EU's REPowerEU renewables aim presents banks with “big question mark”

The EU executive's REPowerEU package proposal on 18 May rushed to augment the bloc's 2030 target for renewable energy, leaving policy gaps.

The EU's development bank, the European Investment Bank (EIB), hosted a conference on investor approaches to national net-zero goals, including the EU's proposed renewable energy target, in Florence, Italy on 9 June.

EIB Senior Economist Manuel Baritaud said banks were looking to invest in renewable energy thanks to predictable profits underpinned by subsidies like contracts for difference and private power purchase agreements (PPAs). The EIB finances renewable projects through the EU's InvestEU instrument.

However, renewable energy investors face risks when these expire. "A long-term contract usually lasts 10-12 years, sometimes more, but after this period the projects we're seeing are exposed to market price risk," he said.

Further risks are created when too much of the same renewable energy source produces power at the same time, dragging the weighted average price at which each facility generates, or the capture price, below zero.

This so-called price cannibalization dampens the appetite of banks and other investors to finance the EU's bigger target for renewable energy.

Current REPowerEU plans foresee doubling EU solar photovoltaic (PV) capacity by 2025, with high shares installed on rooftops where PV can be installed more quickly than on the ground.

Baritaud said that this "capture price risk" beyond 2030 represented "a big question mark" for investors in solar PV projects the bank analysed. "If we want to accelerate and increase the ambition in terms of solar PV deployments, we need to mitigate the risk," said Baritaud.

Longer-term, cross-border power contracts

The European Commission (EC) has proposed a 45% headline target for renewables in the EU energy mix under REPowerEU's revision of its Renewable Energy Directive, a move meant to add the renewables needed to meet the EU's goal of eliminating most of its demand for Russian natural gas this year.

Russia has ended gas supply contracts in three European countries amid a rift over payments against the backdrop of sanctions over its invasion of Ukraine.

The figure would be a 5% improvement on the prior 40% target proposed for the directive under Fit for 55, the bloc's net-zero package of policy proposals.

The EC's target would bring the total renewable energy generation capacity to 1,236 GW by 2030, compared with the 1,067 GW by 2030 set out under Fit for 55. Solar would make up most of the renewable capacity added.

Policies that make power markets stable and renewable investment attractive are needed by investors.

"Market design will be extremely important to attract financing if the EU wants to reach its renewable energy targets," added Baritaud.

The EC is working on policy proposals for the EU's energy markets that Baritaud said would be implemented after 2030.

Power market stakeholders have cautioned against energy market changes, the EC said in an 18 May communication.

The communication intended to address concerns over the all-time high gas and power prices seen following Russia's invasion of Ukraine in the first weeks of March.

But only minor changes in power market design are needed to future-proof markets and enable renewable development, an April report by the Agency for the Cooperation of Energy Regulators suggested.

Policies future-proofing energy markets might add more longer-term contracts, loan guarantees, state subsidies for assets that reduce energy costs like demand response systems and storage, as well as encourage cross-border PPAs and investments, it said.

Networks, storage, hydrogen needed

Adding renewable energy sources requires matching supply to demand in real time using demand management technologies and energy storage, in addition to massive grid investments, Brussels think tank Centre on Regulation in Europe said in a 2018 report.

"Grids are very important: We always need to maintain grids in many places. I'm working on this," said Baritaud, adding that the EU needed more energy storage and battery capacity.

The 45% renewable energy target amplifies this importance. "In order to reach this important goal, we have to also look at the state of our networks, the grids that move electricity around Europe, and understand that they need to be reinforced, to be prepared for additional [demand] that was not clearly foreseen at the moment in which they were designed a long time ago, and they need to be digitized," said Chris Hurst, EIB Director General of Projects Directorate.

The EC's 5% improvement in the renewable energy target would result in almost 10% more renewable energy consumption because industry and other businesses will use electricity instead of fuel, according to Hurst.

There is hope that green hydrogen costs will go down, further increasing industrial consumption of renewable energy. "The more we use new technologies, the more the price comes down. It's a bit of good news we see in renewables and we may see in hydrogen, electric vehicles, and all the new technologies that are emerging," former European Commissioner for Climate Action Jos Delbeke said at the event.

Posted 09 June 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.