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Renewables industry warns about implementation of EU energy crisis solutions

Image via Bloomberg
Image via Bloomberg

Decisions taken in Brussels on Friday by EU energy ministers could destroy the investment climate for renewable energy in Europe if they are not well implemented, industry groups have warned.

Friday’s meeting was the second extraordinary energy council this month, aimed at trying to agree ways for Europe to better manage the energy crisis. Ministers and the European Commission, the EU executive body, agreed measures they believe will help ensure the bloc can keep its lights on, and keep prices down for industry and consumers in the face of Russia’s squeeze on gas. 

EU energy ministers backed plans to reduce electricity demand during peak price periods and allow governments to collect excess revenues from certain generators. It is this second measure, in particular, which is troubling the renewables industry. It allows countries to introduce a revenue cap, set at €180 per megawatt hour, on low marginal-cost generators, such as wind, solar, lignite and nuclear power. The collected funds can be used to relieve the burden of high energy bills on consumers.

The renewable energy industry says it fully acknowledges the need to support consumers, but that the best way to wean Europe off gas imports, bring down bills and reduce greenhouse gas emissions to meet EU climate targets is to boost clean energy production. Its main contention is that while the initial aim was for an EU-wide cap on so-called ‘infra-marginal’ power generation, the agreed level of the cap is only a guideline and EU members states can, if so desired, adopt a higher or a lower cap, and additional taxes or measures on different types of power generation. 

“Taxes on electricity producers’ total revenue, rather than their profits” and a lack of a standardised approach will create market uncertainty and “stop renewables investments,” warned WindEurope, a Brussels-based industry body. “Investors will go elsewhere — to the US, for example, where the Inflation Reduction Act has big tax credits for renewables investments.”

Certain EU countries, such as Spain and Greece, have already introduced revenue caps.

“Disastrous” is how Joop Hazenberg, policy director at Re-Source, a European platform representing clean energy buyers and suppliers, describes their impact on investor confidence. “The booming power purchase agreement [PPA] market in Spain has come to a halt,” he said. “Spain was the absolute and relative leader of the PPA market in Europe with a total of almost six gigawatts of contracted capacity — good for a quarter of Europe’s PPA market. If we get these measures across Europe with different national caps on top, investors will run away.” PPAs are long-term electricity supply agreement between producers and consumers or traders.

Peter Osbaldstone, research director at Wood Mackenzie, offered a more sanguine view, insisting that Friday’s measures were only meant to as short-term emergency policies. “They are intended to run through this winter and no longer,” he said. “While high energy costs will prevail into next year — tempting policy makers to roll-over those new arrangements — these certainly aren’t enduring interventions.” As time-limited measures, they “should not materially deter would-be investors in European renewables. The revenue cap is far above the break-evens of new capacity and related only to market-derived income, protecting other streams of revenue such as PPAs and CfDs.” CfDs, or contracts for difference, are government-backed subsidies that protect renewable energy developers from fluctuations in wholesale prices.

Research from Rabobank in June 2022 notes that PPAs have become an “increasingly popular” source of finance for renewable energy projects. It shows that the PPAs market continues to rise in Europe, but highlights that “high power price uncertainty” can hinder its development. “The lack of standardisation in this market leads to lengthy contract negotiations,” it adds. From 2018 to 2021, utilities in Europe contracted more than 15 gigawatts of capacity through PPAs, according to Pexapark, a trading platform for renewable energy PPAs, with more than 21 gigawatts of corporate PPAs signed in the same period.

Instead of focusing on short-term developments, Osbaldstone calls for “close attention” to redesigning the EU energy market and understanding the complicated question of “what works best in increasingly decarbonised and variable supply mixes”. This question was present before the crisis, but there are “no quick-fixes and, if done badly, [there is] a real risk that some investors could go elsewhere”.

Image via Bloomberg

A service from the Financial Times