The following content is an opinion article written by industry expert, Kieran. All content and opinions are his own.
As we head toward the half-way point of 2020, it seems a good time to reflect on the past six months and evaluate where we go from here. The renewable energy sector, like most industries, has not been able to avoid significant disruption from COVID-19 with projects put on-hold, national tenders postponed, and the day-to-day development of new projects brought to a standstill. In this article, we provide you with the trends in Environmental Energy to watch out for in 2021.
In its latest update, the IEA has forecasted a 13% reduction in new renewable energy capacity additions in 2020 compared to 2019. The impact of COVID-19 is telling when you consider that this is the first decline in additional renewable capacity since 2000.
Despite this, most European countries now appear to have successfully managed the outbreak and normal service is, slowly but surely, resuming. It’s still too early to say if there will be any negative long-term impact on the sector but the reality of climate change has not disappeared, and thus the requirement for rapid development of clean energy technologies. With this in mind, here are three trends that we expect to be significant in 2021.
Green hydrogen begins its ascent
Green hydrogen has long been thought as a key component to achieving major reductions in global carbon emissions. It has been held back; however, due to technological challenges related to its use and the cost of its production. Green hydrogen can be up to four times as expensive as grey hydrogen, which is produced by steam reforming natural gas.
Green hydrogen is produced by electrolysis which is powered by renewable energy sources. Currently, excess renewable electricity is used to power electrolysers which is the only way green hydrogen can be created competitively.
However, renewable electricity is getting cheaper and is now at a point in many regions, where it no longer needs government support. This should lead to two eventualities which will drive support for the green hydrogen industry.
Firstly, cheaper renewable electricity will lead to a more cost competitive green hydrogen which will also drive uptake in the market. In addition to this, as renewable electricity no longer needs government support to develop, Europe’s leaders will turn their attention to the two other pillars of decarbonization, namely transport and heat.
These sectors have not enjoyed the same success as renewable electricity to date and uptake of electric vehicles and heat pumps, for example, has been limited. In particular, the heavy goods transportation and industrial process heat sectors have struggled to decarbonize due to inadequate technologies.
Green hydrogen has been penned as the solution to decarbonize these sector’s, but poor economic viability has prevented its uptake. Governments across Europe are currently subsidizing electric vehicles and heat pumps and green hydrogen is long overdue for some support to assist with its deployment.
Renewable tender prices potentially stabilize short-term
In the past few years, news headlines about renewable energy projects tended to have a common theme. The auction price delivered was either a new all-time low for the specific country or a record low price for a specific technology. Portugal was the winner in the back end of last year with PV Magazine declaring, “Portuguese auction attracts world record bid of €14.8/MWh for solar”.
This is clearly great news for the industry and the consumer — cheaper costs will drive more uptake and the consumer will see the benefits on their electricity bill. But will we see these same headlines announcing new price records in 2021?
It’s safe to say that COVID-19 will have an impact on auction tender prices in the short-term. Manufacturing of components required for solar and wind farms has been disrupted which could lead to supply constraints. This would inevitability put a premium on some equipment which would have a negative impact on upcoming auction prices.
A similar theme could be seen with regard to project financing rates. Financing rates for solar and wind farms has been all-time lows due to a low interest rate environment coupled with ever maturing and reliable technologies.
However, Covid-19 has created a new uncertainty. This uncertainty will surely have an impact on the required returns by banks, institutional, and private equity investors. If the virus remains a threat in 2021, rates of return will need to incorporate a contingency for the impact of a new virus outbreak. If a project in construction goes into lockdown or loses access to materials due to a lockdown in another country, the impact on an investor’s IRR could be significant. This risk will need to be built into the investors return requirement which, in turn, will increase bid prices.
It’s likely that these impacts on the sector will be short-term and that we will see new records in auction bid prices in the near future, but for the moment, these headlines might be few and far between.
A turning point for renewable subsidization costs
The rapid development of the renewable energy sector in the past 20-years has been impressive but wouldn’t have been possible without government support. Through various types of subsidization schemes, governments across the globe have promoted renewable energy. Many believe this was a necessary cost that all energy consumers have had to bear to ensure a clean energy future.
However, we’re now close to reaching a turning point. Whereas, in the past 20-years, renewable energy levies on consumer bills have largely trended upwards, 2021 could signal the start of a downward trend. In Germany, a major proponent of early renewables adoption, the renewable levy (EEG) is forecast to peak at ~ €70/MWh in 2021, according to Agora Energiewende.
Post 2021, the levy is expected to gradually reduce due to the first generation of wind turbines that were heavily subsidized in the early noughties, rolling off the payment scheme. This will be welcoming news for consumers in Germany, and across Europe, where similar schemes are reaching peak cost.