Bonjour, hello, hola to renewables

Kay Hobbs and Simon Courie, TLT, UK, and Harald Wiersema, Holla,

the Netherlands, look at the recent trends and developments in Europe’s renewables industry, and how the landscape for clean energy in the region is changing.

2020 was a year to remember in many ways and not for the best reasons, but from an energy standpoint, there was one encouraging statistic to emerge. For the first time ever, more electricity was generated by clean energy sources across Europe than by fossil fuels (38% vs 37%), according to a report by think tanks Ember and Agora Energiewende, with Germany, Spain, and the UK achieving this balance at a national level. Is this a sign that the pledge made back in 2014 by former European Commission President Jean-Claude Juncker to make the EU the “world number one in renewables” is coming to fruition? With the climate crisis becoming ever more urgent, and with the Paris Agreement ambitiously aiming to cap global warming at 1.5˚C above preindustrial levels, many people will be hoping so.

Analysis by management consultancy Kearney estimates that energy companies are planning to invest up to €1 trillion in clean energy by the end of this decade, and many other sources of investment and

funding are coming to the fore. With increasingly ambitious carbon reduction commitments being made by European governments inside and outside the EU as they strive for net zero carbon emissions, coupled with strategies to support and incentivise the transition to clean energy, the outlook is positive. So, what are the trends and developments driving this momentum, and what are the potential challenges that could slow it down?

Growing and emerging technologies

Growth in electricity generated from renewable sources has largely been fuelled by wind and solar power over the past decade, according to Eurostat. Sharply falling costs have contributed to this expansion – so much so that the International Energy Agency (IEA) says that solar power schemes now provide the cheapest form of electricity. Legal interventions are also having an impact. For instance, in the Netherlands, a new Environmental Act (enactment planned on 1 January 2022) will enable municipalities to require all new houses to have solar panels installed on the roof.

Subsidies have played an important part in helping these technologies become established and proven in many European jurisdictions as well, building trust in wind and solar projects, to the extent that in some countries they have practically been phased out and are no longer necessary to help secure equity or debt funding. An example of this is the UK market where subsidy-based schemes such as the Renewables Obligation have been replaced with auction-based Contracts for Difference, offering price certainty to those projects that offer the most competitive energy price.

In other continental European countries where solar and wind infrastructure subsidies are still available, such as in Scandinavia, the guaranteed income they provide is helping to attract significant investment, notably from Asian investment funds.

However, wind and solar projects only form part of the picture and new technologies are also gaining traction – not least energy storage, which is key to underpinning clean energy systems, and electric vehicle charging infrastructure (EVCI) projects. Carbon capture technologies are also starting to come into the mix, for instance alongside traditional fossilfuelled power plants to help make them greener and reduce their carbon footprint. Geothermal power, hydrogen fuels, and biofuels are becoming more prominent sub-sectors of clean energy too, although when it comes to bio-based vehicle fuels, the potential for fraud from products that are labelled sustainable (but are not) is an issue to watch out for. Currently this is a market that is in some cases not well regulated, and trade needs to become more transparent, especially as many companies increasingly view it as a means to green their vehicle fleets. Stricter controls are needed and are likely to come into place, which could push prices upwards.

The rise of localised multi-technology schemes

Major projects such as large solar schemes in Italy, Spain, and Greece demonstrate the impact that deploying this kind of technology at scale can have and these look set to become increasingly common. However, at the other end of the spectrum, a number of smaller schemes are getting off the ground, and a clear trend towards multi-technology projects, where different clean technologies are co-located on the same site, is gaining traction. These localised hubs pair different types of power generation with battery storage and other energy infrastructure such as EVCI, making power generation and consumption more efficient and 100% clean from end-to-end.

Businesses and communities are seeing the advantages of having solar panels, roof-mounted wind turbines, energy storage, electric vehicle (EV) charging points, etc., interconnected on premises or nearby on industrial estates, in shopping centres, or other community spaces. By exporting electricity back to the local community to power homes and businesses or deliver clean energy for EVs, multitech hubs can deliver an affordable and reliable supply, while simultaneously meeting environmental, social, and governance (ESG) goals and reducing the strain on national grid systems. It is a win-win for all concerned.

Working with businesses and local authorities on projects like this is another route to market for clean energy developers. Joint ventures are also being seen between municipalities and developers, for instance to upgrade district heat networks or create energy centres, reducing heat loss and building new revenue streams while ensuring that heat generation is green.

In countries like the Netherlands where space is limited, governments and local authorities are trying to better plan clean energy infrastructure and distribution – something that has hitherto evolved organically over time and not always in the most co-ordinated way. For example, this could take the form of making ‘zoning’ plans to decide where projects and amenities would be best placed, similar to the way that new housing or commercial developments are planned, and ensuring common infrastructure can be used for multiple local projects.

Weighing up how best to meet local need on the one hand must simultaneously be balanced with an awareness of the potential for community backlash against new and imposing projects being sited on people’s doorsteps. Resistance to having projects ‘in my backyard’ remains a real issue in numerous countries, especially in densely populated areas where space is at a premium. Moreover, managing the demands of businesses and local people is becoming more and more complex. Should priority be given to providing power for major global corporates’ data centres, for example, given that they facilitate millions of people to work remotely? Or should priority be given to directly power local homes and businesses?

On the whole, European countries are continuing to see a rise in both small, localised clean energy schemes as well as larger sites, but while the energy market across the continent is becoming more integrated across borders, national energy strategies do remain fairly divergent. For example, countries such as France and the Netherlands continue to prioritise or research the feasibility of nuclear power projects while Germany is moving out of this technology. The contrast

between heavily renewable Scandinavia on the one hand and Poland, which still relies on coal, on the other is also a case in point. Indeed, while clean energy is progressing across the continent, it is not doing so with the same technologies or at the same rate across all countries, with northern Europe notably outperforming the rest of the continent.

The evolving funding environment

Since energy generation is a leading cause of carbon emissions, continuing to invest in the development and rollout of clean energy technologies is clearly key to tackling climate change as quickly as possible.

Highlighting the scale of the challenge, the UK’s Committee on Climate Change recently said that low carbon investment will need to reach £50 billion/yr to put the country on track to meet its net zero targets – the vast majority of which will need to come from the private sector. Multiply that across the whole of Europe and the potential opportunity value is staggering. Thankfully, demand to invest is high and the cost of capital is relatively cheap, enabling developers to get even less mature and higher risk projects off the ground.

TLT and Holla expect this high level of investor interest to continue, especially as the COP26 summit later this year re-focusses attention on climate issues and the need for clean energy to play an even greater role in powering our world and delivering a green economic recovery from COVID-19.

Much of the investment market remains focussed on bankable projects in mature technologies like wind and solar power. With these technologies now mature and viable subsidy-free, their financing has become extremely competitive and a large proportion of investment is being redirected into other types of projects such as battery storage, carbon capture, EVCI, or heat networks. To what extent other emerging technologies including hydrogen fuels, geothermal power, or biofuels will benefit remains to be seen but these technologies are also increasingly being looked at by investors.

Market competition is such that investors are increasingly open to opportunities to diversify into non-subsidised projects in emerging technologies, but here too there is an oversupply of capital chasing projects. Investors may need to change their way of thinking to make investments viable, by adjusting their expectations around risk and returns or coming on board at an earlier stage, even at the consented or greenfield stage.

Financing these less mature technologies is still very much a play for private equity investors. Although the industry is starting to see a few debt deals in areas such as biomass, clearing banks and other more traditional financial institutions remain much more comfortable lending to wind and solar schemes. New entrants such as global pension funds are now starting to participate in the debt finance market, driving up competition here too. As this happens, lenders may increasingly look to diversify into emerging technologies, developing new products to manage issues like merchant risk or uncertainty around forward-looking power prices and seize the potential these other sub-sectors have to offer.

If funding channels for critical technologies like energy storage, for instance, are to be fully unlocked, such innovations will be vital.

COVID-19 and supply issues

The clean energy sector has not been significantly impacted by the COVID-19 pandemic directly, although there is a strong sense that people have become even more aware of their environment and the impact that humans are having on it. If anything, this has heightened the impetus to better protect the planet and generate energy in a sustainable way using clean technologies.

COVID-19 did, however, create some supply chain issues which raise questions for the clean energy sector in Europe. Chief among them is security of supply and how to make supply chains more resilient by potentially moving the manufacture of vital components or the sourcing of materials closer to home, to reduce reliance on suppliers based outside of Europe. After all, one of the principal motivations behind clean energy (other than green concerns) is that it can give European countries more control over their own energy supply, and reduce dependence on gas being piped from Russia, for example. In the UK specifically, the supply chain issue has been exacerbated by Brexit, with the price of photovoltaic panels skyrocketing due to higher import costs, prompting more debate about building production facilities in Britain.

Other considerations include how green it is to transport raw materials and finished products long distances by air and sea, such as importing wooden pellets for biomass projects from outside Europe (especially if their sustainability can be brought into question). There are no easy answers: finding good quality, local supply is not straightforward but it is increasingly on the radar as an issue at the European level.

With the supply chain under pressure, finding solutions that simultaneously increase resilience, enhance control, and tick ethical boxes are likely to be an increasingly high priority. It will be interesting to see to what extent and how quickly on-shoring or near-shoring of production facilities or new approaches to supply chain management evolve.

The outlook ahead

Overall, the outlook for the clean energy sector looks very positive, even though there are many tough challenges ahead as European countries strive to meet demanding carbon reduction goals. But the political dial is moving in the right direction, innovation is continuing apace, finance is flowing in from a variety of sources, issues around sustainability and ESG are gaining prominence, and public opinion is generally supportive. Developers, businesses, local communities, and financiers are increasingly working together to find solutions to the existential emergency presented by climate change and clean energy is front and centre of that fight.

The 2020s is set to be an exciting and critical decade for the sector, with Europe continuing to lead the charge on clean energy.