Combustion is so 20th century

Burning fuels to generate energy should remain a relic of the last century. This week’s pod discusses, with a touch of “I told you so”, the outlook for decarbonisation in eastern Europe and the options available to countries in the region. Firms will need to urgently move away from coal and lignite before it’s too late or costly.  

Host:

•  Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Paolo Coghe, CEO Acousmatics

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

Did you know Monte uses artificial intelligence and machine learning to forecast spot prices, inflow to reservoirs, wind, and runoff river production. We can improve forecast for your individual power plants anywhere in Europe. Contact us at ai@motelnews.com for more info.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:35

Hello listeners and welcome to the Montel Weekly podcast, bring Your Energy Matters in an informal setting. Today's spot, we'll look at decarbonization, but in this episode we focus on parts of Europe that will struggle to clean up their energy systems. Our neighbors in the East plant a phase out cold and ignite, but what will they replace these fuels with? Our wind and solar, the only options or what are the alternatives? Have these countries admitted defeat against tightening climate targets dictated from Brussels, or can we expect further resistance as after all hundreds of thousands of jobs are under threat, who will build or invest in green NG projects in the region? I'm Richard Sverrisson and helping me to address and discuss these issues is Paolo Coghe, CEO of Acousmatics, a consultancy. Welcome back, Paolo Bonjourno. Paolo, how are you doing? You're based in London these days?

Paolo Coghe, CEO Acousmatics: 1:29

Yes. I'm spending more time in London than traveling around. It's a nice, refreshing change and I like everyone doing the best that I can in these difficult times.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:38

Exactly. Perfect. We're here to talk about. The process of decarbonization in Eastern Europe primarily. Now the discussions are underway in Brussels about, 55 to 60% cuts in emissions by 2030. What do these very ambitious targets mean for Eastern Europe?

Paolo Coghe, CEO Acousmatics: 1:57

It's a wake up call in cases in case this was needed, right? But all of these countries that have some sort of legacy fleet. From years gone by. Should have already been been awakened to the troubles coming. The EU has had a very solid set of policies for. Decades now. So this should be no surprise at all for anyone. So I think those countries that left it a little bit late will find it probably a bit more costly to ultimately meet these targets.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:28

Absolutely. Perhaps they were taken in by lower carbon prices for much of the emissions trading seat, phase two and phase three.'cause when prices were. They didn't really take off until 2018 if my memory serves me correctly.

Paolo Coghe, CEO Acousmatics: 2:41

Yes. Your memory serves you correctly. The good old days of carbon at five euros of term. Exactly. Around 2016 and 2017. Not to mention the years around 2012 or so were actually, it wasn't sure whether carbon as it was, as a market would survive. And it took again. More effort on the part of the policymakers to make sure that the carbon market stayed alive, that some of the problems were fixed, so that ultimately carbon prices could show some scarcity and go in the direction of disincentivizing pollution.'cause that's what we're talking about here. If I may make a joke right at the beginning, in the end, which I think falls well within this topic. Combustion is so 20th century, right? We're no longer in a century where we want to move ahead by burning. Things to produce energy. If we can avoid it and we can,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:36

what's 21st century then, especially for Eastern Europe? If I'm a policymaker sitting in Warsaw, combustion's had its day. What replaces it?

Paolo Coghe, CEO Acousmatics: 3:44

It's a bit difficult to be a policymaker in some of the countries because like we were just saying, there are some legacy impacts. It is not just an economic problem, but a social problem. I'm thinking about mining in Poland, for example, right? Having said that, I forgot which detective or prosecutor always said follow the money. The smart money for some time now has been in renewables, so there's no excuse for not having picked that up. And for having made things or, having written policies that would help the country or block of countries take advantage of the revolution in renewables.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:23

In Poland, we have seen. Quite a massive expansion in especially Rooftop Solar over the past years. Past year or two, I'd say. Do you expect this to continue?

Paolo Coghe, CEO Acousmatics: 4:33

Yes. I was reading that Poland has quadrupled right in the last couple years. The amount of, solar power installations connected to the grid. I think it went from 200 to 800 megawatts in 2019. And of course, again, it will keep increasing. But let's not forget, even though these are very reasonable numbers, let's not forget that, it's easy to double or quadruple if you're starting from very low numbers, right? So there is a basis effect here, at the very least, if I had to use another cliche, which I like using, of course is better late than never, right? But sometimes leaving things late, as I was mentioning earlier, makes it more challenging and for sure more expensive. And I think we have seen some interesting examples of this very recently with the largest utility in Poland coming out with a sort of a change of strategy, the massive change of strategy.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:23

We'll return to that, I think. But if I were to, if we're in the realm of cliches here. Is it too little, too late, what we're seeing here,

Paolo Coghe, CEO Acousmatics: 5:30

right? If I could only choose one between the two, I would say better late than never, right? But yes, in some cases it does seem to be a little bit too little, too late. Again, the counterside of the too little too late is that to make it not so little and to make it not tardy, you have to then work extra hard. Spend extra money and potentially, be burdened with this problem for longer than it would've been if you had instead acted upon the signals. And there were plenty and plenty of not just signals from the economy, but also on the commentary, whether it's the news, whether it's academia, whether it's experts pointing out the way. And going back, if I may add, if I had to pick one signal that companies would've picked in, is the fact that the well started to run dry in terms of financing. Dirty, so to speak, projects, right? The European Investment Bank was the first massive institution to say we're no longer going to lend to projects that have to do with, for example, coal mining. If you go back, just adding these to other institutions, in 2017, I think the World Bank, I think French Bank BNP, Paraba and others, I think. Started saying we're no longer lending to again, quote, dirty unquote projects. So no arctic drilling, no, deep coal mining and so on and so forth. So once this trickle of companies that would normally land made it difficult for companies that would borrow to start these projects, but that's a first sign. If there are fewer people or fewer institutions landing. That means also the cost of borrowing is going to go up. And so you need to start scratching your head and think, is it really worth it?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:18

It's obviously gonna be more costly. And this is at a time when economies all over the world are struggling and are gonna be focusing on rebuilding from the devastation of the pandemic. But is it ironically, is there, do you think there's more. Finances available now through potentially the recovery fund and the green deal to push the decarbonization agenda in Eastern Europe, and especially,

Paolo Coghe, CEO Acousmatics: 7:41

Yes. I don't know if as a result of the corrective measures to pass this pandemic crisis for sure. Even before the pandemic started, there was plenty of money available and I wrote with my friends at AIF about this, plenty of money available to. Make good green forward looking investments from lenders. Versus using that money, for example, to conduct upgrades to make sure that your polluting fleet would come up to regulations. So the way I've talked about this before is that companies that, for example, decided to spend millions of euros in upgrading their, some of their generating plants so that they could meet breath, new air pollution regulations that came around in 2016. They were of course running in place, right? They were spending money, so just to come up to basically barely meet the regulations, exposing themselves to a further tightening of regulations, which we know comes, periodically every four years in the case of breath, even though we don't know what that will be, you know that it is going to move in one direction to go back to what money is available after COVID. Honestly, I would be surprised if institutions left this loophole open. That said, oh since we are all trying to, pass COVID, then yes, don't worry. Yes, you can, invest in coal power plants. I would be surprised if they allowed that it would be an about phase.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:08

Absolutely. I share that view obviously the need and the urgency is there, Paolo, but who is gonna invest in these wind or solar projects in the region? Is it gonna be. External companies or investors, or is it gonna be more local national players?

Paolo Coghe, CEO Acousmatics: 9:23

I think it's gonna be a mix. A mix of sources. There are clearly some lending institutions that are gonna favor this, and they've made it clear with their policies. Then there are some large companies. The first one that comes to mind easily is Eber, which have made a business actually of building. On a large scale, for example, offshore wind farms, right? They, investing billions. Here's the interesting thing, we're not talking about millions, we're talking about billions. So these are large investments. They would take large companies. Having said that, there is a very healthy system of developing projects in Europe, and this has attracted attention. International players from a variety of sources. For example, there are pension funds that like to have exposure to green and renewable markets that are trying to seek these exposure by helping, develop projects in Europe. These would of course add to the local development movement, which again, all we need is some guy or girl that has a mission that will go out, seek a plot of land, get the authorizations, in other words, develop that to then sell it on to larger companies. And there is. Several models that this is done in, you could look at examples around the world from the United States to India where, for example, the national government is helping these large they're called I think, ultra mega or super mega ultra power plants, where basically they are huge swaths of solar projects. Were large players. Play in this market and smaller players play the role of aggregators. So there is a very, developed ecosystem, I think, and I wouldn't expect Europe to be any different. If anything, actually U Europe is one of the large blocks that is at the forefront of such investment.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:12

So That's a different kind of model to what's often talked about the PPAs, or is it a form of PPAs, just a. Contract between a government and a developer or government and Yeah. Sorry to

Paolo Coghe, CEO Acousmatics: 11:21

interrupt. Yeah. Governments, obviously, everyone has a role, right? The government has a role. PPAs are absolutely important because no serious investor, unless they are extremely risk loving, is going to invest in a project that's going to come about without some sort of contracting for the power that the project will produce, right? So PPAs are extremely important. Now, of course. No government will give you a PPA for the next 60 years, right? They will give you a PPA for shorter time periods and the shorter the time period is the more important the quality of the project is. And in terms of getting the funding and getting the project going, the risk appetite of the funders.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:01

Paulo, you mentioned PGE and its plans for carbon neutrality by 2050. How realistic is this?

Paolo Coghe, CEO Acousmatics: 12:08

2050 is a long time away. We could say all sorts of things. I know that pg e has had some, it has had essentially a reversal of its strategy, and so we're back into the world of better late than never. But how realistic is it? I've read some comments from from NGOs where they're not really happy because. It's a little bit like kicking the can, not so much down the road, but on the side of the road where they have this model where they're going to split their coal assets and then only have cleaner assets and going back to this combustion problem, they will still, though, they intend to have natural gas as a transition fuel for many years. So I don't know, how realistic is it? First of all, are they really getting rid of coal or are they just shifting their coal? So are they not solving their coal and mining, ignite mining problem number one. Number two, it's certainly a step forward that they are no longer going to get engaged in building coal projects. But is it so smart in the 21st century, 20 years in to continue to think about combusting a fuel to produce electricity. And again, of course, everybody on, on, on all sides. We all need to be realistic. They can't obviously go overnight from total fossil fuel to no fossil fuel. Having said that, I get the sense that they are a little bit that they could be more aggressive. Let's put it this way.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:32

So you don't buy natural gas as a bridging fuel between the combustible past and a non-combustible future?

Paolo Coghe, CEO Acousmatics: 13:38

I have to be careful about this. Yes, of course there is a role for natural gas as a bridge fuel, but the risk there is that you get comfortable with this bridge fuel and five years become 10, and 10 years become 20. And then where are the. Before you know it, you're coming across 2050 and then what?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:54

Yeah. Locking in those assets that burn in a sense. Yeah,

Paolo Coghe, CEO Acousmatics: 13:57

of course. Because in the end, if we want to keep talking about pg and e, because it's a really nice example. What their strategy had been was to. Effectively double down on, heavily polluting assets. Okay. And then at that borrow more so that they could invest more in these assets. And then when things have changed, and for example, carbon became expensive, even though they have capacity payments, they just could not sustain their earnings with these, let's call it old fashioned fuel, right? And so they've had to come and do a turnabout and say. Essentially they said, if we don't do this, we're going to go bankrupt. Okay. I'm paraphrasing here, but I don't think that statement from the CEO dub Brosky was much different from this. So had they shifted their strategy sooner. They would not have gotten to this point, and there were plenty, as I said, plenty of comments from rating agencies to people that looked at the market and looked and analyzed it like, like myself, for example, saying, not so far away, but back in 2018, be careful. This is not going to end well. You will be left withholding a lot of debt. It will be more difficult for you to borrow more money. Because of your, fossil heavy fossil fuel makeup. And by the way, we are telling you, and we said so in 2018, the sooner you switch to green to renewable, the better it is for you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:28

But that's Paolo. We have the benefit of hindsight here as well.

Paolo Coghe, CEO Acousmatics: 15:32

No, I have the benefit of, sorry of saying this two years ago. Not hindsight, I yeah, I guess we saw what happened next and I was right. Okay. So yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:41

So it's more I told you so rather than the benefit for the

Paolo Coghe, CEO Acousmatics: 15:43

ones for once I can say I told you yes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:46

Okay. Pa but do you expect other companies, not just in Poland, but in the region to follow suit and make such announcements? It seems to be. We've had seen a lot of oil and gas majors come out and say they, they wanna hit net zero by 2040 or 2050, and now PGE in Poland. So what about the others?

Paolo Coghe, CEO Acousmatics: 16:05

Yes. The general trend is that it's worth accelerating the replacement of existing fossil generators with new renewable generation. Okay. That's the trend, if you want to call it that way. And then at what cost and then what I've been arguing in this call among other things is that the sooner you do it, the better it is, right? There's a hurry versus wait type of decision. You should hurry. Okay, you shouldn't wait. Do not delay it. And so again, we could go through a list of companies, suffice it to say that the companies that saw these happening and acted early, their shares, share prices, have done much better. Examples that come to mind are Ted, obviously, but annual is another example, which was very successful in doing these transitions. No transition. No company's perfect, right? There are effective constraints. You can't just, you don't have a magic wand and you can make all these old power stations go away. You still need to keep the lights on and so on and so forth. But that should be just a difficulty to surpass rather than an excuse for inaction.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:05

Absolutely. Do you think, I think in Poland today, the government made some announcements about plans for nuclear and that they hope to come to decision by the end of next year. Do you think nuclear has a future in the region?

Paolo Coghe, CEO Acousmatics: 17:19

Again everything looks good written down on a policy or on a sheet of paper. Then when you have to actually do the work, it is difficult. We've seen a country like France. Struggling and France has had historically the industrial vision and the capability of doing amazing things for many years with nuclear, but they're struggling. So nuclear is very large. The UK is another example, right? In the way connected to France, given the EDF expertise, the Finnish reactor, again, over time and over budget by a lot. So I am not sure what these countries that are. Floating these ideas of doing new nuclear in Eastern Europe, have they thought it through? Are they confident that they can do much better than France, for example? And so I'm not sure that this is the most popular choice or the most smartest choice, so to speak. Again, not wanting to judge anyone but it's definitely a heroic undertaking. For any country.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:18

We've talked about one area on the pod before this year, and that's on small modular reactors. Do you think that could be that could be a solution? Sure. Run these very big, sorry. Yeah. Big massive infrastructure projects,

Paolo Coghe, CEO Acousmatics: 18:29

yes. We could look at it from many different angles and that certainly would solve the problem of scale. But I, is it proven? Is it around yet? Is it costly? Is it scalable itself? Does it solve the problems? I don't, I'm not sure that we're at that stage yet.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:43

So it's more wind and solar, big developments. And then the aggregators who come in Yes. Who will, with either batteries, demand side and will then make sure that gets traded and gets where it needs to be. Yes.

Paolo Coghe, CEO Acousmatics: 18:56

Yes. It keeps the light on

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:57

as well.

Paolo Coghe, CEO Acousmatics: 18:57

Correct. As exactly as you stated. It's wind and solar. Great. But don't forget batteries like you mentioned, don't forget electrification of the carpool, the ability to do grid vehicle, to grid improvements in grid, and so on and so forth.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:12

Yes.

Paolo Coghe, CEO Acousmatics: 19:12

How about much more so than combusting fuels. Sorry.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:15

Absolutely. What about hydrogen? Does that have a role to play here as well in the region? I mean is, we've had seen in some areas the decarbonization of the power sector, but hydrogen is a way to decarbonize the industrial sectors.

Paolo Coghe, CEO Acousmatics: 19:26

Yes. And let's not forget that. Transportation sector, right? If we're talking about about decarbonization. So yeah, pollution of this type is a huge piece that needs to be attacked from many different sides. There is a lot of excitement in the community about hydrogen, and it is showing some promise. Again, I'm not one of these sort of early adopters, so to speak, right? So I like to be a bit cautious. I'm a bit more of a turtle if you will, but there's already plenty, with even if you simply look at the evolution of how solar and wind have evolved, right? How much further down the road we are. With these technologies and how much they've been able to provide. That's really encouraging.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:06

Paulo, thank you very much for talking to us today and outlining how the regions that are struggling to meet very ambitious climate targets. Could move forward in a sense to, to clean up their act, clean up the energy system. So Paolo, thank you very much.

Paolo Coghe, CEO Acousmatics: 20:21

You're very welcome.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:22

So listeners, that's about all from the Montel Weekly podcast this week you can now follow the podcast on our own Twitter accounts aptly named the Mon Weekly Podcast. Please direct message any suggestions, questions. Or let us know if you'd like to be a guest. You can also send us an email to podcast@montenews.com. Lastly, keep up to date with all that's happening in the energy markets on Monte News. You can subscribe on Apple Podcasts and Spotify and please leave a review if you can. Thank you. Goodbye.