Even after COVID-19 has disrupted the usual pattern of all spheres of human life, it seems like it is just nothing for renewable energy: if at the beginning of 2020 the companies, who generate 34% of global emissions, set the goal of becoming carbon-neutral, then by the end of the year this parameter made 54% according to Bloomberg NEF data. Apart from that, energy transition investments reached an all-time high of $501 bn per year.

The movement towards decarbonization has quickened after the Paris Agreement was signed in 2015, the target of which is to slow down the projected global temperature growth rate by 2 degrees Celsius per year. To meet this target more than 1 200 global companies announced about the start of an ambitious GHG emissions (including carbon dioxide) reduction program. Energy companies, which tend to move away from traditional energy sources in favor of renewable ones, are also extensively involved into this initiative. KPMG Mustread tried to figure out how the transition is made, what drives the current status of renewable energy sources (RES) and what is going to drive it in the coming years. 

Regulation

Electrical power generation is responsible for a quarter of all GHG emissions, so energy companies inevitably got under governmental and public scrutiny. According to Bloomberg NEF data, 58 countries announced their goals of becoming carbon-neutral; 18 of them adopted official documents to confirm these intentions.

During current “covid” crisis, when the majority of the world was under quarantine, the demand for fossil fuels significantly decreased, says Vassily Savin, Partner, Head of Power & Utilities, KPMG in Russia and the CIS: “The countries unexpectedly saw a positive impact of this crisis: for the first time in many years they were able to meet previously declared targets on decarbonization and GHG emissions.”

The EU and other countries used to plan to reduce emissions by 80-90%, now the target is 100%. It means that none of the sectors can “hide” behind the remaining 20%, everybody has to reduce emissions, says a representative of Fortum, a Finnish energy company: “Meanwhile, climate change increasingly extends to the sectors, where it did not use to be a priority, for example trade and finance.”

The tendency seems to have embraced the whole world: even China pledged to become carbon neutral by 2060, having formalized the increase in the number of solar and wind units in its five-year plan. The USA’s story is of particular interest here: in 2018 president Donald Trump withdrew from the Paris Agreement, however president Joseph Biden rejoined it the following year with one of his first decrees. “There is no time to waste, we must get down to work immediately”, he emphasized (reports TASS news agency). By 2030 GHG emissions in the USA are to be reduced by 50%. 

Investors immediately reacted to the changes — for instance, Greencoat Capital, a British RES investment giant with over $8 bn of assets, announced their plans for expansion in the USA and for purchasing a wind power plant in Texas. This is the first company’s investment in the United States. 

Besides, the governments not only encourage the development of alternative power generation but also impose financial fines onto the companies which are slow about the transition. So, starting from 2023 the European Union is planning to charge fees for some imported goods depending on the degree of their carbon footprint. It means that an item, the production of which caused GHG emissions, will be more expensive than the same item which is “green”. There are no clear parameters of the new law yet: they are to be elaborated in the current 2021, but according to the European Commission estimates the new fee will cost the business from EUR5 bn to EUR14 bn per year.

Regulators’ efforts are already bearing fruits: during 2020 the power generation level from RES in Europe for the first time exceeded the level of power generation from traditional thermal power plants  – 38% and 37% respectively.  But this is still not enough for the society, says Mr. Savin: for example, on 29 April 2021 the Supreme constitutional court of Germany satisfied the claim of a young generation of activists against the government of the Federal Republic of Germany. The claim said that the goals the government set for the coming years were not ambitious enough and thus the government transferred the burden of reaching carbon neutrality onto future generations.

Investments

Many large funds and banks have certain KPIs to increase the share of ESG-financing in portfolios, discounts are offered in relation to standard level of rates for such financing, says Maria Magomedova, Major Companies Director, Raiffaisenbank. According to her, many opt out of financing a number of particularly polluting industries completely and have a strategy for exiting such enterprises (for example, coal-fired generation is completely forbidden with many funds and banks).

Thus, Black Rock, one of the world’s largest management companies threatens to get rid of the shares belonging to those companies which will not be preparing for a “green” transition. Nowadays it is impossible to shut oneself off from decarbonization issue — it has started to determine almost all aspects of global policy and economy, emphasizes Vassily Savin from KPMG.

Proved ESG-characteristics of the business became a key factor of a company’s attraction for all power industry stakeholders: creditors, insurers, shareholders, regulators, employees and consumers, reports a Siemens Gamesa representative.  Nevertheless, according to the words of Tariq Fancy, former Head of this fund, ESG-declarations are often empty (or at least declared positive impact onto sustainable development is strongly exaggerated). As Tariq says, significant progress in reaching the Paris Agreement’s goals can not be expected without more extensive engagement of state regulation.

According to UBS data, S&P Global Clean Energy Index grew by 128% in the last 12 months compared to the growth by 49% for S&P 500. Sustainable business bond market is also growing: global green bonds reached $155.5 bn having shown the growth by 78%. If overall climate change effort is considered, the economic benefits will make not less than $26 tn by 2030.

The European Union announced about the establishment of the NextGenerationEU recovery plan with the investments of EUR750 bn, one third of which will be financed from “green bonds”. Therewith the EU is already a global champion for issuing such bonds. The USA, having invested $2.6 tn, achieved a four-times increase of RES share compared to 2010.

According to UBS data, S&P Global Clean Energy Index grew by 128% in the last 12 months compared to the growth by 49% for S&P 500. Sustainable business bond market is also growing: global green bonds reached $155.5 bn having shown the growth by 78%. If overall climate change effort is considered, the economic benefits will make not less than $26 tn by 2030.

The European Union announced about the establishment of the NextGenerationEU recovery plan with the investments of EUR750 bn, one third of which will be financed from “green bonds”. Therewith the EU is already a global champion for issuing such bonds. The USA, having invested $2.6 tn, achieved a four-times increase of RES share compared to 2010.

To survive in the market, companies initiate projects to reduce their carbon footprint, including the ones that imply increasing the share of RES-generated power, says Maria: “We already see the companies from resource industries which initiate RES-facilities construction in the immediate proximity of their deposits as well as freedom from coal-fired generation in the regions where it can be replaced with other more environmentally friendly types of energy”.

An important component of decarbonization is the use of absorptive capacity of forests under management, the development of energy-efficient technologies, the unlocking of hydrogen energy potential and the creation of whole clusters of new technologies.

“From 2004 to 2018 our investments into RES, into circular economy and into solutions ensuring sustainable development made billions of euros. Only in 2019 we invested EUR401 m into carbon-free production, and in 2020 the investment made EUR372 m, — says a Fortum representative.  — In accordance with our updated strategy, our group’s further growth will be due to CO2-free and gas-free power generation as well as to changes of our own operations to become carbon-neutral. Apart from this, we are going to engage our clients and society into decarbonization process”.

Technology development 

One of the problems with the transition to carbon-neutrality is the absence of accurate, objective and available data, but acceleration of digitization and integration of digital trust practice in the world after COVID-19 will provide instruments and solutions required for decarbonization, say KPMG experts. MarketLine analysts report that modern technologies are not efficient enough yet, but as they improve, more companies will invest into RES assets.

One of the problems with the transition to carbon-neutrality is the absence of accurate, objective and available data, but acceleration of digitization and integration of digital trust practice in the world after COVID-19 will provide instruments and solutions required for decarbonization, say KPMG experts. MarketLine analysts report that modern technologies are not efficient enough yet, but as they improve, more companies will invest into RES assets.

Digitalization opens up brand new horizons of clean power, emphasizes Leo Birnbaum, CEO, E.ON, a German electric utility company: “It is the first time that the data allows us to see the status of all technical systems at any moment and also see the needs and wishes of our clients”. According to him, in the future energy companies will be getting data about the needs for electric power of each object in the ecosystem — such as electric vehicles, heat pumps, accumulator batteries and so on. The data will be aggregated on an open platform: it will present the stability of energy inflow, as well as opportunities and restrictions for business growth and other necessary parameters. The companies which invest into this data gathering and analysis will be able to provide their clients with the most attractive offers in real time and manage them in the best possible way, he believes. 

Yesterday’s systems, processes and structures do not suit today’s electric power management: the world needs a brand-new operating system, says Leo. “The energy sector should pay more attention to digitalization and partnership in this field to completely unlock the potential of digital technologies for a successful energy transition in relation to infrastructure, resource business and new solutions which are being developed now. In the future a significant role will be given only to those energy companies which will be completely digitized in terms of their internal processes, their philosophy, their clients’ processes and operations”, — he summarizes.  

Hybrid projects, which combine different renewable solutions and digitalization to completely unlock RES potential, are definitely a remarkable trend of the industry development, proves a Siemens Gamesa representative.

Of course, positive shifts from technologies already exist. For instance, the price of a wind turbine has reduced by 40% by 2020 compared to 2010, says Anna Morina, Head of “Otkritie Research” Analytics, “Otkritie” bank. Similar to this, the production cost of solar panels has significantly dropped in price due to research and development of new production technologies, she adds.

RES problems

In the winter of 2021 during the historical temperature drop, which left millions of Americans in Texas without electricity, water and heat, the declarations that it was the government's use of RES (including wind power) to blame, spread over television and social networks. Altogether this state lost 40% of its generating facilities, while wells and natural gas pipelines, as well as wind turbines, were frozen.

However according to official data, the wind generates only 20% of the total electricity in Texas, while solar energy is responsible for 1.1%. The rest is natural gas (47.4%) and coal (20.3%). Ed Crooks, Vice-Chairman, Americas, Wood Mackenzie, explained in his letter to Reuters: “Texas crisis was not caused by renewable energy industry of the state. The greatest generation loss occurred at gas-fired plants, and the fall in production at wind power plants was significantly behind. However, according to him, “the loss of power was a warning about the problems which will be growing as the share of renewable generation in the network will be going up”. 

Let us not forget about the cost and technical problems related to integration of significant volumes of RES in other world’s regions. In Germany, where the government initiated the construction of RES facilities, which have almost the same installed capacity as traditional sources and where it was decided to close a nuclear power plant (NPP), the electric power tariffs are among the highest in the world. Though in neighboring France the energy, generated by a NPP, makes 75% and, despite RES intensive development, nuclear power will remain dominant in this country for a long time.

RES supplies are weather-dependent; providing complete and secure energy supply for a separate enterprise with their help can only be done due to energy storage systems and micro grid technologies, which results in additional price increase, says Valery Dzyubenko, Deputy Director, Energy Consumers Association. 

In the countries rich with natural resources, RES are inferior to traditional types of generation, says Vladimir Lyashchuk, Chief Analyst, “Promsvyazbank”. “RES power plants have a low utilization factor of installed capacity, and they need to be supported by reserving traditional power generation capacities. As the result, traditional types of power generation will continue to prevail in the market”. Coal and other carbonic energy materials will remain significant sources until the problem of reaching stability for RES-based power system is solved, agrees Anna Morina.

Another problem of energy transition is often out of the debate, says Anna: the production of these very solar panels and wind power generators is accompanied by a significant level of emissions. “According to different researches, the volume of carbon dioxide required for the production of 1 m2 of a solar panel may vary from 1 to 2 tons depending on the panel type. If one projects this volume onto the area of solar panels, required to replace the whole installed capacity of the EU, the volume of emissions may significantly rise for this region”, — she emphasizes.

It is unreasonable to destroy the potential of existing energy industry, says Vassily Savin: one should thoughtfully and comprehensively approach the carbonization issue — because sometimes more effect can be reached by replacing steam power technologies with steam-gas ones and by concentrating on the improvement of absorptive capacity of forests under management potential, rather than by closing the existing power plants and replacing them with expensive RES which are not always equally reliable. “There is no point in thoughtless destruction of the accumulated potential of the power system sustainability in pursuit of reputation: the issue requires a step-by-step, comprehensive plan of decarbonization and energy efficiency improvement of each country's economy with optimal utilization of existing resources, which will help avoid energy supply collapse and unreasonable growth in prices for energy resources”, — he concludes. It is unreasonable to destroy the potential of existing energy industry. One should thoughtfully and comprehensively approach the carbonization issue.

The Russian version of the article is available here.