FACTBOX: Ukraine conflict boosts Europe's clean energy ambition amid headwinds

Europe has pledged a rapid transition away from Russian fossil fuels in response to the war in Ukraine, raising already-ambitious decarbonization goals in a concerted effort to end dependence on Russian gas by 2027.

In the short-term, however, European carbon emissions could rise in response to the closure of nuclear reactors and a move to burn more coal in response to soaring gas prices.

With damaging inflation and disruption to supply chains also factors in the medium term, S&P Global Commodity Insights assesses the challenges currently facing the energy transition as the conflict nears its 100th day.

Infrastructure

The EU's May 18 REPowerEU program lifts the 2030 target for renewables' share in final energy demand to 45% from Fit for 55's 40%, based on optimistic assumptions of streamlined permitting, robust supply chains and extensive grid expansion.

• S&P Global Commodity Insights analysis shows that, to reach REPowerEU targets, annual solar capacity growth needs to average 47 GW between 2022 and 2030. In 2021, the EU 27 installed 25.9 GW of new solar, a long-term high after installations averaged 11.6 GW/year in 2010-2019 and 18.2 GW in 2020.
• Europe's ageing distribution power grids need Eur375 billion-Eur425 billion of investment to 2030, a 70% increase on the prior decade, to accommodate new renewables, according to sector association Eurelectric. This assessment was made before REPowerEU's increased targets.
• Onshore wind faces obstinate permitting barriers. WindEurope forecasts annual EU wind installations of 15 GW to 2025. It needs 27 GW/year to meet a 55% emission reduction target. Germany added 1.9 GW of wind in 2021. The country's 2030 climate target requires average additions of around 5 GW/year.

The pivot away from Russian gas, along with nuclear outages in France, has created a short-term risk of higher emissions from increased coal-fired power generation in Europe.

• Coal-fired output was up 27% on the year across the top five European countries in April, with Germany the highest consumer, and up 20% on the year in January-April.
• CO2 emissions under the EU ETS rose by 7.3% in 2021 compared with 2020 levels due to high natural gas prices bringing coal-fired plants back into the merit order, as well as an economic recovery from the pandemic.

Trade flows

REPowerEU doubles the EU's 2030 renewable hydrogen production target to 10 million mt/year, requiring in the region of 80 GW of electrolysis, with an additional 10 million mt/year in imports. The UK has followed suit, doubling its low-carbon hydrogen production target to 10 GW by 2030, with half of this from electrolysis.

• Europe produces around 7 million mt/year of conventional hydrogen, used largely in refining and fertilizer production, and predominantly derived from fossil fuels, representing an estimated natural gas consumption of 29.7 Bcm/year, according to S&P Global analysts.
• S&P Global has tracked around 9 million mt/year of low- or zero-carbon hydrogen projects due online by 2030.
• The European Commission has called for a 75% renewable share for hydrogen used in industry and a 5% target for renewable fuels of non-biological origin (RFNBO) in transport by 2030.
• S&P Global analysts said the EU hydrogen targets were "aspirational" and unlikely to be achieved, resulting in a need for further LNG imports to the continent.

The EU has outlined partnerships for importing hydrogen and its derivatives from the Mediterranean region, Ukraine and the Middle East.

• Green hydrogen imports could start in 2024 with Germany expecting a first cargo of green ammonia via its H2Global import scheme. The EC said an import framework could draw on H2Global.
• Before the invasion, Ukraine aimed to develop up to 10 GW of renewable hydrogen production capacity by 2030, with 7.5 GW of this dedicated to exports to the EU, and the rest consumed domestically.
• President of the Ukrainian Hydrogen Council Oleksandr Riepkin said April 13 that Ukraine and the EU could do the groundwork in preparation for a post-war rebuild and hydrogen export arrangement.

Prices

Gas prices in Europe have remained above $20/MMBtu since the start of 2022, averaging more than $30/MMBtu, S&P Global data showed.

• Calculated grid-powered hydrogen production costs in Europe have risen sharply since late 2021, driven by soaring gas and power prices. S&P Global assessed the cost of producing renewable hydrogen via alkaline electrolysis in Europe at Eur10.64/kg ($11.41/kg) May 31 (Netherlands, including capex), up from Eur4.28/kg a year ago.
• Many renewable hydrogen project developers in Europe are targeting production costs of below $1.50/kg before 2030, underpinned by long-term renewable power purchase agreements, or dedicated renewable generation.

Carbon markets have been volatile since the invasion, as the market took stock of the conflict and then the EC's response.

• EU Allowances for December 2022 delivery crashed by more than 30% in the five days to March 2, touching as low as Eur55/mtCO2e intra-day. That compares with an all-time high of Eur96.33/mtCO2e Feb. 7, according to S&P Global.
• Carbon prices rebounded to Eur91.72/mtCO2e by May 17 as EU lawmakers found agreement on proposed market reforms, but fell back to Eur78.15/mtCO2e May 23, after the EC surprised the market with a proposal to sell up to 250 million allowances from the Market Stability Reserve.

The Ukrainian-Russian conflict has exacerbated existing issues around the cost of shipping, EPC services, logistics and materials for the energy transition.

• Material cost hikes have trickled down to wind and solar components, bumping average solar module prices by 15% and 10% for wind turbines, causing project delays and renegotiation of power purchase agreements.
• Platts assessed domestic HRC steel prices in Northern Europe at Eur1,000/mt ex-works Ruhr May 27, up 8.5% since the start of 2022. Steel contributes heavily to the final cost of wind installations, with over 100 mt used on average per MW.
• Inverter and electrical installation costs depend largely on the price of copper, up 15% in the year to March. Prices for aluminum, used in solar module frames, racking and support structures as well as electricity networks, were up 17% in the year to May.