Transitioning to renewable power in Western Europe
Viacheslav Jijin
Value creation services ● M&A transaction advisory services ● Go-to-market
1. Electric energy transformation highlights
Humanity keeps on looking for ways to drastically reduce greenhouse gas emissions from 51 billion tons a year to zero, and, as the best scientific minds keep on endeavoring to harness viable nuclear fusion as the source of clean and near-free electric power, the past year brought additional complications, disruption and unpredictable scenarios that make energy transformation strategies more important than ever.
Western Europe is at the forefront of the trend as it is currently right in the middle of energy disruption and is most active in the search and deployment of groundbreaking sustainable energy technologies. In this article, we briefly touch upon the opportunities and challenges in the electric energy transition that the European countries are facing.
There are multiple factors affecting the supply and demand for electrical power in Western Europe that reflect the new normality we now live in:
According to S&P Global Commodity Insights, by 2030 the share of renewable energy sources in electricity generation in Western Europe could reach 60% compared to the current weighted average of 35%.
As industrial users in Western Europe are preparing to completely eliminate dependency on fossil fuels by 2050 and gearing towards carbon neutrality, and consumers are switching from gasoline-powered cars to EVs and from gas-powered to electrical heating, ventilation, and air conditioning systems (HVAC), the gap between the increased demand for electricity and the current power generation capacity will have to be filled by sustainable sources of electrical energy.
2. Overview of renewable sources for energy transfer in Europe
In the next decade, the European electric power industry will have to replace thermal power plants operating on fossil fuels with power plants that use the renewable energy of solar radiation, wind, biomass, water, geothermal power, and other forces of nature. Because the success of the transition to green energy will be largely dependent on the creation of distributed power grid, it will also require extensive modernization of all transmission lines, including the introduction of digital technologies to make this process ‘smart’ and regulate the operation of power systems based on the current electricity demand. The foundation of such a smart power supply system will be a distributed energy storage network utilizing various technologies. It will ensure the stability of supply in case of local outages or even in periods when there is less sun and wind. When supply exceeds demand, there are ways to store excess electricity, for instance, by producing hydrogen gas from water using renewable sources, recharging batteries, or running pumps at hydro-accumulating power plants.
Unlike fossil fuels, renewable energy sources are based on inexhaustible resources. Various technologies are deployed in Europe to exploit nature’s potential, below is an overview of the most promising types.
2.1. Solar Photovoltaics
According to SolarPower Europe, the EU added a record-breaking 41.4 GW of solar power in 2022, this new capacity is equivalent to the energy needs of 12.4m households.
The sun sends more energy to Earth in one hour than is consumed worldwide in a year and this energy can be used in a variety of ways. Photovoltaic (PV) plants and rooftop installations convert sunlight directly into electricity. However, PV installations can also be used in autonomous systems in remote locations; such solar plants can supply electricity to nearby customers using a mini-grid. To provide power during periods of insufficient solar radiation, the mini-grid can house battery-powered energy storage devices. The use of hybrid systems - a combination of different renewable energy sources (e.g. PV plants with wind turbines or hydroelectric power plants) or electric generators driven by engines running on diesel or biofuel - is a convenient solution for small communities and industrial installations located far from electrical networks, for example in mining. PV installations can provide constant power supply to irrigation equipment, drinking water supply, water desalination, and disinfection stations. Networked units can be optimally integrated into rooftops and facades of buildings, taking into account all architectural features. Large installations with a capacity of several megawatts are usually built on inexpensive land plots away from settlements.
Thermal solar (heliothermal) power plants operating on concentrated solar energy (Concentrated Solar Power - CSP) have also become a viable solution to generate electricity. In recent years, solar-powered systems with the technologies available in parabolic mirrors, solar power towers, and solar discs have been able to make substantial contributions to the production of heliothermal electricity. In all of the above technologies, solar energy is concentrated at a water tank or another receiver that is connected to a machine converting heat directly into electricity (usually a Stirling engine). These technologies are already mature and, for the most part, adequate to exploit the very high solar potential of Mediterranean countries.
2.2. Wind energy
Wind energy has been used for several centuries, and over the past decades it has become an important component of a permanent electric energy supply. Most of the wind turbines built in Europe are land-based, and as a rule, several wind turbines are combined in a wind farm and send the generated energy to the distribution network. Single-unit installations are better suited for the power supply of settlements located far from public utilities. In countries with a shortage of available land plots, such as Germany, great potential is seen in the replacement of obsolete low-capacity onshore wind turbines with new, more powerful ones.
The offshore wind turbine count in Europe already exceeds 2,300, and there are multiple large-scale projects underway to increase the output of offshore wind fields, an example being the Hollandse Kust Zuid project with 140 turbines, each powering an 11 MW generator.
The WindFloat Atlantic wind farm, which is located off the coast of Portugal, has recently become Europe’s first floating offshore wind farm, implementing a promising technology that allows erecting turbines that are not fixed to the seabed
The average wind velocity and constancy at sea are higher than on land and, as a result, the offshore power generation is typically 40% higher than onshore installations.
2.3. Hydropower Plants
There are over 21,000 hydropower plants of various sizes currently in operation in Europe, most of which are small plants generating less than 10MW. Many existing hydropower plants can significantly benefit from the installation of modern generators, smart control systems, and other technologies that can increase efficiency and extend useful life. The list of types presented below is not exhaustive, there are a number of emerging technologies that harness the power of water to generate electric power.
Hydro Water Reservoir/Storage
The most common type of hydroelectric power plant is a Hydro Water Reservoir or an impoundment facility, which is usually a large hydroelectric system that uses a dam to store river water in a reservoir. The water released from the reservoir passes through the turbine, spinning it, which in turn activates the electricity generator.
In Europe West, the XFlex Hydro project was launched with the aim of finding efficiency reserves for variable-and fixed-speed water turbines, smart control systems, hybrid battery-turbine systems, and the development of enhanced hydropower technologies through advanced computer simulations. The enhancements are being implemented at the Alto Lindoso 630 MW hydropower plant and the Caniçada 70 MW hydropower plant, both located in Portugal.
Hydro Pumped Storage
Pumped storage hydropower (PSH) power plants store energy using a system of two interconnected reservoirs, one of which is at a higher altitude than the other. Water is pumped into the upper reservoir during periods of excess energy, and during periods of excess demand, water from the upper reservoir is released, generating electricity as the water passes through reversible turbines on its way to the lower reservoir. The cycle is then repeated with an overall efficiency of about 80%.
In fixed-speed pumped storage power plants, power control is possible during power generation, but with modern variable speed technology, it is possible to control power both during generation and pumping, providing additional flexibility to maintain grid stability.
The European Commission has implemented a Hydropower Extending Power System Flexibility (XFlex Hydro) project, which is being delivered by a consortium of 19 industry partners and aims to enhance hydropower’s potential in modern power markets. The supported PSH projects in Europe West include Alqueva (Portugal), Frades 2 (Portugal), Grand'Maison (France), and Z'Mutt (Switzerland).
Hydro Run-of-river and poundage
Run-of-river (RoR) hydroelectric power plants are hydroelectric power plants that use the energy of running water to generate electricity in the absence of a large dam and reservoir, which is different from conventional reservoir hydroelectric power plants. The main difference between this type of hydroelectric power plant and others is that the run-of-river projects rely on the natural flow of water to generate energy and not the power of falling water. Sometimes called a diversion facility, the RoR power plant typically channels a portion of a river through a canal and an inclined pipe (called a penstock) that carry water down to the turbines inside the actual power station to produce energy.
Pondage (or poundage, a small amount of water stored behind a dam) is sometimes used, making the RoR power plants more reliable overall as they compensate for any inconsistencies in the water flow.
Some RoR power plants in Europe are now hybridized with a battery, for instance, the Vogelgrun RoR hydropower plant situated near the German-French border was coupled with a battery system as part of the XFlex Hydro project in order to improve its flexibility.
Wave/tidal power
Wave/tidal power is the capture of energy of wind waves or tides to generate electricity. Despite the wave energy's worldwide potential having been quantified to be greater than 2 TW, wave power is not currently widely employed for commercial applications; the only commercial roll-out was announced for the HiWave-5 project. However, the wave energy industry is honing hundreds of prototypes to find the best, most cost-effective equipment to generate clean energy from ocean waves. Locations with the most potential for wave power include the western seaboard of Europe.
2.4. Other sustainable sources of electric power
Hydrogen
European investment in the introduction of green hydrogen, which is considered a clean alternative to fossil fuels, will amount to 320-460 billion euros by 2030. The funding will be directed to provide enough green electricity to produce hydrogen, significant amounts are also allocated to the construction of electrolysis facilities, and innovative infrastructure for the transportation, distribution, and storage of hydrogen.
Hydrogen networks are becoming a popular theme as researchers point to a consistent benefit of a pan-European hydrogen backbone that will connect high-yield regions with demand centers, synthetic fuel production facilities, and geological storage sites. Another commonly discussed topic is the repurposing of natural gas pipelines for use with hydrogen, where up to 50% of the natural gas pipelines can be reused for transporting hydrogen. The initiative is also supported by the largest automotive companies interested in the massive use of hydrogen as a fuel. However, it will take at least 10 years to create a well-functioning competitive market for hydrogen.
Stationary hydrogen power plants are using hydrogen and oxygen as power, they operate fuel cells that produce water, electricity, and heat without creating any emissions other than water vapor. They are either connected to the power grid or can be installed as grid-independent heat and electricity generators that provide clean power to homes, businesses, telecommunications networks, and utilities. The largest hydrogen fuel cell park is currently located in Hwasung (South Korea). With a 59 MW capacity, the facility delivers renewable energy to the power grid and high-quality heat to the district’s heating system.
As discussed above, hydrogen is also used as an energy accumulator, whereby excess electricity is directed toward electrolysis to split water into hydrogen and oxygen.
Biomass
Biomass fuels are organic materials produced in a renewable way. The two categories of biomass fuels, wood fuels (including mill and forestry residues) and animal waste (including dry manure and manure slurry), make up the vast majority of biomass fuels available. Other sources of biomass fuel are municipal solid waste (MSW, including urban wood and yard wastes), agricultural residues, dedicated biomass crops, and chemical recovery facilities owned by pulp and paper plants.
Biomass fuels have a low energy density compared to fossil fuels. In other words, a significantly larger amount of biomass fuel is required to produce the same energy as a smaller amount of fossil fuels. The low energy density means biomass fuel is usually consumed locally or only transported over short distances.
An example of a sustainable European project of electricity generation from biomass is the 46 MWe electricity-only Ence-Huelva biomass plant in Spain operating on forestry residues in wood chip form.
Biogas / Green Gas
Biogas is the gas resulting from an anaerobic digestion process of organic matter such as food waste, non-edible sources, including livestock manure, agriculture wastes, waste water, landfill gas (LFG), and inedible wastes. As opposed to natural gas, its methane content is only 50-75% vs. 80-90% for natural gas, it also contains 25-45% carbon dioxide, 2-8% water vapor, and traces of other gases.
The process of efficient conversion of biogas into electricity using fuel cells hasn’t reached the levels of commercial practicality, as this process requires very clean gas and expensive fuel cells. Therefore, this option is still a matter of research and is not currently a practical option. A typical biogas power plant usually converts animal manure, green plants, and waste from agro-industry and slaughterhouses into combustible gas, which is then transformed to electric power mainly by means of an internal combustion engine with a generator.
Although biogas systems turn the cost of waste management into a revenue opportunity, they also provide a possibility to recycle nutrients in the food supply, reducing the need for both petrochemical and mined fertilizers.
Geothermal power
Geothermal power plants draw heated fluids from underground reservoirs to the surface to produce steam to spin a turbine for electricity generation. According to the EC Deep Geothermal working group switching from fossil fuels to geothermal energy can decarbonize up to 25 % of the EU population’s energy needs and reduce energy bills. It assesses that with modern technology, up to 25 % of the European population can cost-effectively deploy geothermal heating, and geothermal power plants could provide up to 10 % of Europe’s power demand.
Innovation in energy sourcing
Investors are again increasingly keen to invest in new clean technologies after a slowdown that was observed after the initial CleanTech boom of the early 2010s. Although there is still no shortage of ideas stemming from tech-heavy startups and research labs, many of these ideas fail to pass the feasibility test or fall through during the assessment of their technology readiness level.
By implementing demand-side policies (e.g. carbon taxes), the governments are now improving the expected performance of early-stage electric energy investment projects, helping attract private funding to CleanTech and reducing the funding gaps in clean technologies.
3. Key challenges
Cost and marginality
According to the International Energy Agency, annual investments in clean energy worldwide need to reach $4 trillion by 2030 to meet the generally accepted commitment to achieve zero CO2 emissions by 2050.
Investing in solar, wind, and other clean energy sources have long been a business with a significant amount of risk. Equipment companies operate on low margins, and those who finance them sometimes take significant risks for cash flows that can take years to materialize. Although clean electric energy projects appear to be technology products, they cater to utility markets that are slow to grow and are affected by inflation, so the return on capital invested is usually moderate.
Renewable power station components such as solar panels, turbines, converters, inverters, and smart switches are mostly made in China, which makes it difficult for installers to get a steady supply of such materials to scale the roll-out. The sanctions and tariffs against China and supply chain disruptions have increased prices and shipping costs, which impact the margins of the renewable electric power industry.
Technology challenges
Electricity generation from renewable sources is fundamentally different from the current fossil fuel system, which is characterized by strong centralization.
Grid expansion has to progress rapidly enough in order to be able to quickly connect new nodes, such as offshore wind turbines, to the grid using power lines. At the same existing power lines have to be able to transmit a lot more renewable energy as fossil fuel-based sources keep phasing out.
Recommended by LinkedIn
Load balancing is becoming more important as the international integration of national grids makes it possible to distribute electricity throughout the continent. Such interaction is already underway within the framework of the European Network of Energy System Operators
Storing renewable energy is important to compensate for situations when wind, water, and sun aren’t providing enough power. Western Europe is investing in energy storage, such as pumped storage, batteries, and “power to gas” (P2G) systems.
Politics and bureaucracy
The pace of buildouts of renewable power plants often is slowed by long permitting times. When a renewable energy company applies for the construction of a wind or solar farm, its first step is approaching the grid operator about the possibility of connecting to the power grid. At the same time, the rest of the authorization process starts. And it is in this second part of the journey that there are hidden pitfalls that jeopardize the projects, such as:
The time to obtain authorization for the construction of a renewable energy power plant can be up to 3-5 years in some countries, which raises concerns about the possible plant’s obsolescence when it’s finally put into service almost a decade after it has been designed.
To address the above issues, the new REPowerEU plan provides recommendations to EU member states to establish special zones for renewable energy with reduced and simplified permit procedures in lower environmental risk areas.
Environmental concerns
It is a known fact that there are adverse impacts of wind and solar farms on animals, particularly birds and bats. Birds are killed when they try to fly through the rotating blades of wind turbines, and they die from overheating when they fly over large solar farms. Large wind turbines are a source of low-frequency sound waves that propagate over a long distance and affect wildlife. Global hydropower development also threatens the fish fauna of rivers and other ecosystems that provide habitats to freshwater fish.
Such environmental concerns are often raised at the time of every project design and permitting process. However, there is a general consensus that the adverse effects of renewable electricity sources on humans, animals, and birds are a fraction of the threats posed by fossil fuel-based power plants.
4. Country snapshots (Europe West)
Germany
As an EU founding member, the country is famed for its highly productive manufacturing sector, which accounts for a larger share of the GDP compared to other advanced economies of similar income levels. As a distinctive feature, Germany has over 7,800 hydropower plants, and 436 of them have a generation capacity of 1MW or more producing 84% of renewable energy.
The outsize role of Germany’s industrial sector has meant the country was particularly exposed to the surge in energy prices in the wake of the conflict in Ukraine and the subsequent reduction of Russian flows of natural gas into Europe. The government is pushing toward a radical shift in Germany’s energy policy, aiming to replace all Russian energy imports by 2024, extend the lifetime of nuclear power plants, accelerate the deployment of renewable energy capacity, and incentivize energy savings.
Germany has set a commitment in law to achieve 100% sourcing from renewables by 2035, and climate neutrality by 2045.
Austria
Austria used to import around 80% of its gas from Russia before 2022 and is therefore now vulnerable to the fallout from the military conflict in Ukraine. Following this cause, in October 2022 €5.7 billion was promised by the Austrian government to help decarbonize industry and reduce fossil energy footprint. If such green investment continues, Austria could not only create a more resilient clean energy economy but can become a major hub for green energy in Europe.
France
In France, nuclear power covers a higher percentage of electricity production (67%, compared to 22% in countries like Spain). France has gone further than many other countries to shield residents from the global spike in energy prices. Measures include the state-owned energy company EDF capping price rises at 4% for 2022 and 15% for 2023, as well as one-off support payments to some households. It has also implemented a number of initiatives to discourage personal vehicle use.
Even before the current energy crisis, France was at the forefront of addressing climate issues, the new plan calls to massively expand the use of renewable energy. The focus is on solar energy with the goal of increasing production capacity by an order of magnitude, offshore wind power with the creation of about 50 offshore wind farms, and onshore wind power with the goal of doubling available capacity by 2050. Overall, the share of renewable energy in power generation was more than 25% in 2021, and France's goal is to increase this share to more than 40% by 2030.
France has set a commitment in law to achieve net zero emissions by 2050.
Italy
In Italy, gas is the dominant source of electricity production (46%, compared to 26% in countries like Spain). Russian natural gas accounted for approximately 40% of Italy’s gas imports in recent years. Over the course of 2022, Italy has sought to reduce its dependence on Russian energy by increasing imports from MENA countries and leveraging existing supplier relationships. Renewable sources accounted for nearly 20% of the total energy mix in 2021 and a higher percentage of the electrical power generation mix, satisfying 36% of total electricity demand in 2021.
Inflation reached 11.8% in November 2022, the highest rate since the 1980s, and the price growth has mainly been driven by the energy and food categories. To protect its citizens from price spikes, the Italian government has spent well over €50 billion in 2022, with a further €15 billion set aside for support on energy bills in the 2023 budget. The economy is expected to return to growth in 2024, expanding at a rate of 1.3% in line with Italy’s long-term growth trend.
Although a legal commitment has not yet been set by Italy, a government policy document has referred to achieving climate neutrality by 2050.
Luxembourg
Green growth will be a particular priority area, with the country having set a commitment in law to achieve net zero emissions by 2050.
Luxembourg is ahead of plans in terms of solar PV roll-out. At the current pace of installations, Luxembourg could meet its 2030 solar energy targets as early as 2026. The country offers a subsidy of 20% of the investment cost on photovoltaic systems, with some communes offering additional benefits. The government also introduced a reduced VAT rate from 17% to 3% for solar panels.
Netherlands
In 2022 the Netherlands generated nearly 17% more renewable energy than in 2021, saving about 1,6 billion cubic meters of gas. The increase was primarily driven by more solar energy installations, but the share of wind energy also increased.
As of 2022, 41% of the energy consumed in the Netherlands is generated sustainably, compared to last year, when it was 33% of all electricity. Electricity currently accounts for 20% of energy consumption in the country, but this share will increase as industry, transport, cooking, and heating become increasingly electric.
Portugal and Spain
The electricity industry restructuring originated the unbundling of the traditional vertically integrated companies and the creation of disaggregated structures. The regional Iberian Electricity Market (MIBEL) resulted from the decisions made in 1968 by the Portuguese and Spanish Governments to promote the integration of both countries’ electrical systems. Although both countries share the same wholesale market, the end-customer electricity prices vary due to the structure of the retail market and more tariff regulations in Spain.
The power system of Portugal is characterized in that about 70% of the installed capacity comes from renewable sources, mainly hydroelectric power plants (hydro cascades), which have a variable supply in wet and dry months. Solar capacity is also growing quickly, benefiting from both countries’ clear skies, and is expected to triple or quadruple by 2030. The newly enacted laws prohibit new hydrocarbon exploration and extraction projects in both countries, and existing projects were shut down.
Spain’s government has attempted to minimize the impacts of the energy crisis on its citizens by, among other things, reducing VAT on energy bills as well as by presenting emergency support packages to assist vulnerable households and businesses.
Portugal and Spain have set a legal commitment to reach carbon neutrality by 2050.
Switzerland
The country’s near self-sufficiency in energy production, low dependence on fossil fuels, broadscale price regulations, and relatively low exposure to global food prices have reduced the exposure of consumers to soaring global energy prices.
Hydroelectric power plants are the main source of energy in the country, there are over 680 hydroelectric power plants, and they provide the country with more than half of its own energy (61.5%, as of 2021). Further, 28.9% of the energy is produced by four nuclear power plants, and 6% is provided by non-hydro renewable sources of energy, such as the sun, wind, wood, and biogas.
In winter and dry summers, when electricity generation from hydroelectric power plants logically decreases, energy is purchased from neighbors - mainly in Germany and France.
In the long term, the government would like to increase its own energy production from renewable and low-carbon sources, with particular attention to nuclear and solar energy.
Concluding remarks
The geopolitical upheavals of 2022 have highlighted and accelerated the energy transition processes in Europe, the target share of renewable energy in 2030 is proposed to be raised from the current 33% to 45% by European Commission.
Ambitious goals have been set to fully transform the electric power industry to net zero by 2050, but the starting positions, conditions, and terms for the implementation of projects vary from country to country. Coordinated decision-making and target setting can make a significant difference in the speed of the rollout of clean electricity.
Now that the supply of clean power is considered the primary public interest, the efforts of the public and the private sectors are getting more aligned, and there is a range of feasible technologies and clean sources to choose from, the stated objectives of the energy transfer look to be achievable.
The new European directives provide the member states guidelines for establishing fast-track permitting procedures and selecting land zones and inland water areas that are particularly suitable for specific renewable energy technologies and pose less of a risk to the environment. Renewable energy schemes are being adopted, which allocate funding, provide tax breaks and other incentives to support the industry.
However, cascading the goals on the national level and their robust implementation by all countries in Western Europe will be crucial to remove fragmentation and disparities in national contribution towards the common result.
Contributions
References
Senior in EY - Due Diligence
1yGreat article!