REPowerEU represents a shift in impetus for decarbonization, where wartime energy security now supersedes climate leadership. While the plan maintains its multi-pronged commitment to supporting renewables, extraordinary measures have been proposed by way of managing the immediacy of the conflict’s reverberations. These include options such as boosting LNG imports and the promotion of bio-methane, among others.
REpower, as comprehensive as it is, faces five mammoth challenges:
First, Moscow is betting on a long war scenario. Russia is ready to halt gas flows before key capitals (Berlin and Rome) decide to say basta and call time on Russian gas imports. This would be a game changer and would also trigger a wild race to store gas (even if MS are doing a good job) and survive until the end of next winter. For instance, BNETZA, the German energy regulator, has projected several scenarios whereby German gas supplies last until early February ‘23. Not a good sign.
Second, the LNG avenue is expensive and more complicated than expected. A fire at one the largest U.S. LNG export facilities (Freeport) immediately sent European wholesale gas prices up 10% to €88 per megawatt hour that week. Astronomical prices to attract cargos from Asia into Europe (9 times higher than two years ago) and extra time to build LNG facilities do not help in achieving the huge ambition that REPower had by the end of the year. On top of that, roughly 70% of global LNG trade is locked into long term contracts, thus limiting the EU’s options to secure additional LNG volumes in the near-term.
Third, REPower is in trouble as some national governments attempt to contain energy prices and historic inflationary pressure across Europe. Most of the measures are labelled as exceptional and temporary, but their consequences remain unpredictable. Germany, Austria, and the Netherlands have revived coal power. The top three French electricity giants are calling on citizens to save electricity. Spain and Portugal have persuaded the Commission to introduce a gas price cap (encompassing 6 billion euros and very tricky financing model) to ease the pain for consumers and industry. The introduction of such short-term policy fixes will only accelerate at the national level as the crisis (and possible recession) hits European economies.
Four, REPower has not entirely factored in the rapid macro-economic deterioration. Record inflation and climbing interest rates (perhaps a bit late?) will only weaken the financial outlook of investors bankrolling the EU green economy: renewables, green hydrogen, processing and manufacturing raw materials for sustainable value chains, disruptive technologies to decarbonize industrial processes and energy-related pan-European infrastructure. The CAPEX problem will intensify and continue to hamper investor appetite for Europe’s emerging green economy.
Five, REPower’s contentious EU coordinated demand reduction plans (with pre-emptive voluntary curtailment measures for industry) may land when production curtailments arise from energy market conditions themselves! As witnessed in the European aluminium industry (which has curtailed more than 1 million tons – or 50% of total production), the demand for electricity and gas may shrink in response to current energy market conditions. With that, the options to further stimulate demand for hydrogen, green and cheap electricity, innovative projects and, overall, large scale investments will also be thwarted. The result: a domino effect that will clash with current climate ambitions and targets.
In short, REPower EU is in big trouble.
The dynamics of the war combined with the new macro-economic conditions are shaping, very rapidly, a new political and social context which European policy and policymakers must address. Energy security will certainly dominate the political agenda for the next two years and the potential to fall into a recession with increasing social fractures could become the most serious threat to both the implementation of the Fit for 55, and the achievement of our 2030 climate targets.
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November 4, 2022