➤ Russia's invasion of Ukraine presents a "major opportunity" for Europe to accelerate the energy transition.
➤ European Union member states need to quickly implement simplified renewables permitting rules set out by the REPowerEU strategy.
➤ Renewable power contracts still offer better value than fossil fuels, despite increasing contract prices.
With a 20-GW global portfolio of wind, solar and hydropower generation, Portuguese utility EDP - Energias de Portugal SA is one of the world's largest renewable power producers. The company, together with its listed subsidiary EDP Renováveis SA, aims to deploy 4 GW of new capacity per year to 2025 — doubling its installed wind and solar capacity — and has longer-term ambitions to surpass 50 GW by the end of the decade.
Miguel Stilwell d'Andrade, CEO of both companies, spoke with S&P Global Commodity Insights on July 14 at Aurora Energy Research's annual conference in Oxford, England, about navigating the recent period of volatility and the opportunities it presents. The following is an edited transcript of the conversation.
S&P Global Commodity Insights: Is this the most challenging period of your career in the energy market?
Miguel Stilwell d'Andrade:
For us in particular, it's a major opportunity. There's a discussion going on ... [about whether Europe is] going to backslide on the energy transition. Honestly, I believe that it's not a question about taking one step back, it's taking two steps forward. Because renewables, if they weren't competitive before, now they're much more competitive on a relative basis versus gas or coal. We think Europe will be accelerating massively the rollout of renewables, and I think it's a great opportunity to continue to grow and to accelerate the energy transition.
A major part of that opportunity stems from REPowerEU, the European Commission's strategy to pivot away from Russian gas. How far-reaching and significant is that plan?
"Fit for 55" [the EU's plan to reduce carbon emissions by 55% by 2030] was already ambitious; REPowerEU is even more ambitious. I don't think the question now is so much about the level of ambition that we need to have; it's already sufficiently ambitious for 2030. The question now is execution. And that comes down very much to getting enough projects licensed, permitted, built and interconnected to the network in this short timeframe. It's now more a question of just getting it done. REPowerEU does help and points the way, but it comes down to the member states now to really unlock.
How much of a bottleneck has permitting been in recent years for EDP?
It obviously varies, but maybe the fastest [process in our European markets] is three years. But in some countries, it can be almost as much as seven years to ... get a positive license. And then we have to interact with dozens of entities, like super bureaucratic processes. So I think it's really just a question about standardization, simplification, digitalization, having a one-stop shop for people to be able to deal with.
For example, in Spain, you've got almost 200 GW of projects that have requested interconnection. [Here] we need to find a way of separating the speculative projects from the ones that will really get built and allowing those to move forward.
How has the recent inflationary pressure across energy and commodities impacted EDP?
It makes projects marginally more expensive. So, for example, what we're seeing is [power purchase agreement] prices going from [€30/MWh to €35/MWh], or [€40/MWh to €45/MWh]. But it's still much cheaper than where gas is at €200-€300/MWh. So it is having an impact, which is then flowing through into energy prices. But on the renewables side, it's not a massive impact.
You have talked in the past about having to renegotiate certain power purchase agreements. How difficult have those conversations been with off-takers?
Particularly in the U.S., where most of our relationships are with corporate customers, it was possible to do that renegotiation. And I think for them, the issue of actually getting the project is really important. So even if they have to pay a little bit more — and we're talking about $3-$4/MWh more — to ensure that we are delivering the project, we were able to have that conversation and come to an agreement on that.
EDP has a significant hydropower portfolio. Have you been able to capture some of the benefits of the high power price environment with that fleet?
Actually, this is not a great year to talk about hydro. We had the driest winter in 90 years, and there aren't records before that, so it was even longer. So essentially, we did not capture that. If anything, for example, in our first-quarter numbers, we actually had a net loss because we already sold to our customers ... at [€60/MWh], counting on a certain volume of hydro for an average year. It was much lower than average, and so we actually had to buy energy in the energy market at a much higher price.
Have you thought about pursuing more merchant price exposure in your renewables portfolio as a result of the high prices?
The same way that this can go up, it can come down. We don't like taking 30-year investment decisions based on short-term, one- or two-year power prices. Are we willing to take a little bit more merchant risk? Yes. But we need to look at it in the context of a 30-year project, so we wouldn't necessarily leave it [fully merchant], because as I say, all we need to have is the Ukraine war to be over, maybe Russia decides to open up the gas pipelines again, and the prices come crashing down. We're not in the business of guessing what the power prices are going to do in the future. We're in the business of building renewables.
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