Green energy headwinds

This week our dedicated team of environmental markets reporters discuss the price drivers for GOs, challenges in the PPA and green hydrogen sectors as well as cross-border issues impacting the expansion of renewable energy across Europe. 

Guests: 

• Rachael Burnett, Environmental Markets Reporter, Montel
• Tasmin Chowdhary, Correspondent Germany, Montel
• Enza Tedesco, Environmental Markets Reporter, Montel

Transcript

0:01

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

Hello listeners and welcome to the Montel Weekly Podcast, bring Energy Matters in an informal setting. This week we take a turn inwards in a discussion on the latest developments in the energy transition. If you're wondering about what's happening with Goss, what's happening in the power purchase agreement sector, or if you want UpToDate news on green hydrogen, then you've come to the right place. Joining me, Richard Sverrisson are the Montel reporters that form the core of what we call the Green Dream Team. First of all, Tasmin Chowdhary. Hello Tasmin. Great to have you on the pod.

Tasmin Chowdhary, Correspondent Germany, Montel: 1:08

Yes, thank you, Richard,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:09

Rachel Burnett. Rachel, this is also your first appearance. How are you?

Rachael Burnett, Environmental Markets Reporter, Montel: 1:13

Hi, Richard. Yeah, I'm well. Thanks. Thanks for having me on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:15

And finally, Enza Tedesco, a warm welcome to you Enza.

Enza Tedesco, Environmental Markets Reporter, Montel: 1:19

Thank you very much Richard. Nice to be here.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:21

Excellent. So I thought we could start by, by looking at, what's happening in the guarantees of Origins markets, which, goes for some, are an integral parts of the transition to, to clean energy. You've been looking at this Tasman what's happening to prices at the moment? So what are traders saying?

Tasmin Chowdhary, Correspondent Germany, Montel: 1:37

Recently prices, there's been a bit lack of activity this week. So prices seem to be. More flat week on week. But there is potentially some upside to prices because I've heard from sources that in general the market is fundamentally very tight in terms of hydro supply, which is one of the key sources of geos, or one of the benchmark geos is the Nordic hydro. Currently the reservoirs are around the normal level, but they, the forecasts are quite dry for the region and in the Alps as well. There is less rainfall than normal, so potentially it will be a bit harder for buyers to track down suppliers because they are not so certain about their deliveries for next year. It, that's on the hydro side, definitely. And I've just heard from others that potentially as in the power market, the geo's market activity could be a bit slower in the next few months because of the summer vacation period. So this might last out until August and possibly we could see more price volatility because. This market does jump with the announcements and new data produced from the Association of Issuing Bodies. But yeah, potentially just more volatility in the next few months.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:03

So quite literally, the supply as well as the geos could dry up a bit coming up, but. Tasmin, what kind of price levels? If we compare it to the power price or to, the carbon price, it's obviously significantly lower. Maybe even just a fraction of that, isn't it?

Tasmin Chowdhary, Correspondent Germany, Montel: 3:17

Yeah. Currently wind geos and hydro for next year are around 30. To 40 cents. It's per megawatt hour, so it's very low in comparison, although other colleagues have reported that it does vary across region. So for example, German, we read recently that German wind geos were around. Two euro per mega hours is significantly higher. It just, it does vary, but in general, very low.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:47

Yeah, absolutely. That compares with the carbon price. On, on Thursday when we're recording, we are seeing, carbon prices rise above 55 euros per ton. The first time it's reached that level for about five weeks. But Rachel, if I can turn to you, what, you've been looking at the guarantees of Origin market for in recent weeks. What's been happening to prices? What are traders and analysts saying when the ones that you speak to?

Rachael Burnett, Environmental Markets Reporter, Montel: 4:10

As Tasman said one of the main, one of the main drivers, particularly in recent weeks, has been the supply, which is closely linked to weather phenomenons because of Nordic Hydro. So when we see a lot more. Hydropower production, we see a lot more supply and that obviously drives the prices down and that's what we've seen over the last few weeks. We had a peak I think in around the middle of May and since then it's been gradually tailing off. And geos tend to follow this kind of pattern each year. It's quite seasonal. Quite a lot of the geos of higher prices at the beginning of the year. And tend to tail down more towards the end of the year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:47

You mentioned, or Tasman, you mentioned the sort of regional variation in prices between Germany. Maybe that's a lot of buyers who want, to buy, who want to get the local product, if you like, but what are the other regional variations Enza, could you say what, between sort of Italy and France and Nordic, what are you hearing?

Enza Tedesco, Environmental Markets Reporter, Montel: 5:03

First of all, we need to start from the premise that geos are not commodities. They are unlike standardized commodity futures. Because each geo is unique. It differs from one country to another, from the technology is produced from. So whether it's solar, hydro, or wind, and from how old is a certain plant. Also, let's not forget that on the demand side, often times geo bias are very specific about what kind of plant they want their geos from. What country or how old that facility has to be. So the more specific these requests are, the pricier, the GOs. So with that in mind, even though there is an overall underlying price trend, it's only natural to see price variations within the different European countries. For example, Spanish GOs have always been cheaper compared to the Nordic benchmark. They trade around a couple of cents below the Nordic benchmark around 37, 30 8 cents at the moment, and mainly because most of these are not exportable and can only be used domestically. Italy also has historically traded about one to 3 cents below the Nordics. Although I've been told that there were times for example, in 2017 and 2018, that Italian geos were in short supply, and so they traded at a premium of three to 5 cents over the benchmark. On the other hand, there are certain countries, like Tasmine also was mentioning earlier in, in which geos carry a premium over the Nordic benchmark. And this is the case of the Netherlands Germany, Belgium and Switzerland. And that's because local buyers seek local geos and there's not enough supply to meet that domestic demand. In fact, all those countries are net importers of geos. I was told that Solar Geos, which is normally the most expensive technology compared with winded hydro from the Netherlands, traded as high as three euros recently. That's quite a big difference. And as for France, French geos have historically been more expensive, but currently those goss have been trading more in line with the Nordic benchmark. Since France seems to be floating the market offering more than three terawatts every month through its auction. So the five to 10 cent premium they used to hold is now only visible in the contracts, further down the curve, say 2023, for example.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:44

What will also be interesting is to see what happens or what comes outta the renewable energy directive or the revised renewable energy directive and the F 4 55 package that the European Commission is proposing in the middle of July. So I wonder whether that will let, that will increase more standardization. It certainly will bring green hydrogen or just hydrogen generally into the picture. Are you. Hearing anything or any hints here, Rachel, about what could be in the pipeline here from the commission?

Rachael Burnett, Environmental Markets Reporter, Montel: 8:11

What I've heard from a few people is that I think standardization would be welcomed. I don't know if it's going to be in the plans or not, but certainly one of the major issues in the market at the moment is fragmentation. Each country. Just does its own, has its own system, and the more standardization there is, the easier it is to trade across borders. And certainly when we bring hydrogen. And hydrogen will be brought into the mix by this new directive is what I understand. It's gonna be more important than ever that we can have geos that are more standardized across different countries and even for different technologies potentially as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:54

Yeah, we seem to be quite a way off that at the moment. But Rachel, if I can just stick with you and ask you,'cause, the guarantee of origin, the certification that the power produces. Green is obviously very important for companies who want to sign long term or even short term power purchase agreements. So to procure renewable energy. You do a very nice weekly roundup for our energy transition weekly publication, Rachel, so what, what's been happening this week in the PPA sector?

Rachael Burnett, Environmental Markets Reporter, Montel: 9:21

This week one of the, one of the things I've heard from the market is that for the first time, potentially ever, certainly in a long time, we've seen the costs of developing solar projects actually rising. Which is due to increased demand from India and China in the wake of the COVID pandemic and the bigger green wave in general. There's been a rise in the raw materials. The costs of these also a rise in freight, and this is putting pressure on developers and it varies hugely country to country. A country like Spain has so much solar. PPA prices tend to be low. It's a very active market, one of the most active markets in Europe. This pressure on developers is really gonna put a squeeze on prices from what I've been told, because they're already really close to the bone on their costs of developing

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:16

This is despite, a very strong wholesale prices as well, certainly this year and potentially for the coming year in some areas. There's a topic, I think you're right, Rachel, isn't it that, the squeeze on the supply chain is certainly hitting often, the wind developers and also those wishing to build the solar panels in, in, in all parts of the world.

Rachael Burnett, Environmental Markets Reporter, Montel: 10:35

Yeah. Different countries have different problems. I'm told that this issue with the bottleneck with solar could lead to four to six months delays in projects. So we're gonna see a real bottleneck. And as corporate demand is rising for PPAs, more companies and even utilities as well want to sign and they want to sign quickly because power prices are going up on the wholesale market. If there's less projects coming through, then they're really not going to have as many options. Other countries such as Germany, Italy, Belgium, they have issues with permitting, and what I'm told is just projects get held up for months, sometimes even years. In the permitting process. And this, there's a lot of demand. I think particularly in Germany. There's a lot of demand for PPAs, a lot of strong industrial corporate and utility off takers, but the projects aren't coming through, so they have this issue.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:27

Maybe we should ask a Germany experts here Tasmin. What, what's happening in, in, in PPAs. What's happening with the, on the supply side here? Certainly there's demand for these projects. What are you hearing?

Tasmin Chowdhary, Correspondent Germany, Montel: 11:37

Definitely there is plenty of demand from corporates and, for example, from the steel and chemicals industry in Germany. These will be big sources of PPA demand, but at the moment there, as Rachel said, there are plenty of issues with permitting. So many projects are just not being built. And the auction process, many are. Suggesting that there just is not enough capacity in these auctions being offered to, to meet Germany's long-term renewable goals. So there is definitely many analysts are pointing to the imbalance between demand and supply in the PPA market. I think the main sources of supply for PPAs or those with the most. Potential are older renewable projects, which are exiting the country support system. So this is the feed and tariff, the EEG scheme. However, those have been operating already for 20 years. So the most they can sign for a future PPA is up to five years. So those green image seekers, as they're called will not be so keen to sign PPAs with older projects because they'd rather be seen as supporting something that's newly built on that side. Then there is more potential for solar. Because we're seeing a lot of unsubsidized projects in, a hundred, 200 megawatt projects being built, and automatically those solar projects over 20 megawatts are not eligible for subsidies either way. So that, that's probably where there is most potential. And if we do see in the next auction rounds for offshore wind, there could be more PPAs in that, on that side as well.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:25

Interesting. So obviously we, something we've discussed on the pod before is this concept of additionality so that the corporates want new facilities. They don't want to tie themselves to a site that's been producing for the last 20 years. As you say, Tasman, that's what's happening in Germany. How about in Italy? Enza. You can also explain this this Italian concept of agri Voltaic as well. I think that's quite an interesting idea.

Enza Tedesco, Environmental Markets Reporter, Montel: 13:48

Well, a lot of sector exports believe that the removal of this complicated permitting procedure would unlock the potential of more corporate PPAs in Italy. Despite the strong growth in European corporate PPAs over the past few years, Italy unfortunately has been in the 13 place in Europe in terms of PPAs announced in the country, according to a recent report by an Italian energy consultancy. And in fact, last year. There were only 100 megawatt of corporate PPAs signed and that compares to 1.3 gigawatt in Spain, and 0.8 gigawatt in Germany. And Italy has only account for 2% of total European corporate PPAs since then. So obviously there is a lot of potential and people are waiting for new government rules to actually make a difference and streamline all the bureaucratic process for the authorization of these green projects. Unfortunately that's been a big problem in Italy and and it's been the missing link in the Italian transition, the energy transition so far.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:08

That's very interesting, Angela, because Italy certainly won't be 13th place in the Euros, will they? I think, but in, in the PPAs they're lagging behind. What is it, what's at the core of these permitting problems? Is it. Bureaucratic processes? Is it the sort of not in my backyard concept or what is at the core of these red tape bottlenecks?

Enza Tedesco, Environmental Markets Reporter, Montel: 15:27

It is a bit of a combination of both. Bureaucracy has been. Like the Achilles heel, unfortunately in the transition because investments are there, the projects are piling up, but there are these really complex and extremely lengthy authorization procedures are blocking and delaying thousands of renewable megawatts in Italy. And I'm not just referring to new renewable capacity. I'm also talking about repowering and revamping and even for the energy storage and batteries. And obviously there's also the side of the nimby. So not in my backyard phenomenon and all these superintendency that are the regional. Bodies that are part of the Ministry of Cultural Heritage have been blocking a large number of renewable projects in the past because of that, in the name of preserving the landscape and and culture heritage. So what the government, the new government, which, which was so soaring in February, has done, is put together a set of new measures known as the simplification decree that were enforced at the beginning of June to streamline and speed up all these processes. And with the hope to unleash the potential of the renewable sector. So those green projects that fall within the Italian recovery plan and the National Energy and climate Plan would get fast tracked. And in those cases. Getting, for example, the environmental impact assessment, which is one of the most controversial authorization would take no more than 130 days now and that is a big improvement when you consider that same authorization used to take up to two years for wind project and about one year for solar projects.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:18

Wow. That's, yeah that's certainly cutting that time down. But Enza just, could you tell us a little bit about this concept of agri voltaic, I know Italy has agritourism, but what's this agri agri Voltaic?

Enza Tedesco, Environmental Markets Reporter, Montel: 17:29

Agri Voltaic is the coexistence of solar panels and crops on farmland. And farmland has been also a big issue in Italy because a lot of farmers lobbies have been against having renewable in this case, specifically solar projects developed on those green fields. So there's been a lot of oppositions from that sector. And now what they've been developing is exactly that. The coexistence, it is possible to have. Crops side by side, renewable energy. Obviously that implies a bit of a higher cost. I've been told I think between 10, 10 and 20% more costly. But that will be also a way to go around these these difficulties that the sector is facing. And in fact, a big company like Anelle. Does have a lot of projects in the agri type because they are betting that could be a solution to increase the solar production because we have to keep in mind the solar capacity in Italy needs to triple by 2030. As part of the targets of the country. So that sector is the one that needs to grow the most. And so that could be a solution to, to achieve that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:53

Tasmin, what are the main permitting issues in Germany? What's holding up plans there? Is it also the similar issues to what Enza is describing in, in.

Tasmin Chowdhary, Correspondent Germany, Montel: 19:02

Yes, exactly. It's the lack of public acceptance for onshore wind in particular is one of the key issues. So that is definitely holding back growth for onshore wind, but there is. More possibility, growth, possibility, for example, for solar of the project. Yeah, I think that is one of the key issues

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:22

hopefully that will speed up. Germany does have some very ambitious emissions reduction plans and also renewable targets. So you know, we maybe we'll see this speed up. Rachel, if I can touch on Spain and Iberia, maybe Spain and Portugal. Together, there's some very ambitious targets and a lot of projects. In the pipeline now. What are you hearing about the, are these projects that have been announced or deals signed? Will they all see the light of day? How realistic these projects, they're in the pipeline?

Rachael Burnett, Environmental Markets Reporter, Montel: 19:50

We've got a lot of projects in the pipeline in Spain. The last figure I saw, which isn't even the most up to date one, was 131 gigawatts with grid connection rights, granted. And the general consensus seems to be that nowhere near all of these projects are going to reach completion. Certainly not within the timescales that have been proposed. And that's lucky because if they did reach completion, then the PPA markets would be sunk.'cause there isn't the capacity to absorb all that much in such a short amount of time here in Spain, cannibalization. Which is the phenomenon where the sun is shining as it so often is in Spain, all our solar plants produce at the same time and they produce a lot of energy at the same time. And this drives the prices down to zero, sometimes even negative prices. And this makes it very difficult to negotiate PPAs and to, you have to end up with very complicated. Contract structures to allow for these kind of price mechanisms. And the more that we see these prices drop and drop, then why would you invest in a plant? Because you're not gonna make very much money selling the energy. So it all plays into themselves, and I think what I've heard is a more realistic figure is perhaps three to four gigawatts of the net capacity increase in renewables over the coming years, the next five years.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:20

Could you touch a little bit upon the prospects for hydrogen in Spain? What are the plans here? Green hydrogen in particular.

Rachael Burnett, Environmental Markets Reporter, Montel: 21:27

The government has announced the goal of four gigawatts of electrolyzer capacity by 2030, and there has been a flood of interest and proposals. Five more than 500 proposals have been mooted in Spain, but I think. Again, there's a pinch of salt to be taken with all of this because we couldn't have this much hydrogen capacity in Spain. It's, I think, again, many of these projects are being proposed as a mechanism to try and get some funding secured, and not all of them are going to get funding, and certainly not all of them are going to. To come to fruition.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:09

Absolutely. Now you are hearing some sort of, some more critical voices as well emerging here. Aren't you Rachel, in, in terms of the hydrogen plants, not just Spain, but in Europe as a whole?

Rachael Burnett, Environmental Markets Reporter, Montel: 22:17

Yeah, there's been a lot of excitement about hydrogen. It's seen by, I think a lot of people as a silver bullet to many of our energy problems. There are still some major obstacles that need to be overcome, and one of the main issues at the moment that I've heard about is that when you've got your renewable electricity and you want to convert it into hydrogen, you lose so much energy in this process and then you've got the issues of transporting it where again, energy is used or lost. And one figure that I've heard is that it's 35% less efficient in terms of energy than direct electrification. And as technology improves for batteries and for what we're capable of doing, I think particularly in transport, haulage now I think is seen as an area where. More likely than not we'll have batteries than hydrogen. Certainly in most cases it's a similar situation with heating buildings. Electric heat pumps are most likely going to be a more viable option in many cases, although I have also heard that. I think particularly in older buildings in Europe, some of them won't be as attractive for conversion and perhaps green gases like hydrogen will come into the fore. And hydrogen does also have a role to play potentially with. With balancing the grid, as we see more and more renewables or producing at once and all not producing at once, it can help to store the energy and then release it when we need it.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:46

As you say, hydrogen, it is difficult. There's obviously lots of ambition. It's gone from being a very embryonic market to attracting the interests of major utilities, oil and gas majors, et cetera. So I think for those listeners who want to listen to more on Hydrogen, follow us on the Monte Weekly podcast, of course. But there's another podcast that I'd recommend to those listeners called Redefining Energy. And they covered an episode very well on the problems around hydrogen, that it may not be the silver bullet as you describe Rachel. If we can just maybe finally talk a little bit about Germany's plans for hydrogen Tasman. What's happening there?

Tasmin Chowdhary, Correspondent Germany, Montel: 24:19

Yeah, so the government is targeting five gigawatts of Electrolyzer capacity by 2030, and they've already announced some support and funding for about two gigawatts of this. So they are making some progress. There are around hundreds of submissions and 60 projects were chosen. One of the key issues though is as we've talked about, the permitting issues and fray strong. Ambitions in green and renewable energy, but the lack of capacity that is available for green hydrogen production. So this will be one of the key challenges and therefore experts have pointed to the need for blue to allow for blue hydrogen in Germany, which is with steam reforming combined with. Carbon capture and storage. However, the challenge is that this is very politically unpopular and the current law prevents, this prevents CCS, which means that the options for blue hydrogen are quite limited. So we'll have to see change in regulation in the next few months or years to allow for it because there are currently many of. Cross border or internal German blue hydrogen projects from the steel sector in particular where they are keen to invest in hydrogen, but they're very limited in terms of their options. So Germany in general, demand for hydrogen overall is set to be over a hundred terrible hours. It will just have to be imported from more cost competitive countries.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 25:59

Thank you very much for your contributions, Enza, Tasmin, and Rachael. So listeners, you can read all about these topics and much, much more in the energy transition weekly that comes out every Friday. It's free until the 1st of September. Go to Info Montel Energy and that's all for this week. So listeners, you can now follow the podcast on our own Twitter account at ly named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.