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Energy independence drive could impact renewables adoption

Promoted by Fidelity

The war in Ukraine has dramatically increased the need for energy independence in the European Union (EU), which recently announced a plan to reduce its reliance on Russian gas. This will require more use of fossil fuels in the short term, but long term should accelerate the switch to renewables

Amid the war in Ukraine and the escalation of sanctions, European governments are rushing to find ways to reduce their dependence on Russian gas, through reopening or delaying closure of coal plants in Europe, and finding other sources of gas. Near term, emissions and costs will rise as a result.

Simultaneously, countries and companies are seeking ways to mitigate their exposure to higher oil and gas prices through greater efficiency, more use of lower-cost alternatives such as renewables and investment in nuclear. 

“The wind and sun belong to no one’ German Economy Minister and Green Party member Robert Habeck noted recently.

The International Energy Agency recently launched a 10-point plan on how to reduce reliance on Russian gas, advocating measures such as rerouting to other gas suppliers, increasing gas storage, accelerating wind and solar development, maximising existing generation from bioenergy and nuclear power, and speeding up roll-out of heat pumps to replace gas boilers. In March 2022, the EU announced a plan for achieving energy independence “well before 2030” through greater use of LNG and energy storage, and swifter adoption of renewables.

Long term, we expect the increased emphasis on energy independence, in addition to the structural move towards “net zero”, to accelerate the energy transition.

Emissions likely to rise in the near term

Short term, the push for independence will generate higher emissions given the EU’s current energy mix (see chart 1). The EU relies on Russia for 40 per cent of its gas (90 per cent of its gas is imported). The supply gap cannot be entirely filled by switching to alternative gas providers, and it takes time to build wind and solar plants. So it will have to consider other fossil fuels.

Germany, for example, has announced that it could delay the planned closure of some coal-fired plants and consider extending the life of nuclear plants, though legal and technical impediments may make this impossible. Germany decided to phase out its nuclear capacity in 2011, following the Fukushima disaster – a decision that made the country more reliant on Russian gas.

In Italy, Prime Minister Mario Draghi has said the country would consider reopening coal plants, and is seeking to increase domestic gas production, which had fallen in recent years. Enel, Italy’s biggest utility, has been closing coal-fired plants in line with its targets for a complete exit from coal by 2027, and so far, hasn’t revealed plans to reopen coal. When engaged with the company recently, it remained committed to long-term goals for decarbonisation while acknowledging the near-term uncertainty. It also announced it will change plans to convert two coal-fired plants to gas, and will instead explore the possibility of repurposing them into renewable energy storage infrastructure. 

European utilities generally are likely to increase energy storage for both gas and renewables as well as sourcing more gas from North Africa and the Middle East. 

Accelerating renewables to achieve independence and net zero

As well as seeking alternative sources of fossil fuels, European countries have signalled long-term plans to accelerate the move towards net zero.

Germany, with a net-zero target of 2035 (previously 2040), believes it can achieve 80 per cent of its target by 2030. German Climate Minister Oliver Krischer tweeted about the change as a way to stand with Ukraine. 

At the time of writing, there has been little actual disruption of oil and gas supply to Europe. However, countries are positioning themselves for that eventuality and prices have risen significantly as a result. This provides further incentive to switch to lower-cost power.

Over recent years, the building and operational cost of renewable technology has fallen significantly, making an acceleration of net-zero targets financially feasible. The cost of solar energy, for example, has fallen by around 80 per cent in the last 10 years. An increase in investment and the application of engineering expertise in highly skilled economies like Germany could drive costs down further. 

Obstacles remain

Prices of mainstream commodities needed for the transition (including steel and aluminium) were already rising prior to the invasion of Ukraine on the back of high demand post COVID-19, rising even further recently. 

Rare metals needed for electric motors, photovoltaic cells and batteries could be particularly sensitive to price squeezes as production is concentrated within two countries – Russia and China. Retaining access to these key supply chains will be critical to a successful transition to renewables. 

Intermittency, meanwhile, remains an issue. The irregular output of wind and solar assets means significant advances in storage technologies will be necessary to drive universal adoption.

Following the Ukraine invasion, markets are beginning to reflect this increased need. For example, recent moves in share prices of hydrogen electrolysis stocks suggest some investors now believe this technology will one day provide part of the answer.

As the war continues to unfold in Ukraine, the benefits of moving away from an energy system dependent on imported fossil fuels have become clearer. While there are still challenges ahead, we hope that soon, Europe’s energy grid will be both cleaner and more self-sufficient.

Energy independence drive could impact renewables adoption
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