New challenges and innovative solutions in Europe’s energy transition

Katerina Kaplet and Bastian Winkelhake of Charles River Associates discuss key findings from the E-world 2022 conference that will shape the future of energy transition in Europe.

Europe is striving to be a global leader in green digital. However, accelerating the charge of digitalization and energy transition is even more challenging in the face of rising energy prices and geopolitical developments that are having a profound impact on the entire energy supply chain. Therefore, balancing energy security, sustainability and changing electricity demand was the backdrop for this year’s E-world conference in Essen, Germany, one of the largest international conferences, bringing together energy innovators from across the continent.

Despite market challenges, there are many signs of progress in Europe’s energy transition. In June this year, the Committee on Climate Change reported that the UK had reduced its total territorial emissions by 47% compared to 1990 levels, and that emissions by 2021 were still 10% below EU levels. before the pandemic. In Europe, 2021 saw the highest electric vehicle (EV) sales to date, growing 66% year-on-year to over 2.2 million new registrations. Renewable energy generation is also showing positive signs, with Europe posting a record year in 2021 for new onshore wind installations.

Although there are positive indicators of Europe’s energy transition, more innovation is needed to achieve net zero emissions, and a range of actors will need to play a part. Start-ups, for example, are generally seen as venturing into new, riskier innovations. Large players tend to focus most of their resources on day-to-day operations and related programs, with a smaller portion devoted to high-risk initiatives. They support innovation by investing in start-ups (and therefore limiting the risk), rather than directly driving the process.

Beyond the private sector, there is a call for greater involvement of public organizations, in particular regulators and legislators. The European Financial Reporting Advisory Group (EFRAG) which published its draft European Sustainability Reporting Standards (ESRS) in April this year is a good example of where cross-border regulations require increased corporate transparency on environmental performance as an incentive for decarbonization.

All eyes are on the energy sector – public and private actors – for what can be provided to drive Europe’s green energy transition while ensuring enhanced energy security. In light of this, we describe a selection of our main takeaways from participating in E-world.

Decarbonization of heating and industry

The decarbonisation of industry was a key theme of the conference, as hard-to-reduce sectors such as steel and cement production will require new innovations to tackle carbon intensity. Unsurprisingly, the role of hydrogen was a big topic of discussion. However, the financial feasibility of projects, including the availability of infrastructure, presents challenges in moving companies from the planning phase to completion. Similarly, carbon capture, utilization and storage (CCUS) technology has been touted as an option, direct air capture technology company Carbon Engineering Ltd. exploring how carbon capture can be scaled up to megaton scale to mitigate unavoidable emissions from industry.

It is evident that there is an interest in technologies and an appetite to explore the possibilities of scaling up initiatives. This will require support from governments and regulators to create optimal market environments for success, including subsidy mechanisms and more clarity on regulations, targets, certification, monitoring and evaluation.

Heating was also discussed in relation to new financing models to support the decarbonization of a traditionally difficult sub-sector. Heat pumps, which have seen steady growth in Europe over the past decade, were cited as an example of growth in this area, with northern Europe leading the way in installation. In terms of heat pumps installed per 1,000 homes in Europe in 2020, Norway led with 41.79 and Finland followed closely with 39.01. In other markets, such as the UK, which had a much lower rate of 1.3 per 1,000 households, additional public incentive will likely be needed to expand the deployment of heat pumps alongside insulation measures and energy efficiency of homes.

Regulation and subsidies represent a pillar to support decarbonization. The other pillar is ease of implementation. In this context, start-ups such as Everyone Energy, which exhibited at E-world, provide valuable support to increase the adoption of rooftop solar. The rules of the German solar subsidy scheme (with their regional differences and specificities) can be a challenge. Everyone Energy offers an attractive solution to reduce friction for those interested in installing solar panels. Their solution combines information on all relevant regulations and helps potential investors decide on the business model, as well as prepare qualified materials that can be used by installation providers. It also connects the potential customer with the most suitable supplier, which helps to reduce the risk of potential projects falling back before implementation.

Market structures to support sustainable transformation

With the growing share of renewables in the energy system and the shift from subsidies to direct marketing and market-based contracts, the need for market innovations and new products increases. The E-world Trading Forum offered several examples of innovation in this area. The European electricity exchange, EPEX SPOT, has presented its Local Flex trading service, which offers the possibility of flexible trading to manage grid congestion, by connecting flexibility providers to transmission system operators (TSOs ) and distribution system operators (DSOs) (by leveraging the local platform energy market, which was acquired from Centrica in 2021).

In addition, a new collaboration between EPEX SPOT and Speedwell Climate was announced, cooperating on new weather indices. By combining expertise in weather, catastrophe and climate data, the renewable energy-focused hedging tool will provide risk management and hedging opportunities to the renewable energy sector, enabling increased risk management for investors and producers.

In another nod to the collaboration, the Trans-European Market for Guarantees of Origin was also widely discussed to help improve continental transparency and continue to encourage renewable technologies.

Power Purchase Agreements (PPA)

It is important to also cover PPAs as one of the main topics of discussion in the electronic world through numerous booths, keynotes and conversations. At current price levels, PPAs are, in many cases, more economical than subsidized models, which is part of why we are seeing many wind efforts – both onshore and offshore – switch to PPAs.

The standardization and support of PPA contracts is gaining in importance, as shown by the frequent discussions on the European Federation of Energy Traders (EFET) PPA model(s), its planned revisions and improvements, as well as the emphasis on the distribution of risks and structures. Presentations from Pexapark, EFET, Engie and others covered the PPA from several insightful angles.

Another example is the Marktoffensive Erneuerbare Energien initiative of the National Energy Agency (dena) in Germany, which aims to work with the Association of German Chambers of Commerce and Industry (DIHK) and the protection, as well as with producers, potential buyers and other market players in order to strengthen profitable business models for the direct purchase of green energy. Dena has good reason for the move, with a survey cited during his Electronic World presentation showing that more than half of German energy experts see PPAs as “important”, and another third believe that they are “very important” for a model future-oriented market for Germany.

In summary, it was encouraging to see innovation from across Europe’s energy sector come together at E-world this year. Beyond the activity at the show, the trends identified strongly reflect discussions of energy security, sustainability and potential future demand developments that we are witnessing in the industry both on a day-to-day basis and in terms of strategic topics for the future.

Katerina Kaplet, Associate Director, Charles River Associates

Bastian Winkelhake, Consulting Partner, Charles River Associates

Katerina Kaplet
Principal Partner
Charles River Associates

Bastien Winkelhake
Consulting Partner
Charles River Associates

Attention, this article will also appear in the eleventh edition of our quarterly publication.

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