By Daniel Bowie-MacDonald, Investment Specialist, abrdn
Although the energy crisis in Europe has caused some coal- and oil-fired power stations to come back on stream, it has also galvanised both action and greater investment into the transition from fossil fuels to green energy.
A record $755bn was invested in the green energy transition in 2021. This year, which has seen Russian oil and gas supplies to Europe plummet due to the Russia/Ukraine conflict, investment in clean energy globally is expected to top $1.4 trn.
So far, 2022 has been a year of significant weather extremes, aggravated by climate change. Wildfires in Portugal and Spain, hurricanes in the Caribbean, drought in Europe, China and the US, as well as record temperatures in Pakistan, followed by devastating flooding that has affected more than 30 million people, destroying lives, livestock and homes. Pakistan’s climate change minister, Sherry Rehman, has described the floods as ‘the climate event of the century’ and ‘a catastrophic health crisis’.
The moral imperative to reduce carbon emissions to slow global warming is clear. And the European energy crisis has caused soaring energy prices and supply shortages that further drive the need to seek alternative energy sources and supply. But, as the European crisis shows, switching from fossil fuels to clean energy is not something that can happen overnight, even in wealthy Europe.
In reaction to Russia’s action in Ukraine, the EU announced REPowerEU, an ambitious strategy that aims to make Europe completely energy independent from Russia well before 2030. In the short term, the plan focuses on forging new energy partnerships with reliable suppliers; a rapid rollout of solar and wind energy projects, plus renewable hydrogen deployment; increased production of biomethane; EU-wide hydrogen projects; EU-wide advice on how citizens and businesses can save energy; and filling EU gas storage to 80% capacity by 1 November 2022.
In the medium term, REPowerEU aims include: enabling investment and reforms worth €300 billion; boosting industrial decarbonisation with €3 billion of projects under the Innovation Fund; improving legislation and speeding up permits for renewables; investing in an adapted gas and electricity infrastructure network; increasing energy-efficiency targets and raising the European renewables target for 2030 from 40% to 45%.
Cleaning up industry’s energy supply is another major focus with aims around electrification, energy efficiency and increased renewables. The biggest savings could come from manufacturers of non-metallic minerals, cement, glass, chemicals and refineries. An estimated 30% of EU steel production is expected to switch to renewable hydrogen by 2030.
Financing these enormous ambitions will involve both public and private investment on a staggering scale. Additional investments of €210 billion are needed between now and 2027 to phase out Russian fossil fuel imports. The Recovery and Resilience Facility (RRF) is at the heart of the REPowerEU Plan funding, as member states can use the remaining RRF loans (currently €225 billion) and new RRF grants, funded by the auctioning of Emission Trading System allowances. Other sources of financing are likely to include: the Innovation Fund, national fiscal measures, private investment, and the European Investment Bank.
Recently, the European Investment Bank has scaled up its financing of infrastructure for renewable energy. Lending is to be increased by 60%, or another €30bn over five years. This money is not to go to gas infrastructure, but rather, into energy efficiency, renewable, grid and energy-storage projects. Private investment, in the region of €115bn until 2027, is also being sought for these kind of green energy projects.
These enormous ambitions will certainly attract investors to renewable opportunities. Take the solar PV opportunity as an example – according to the IEA, solar accounts for only 3.6% of global electricity generation today, but it’s fast becoming the lowest-cost option for new electricity generation in many parts of the world and it is expected to become the largest source of energy by 2050. This will require solar capacity to increase 20-fold. By 2050, the IEA expects two-thirds of all energy supply to come from wind, solar, bioenergy, geothermal and hydro. Investors are undoubtedly recognising this rapidly growing investment opportunity, with most wealth managers expecting to increase their exposure to clean energy in the next 12 months.
The EU’s ambitious climate goals have certainly been shaken by recent events. So, while we may see greenhouse gas emissions increase in the EU over the shorter term as countries scramble to fill energy gaps over the coming winter, these shocking environmental and geopolitical events have catalysed progress towards an energy-independent and carbon-neutral Europe.
But beyond Europe and with COP27 coming to a close, many hope that countries will look to improve their commitments and ensure their ambitions are backed by credible action that could still, even at this late stage, keep global warming limited to 1.5C.