricity costs, with steel and cement producers, for instance, migrating to Eastern Europe and Asia.
EU electricity prices are set to remain at historically high levels (the front month baseload contract reached €450/MWh in December 2021) and could continue to rise. Governments have had to step in after the recent spike in power and gas prices to cap the maximum price increase utilities could pass on to end users. Ultimately, though, end users will face rising electricity and gas bills and experience directly the real cost of this very rapid transition to green energy. In fact, some pockets of “electricity poverty” are already emerging in the EU, as low-income households struggle to pay their energy bills.
The fact that at the recent COP 26 in Glasgow most of the ambitious targets were watered down, in some cases significantly, reflects the increasing scepticism of developing countries. After all, if the EU is already struggling, how could they manage, given their own additional challenges? Just to put things into perspective, the market price for EU CO2 certificates peaked at €90/t in December 2021. This equates to a cost of €33.7/MWh for a 50% efficient gas power plant and €68/MWh for a 45% efficient coal power plants. Such levels exceed the cost of electricity generation in most developing countries.
Emerging economies are not ready yet to trade short-term economic growth (10-30 years) for potential long-term progress against climate change. Instead, the message being sent by China and India, amongst others, is that they will achieve an energy transition, but at their own pace.
Author Guillaume Perret, director Perret Associates