Listen: What a new EU energy plan means for renewables investment

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Lindsey Hall: I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 thought leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Russia's invasion of Ukraine has made ESG-focused investors and companies rethink what role they should play when it comes to geopolitical conflict. Many global corporations have announced plans to exit their stakes in Russian companies or pause business in Russia.

Esther Whieldon: The conflict has also seen policymakers around the world rethink their energy strategy and the energy transition. For example, Germany obtained 60% of its gas imports from Russia in 2021. The country is now increasing its reserve of coal and gas to boost supplies and keep prices in check. This has led to concerns that the transition to clean energy could be delayed.

Lindsey Hall: At the same time, other policy moves may have a positive impact on investment in renewables, which includes solar power, wind farms and hydro energy. In May, the European Commission proposed a new plan to wean the EU supplies of Russian fossil fuels. Russia accounted for about 45% of the EU's total gas imports in 2021.

The proposal will require a huge investment in renewables. Now we asked our regular contributor, Jennifer Laidlaw, to join today's episode and explain what that plan entails. Jennifer is also a member of the Thought Leadership team here at S&P Global Sustainable1 with Esther and I, and she's based in Paris.

So Jennifer, thank you for joining us. And what can you tell us about this plan?

Jennifer Laidlaw: The plan will require an additional EUR 210 billion investment by 2027 in renewables and hydrogen infrastructure, energy efficiency, liquefied natural gas importations as well as helping industry reduce its fossil fuel dependence by 2030.

The commission is also proposing to raise the EU's energy savings target for 2030 to 13% from 9% and to increase the EU's 2030 target for renewables as part of its energy mix to 45% from 40%. To find out more, I started by speaking to Elisabetta Cornago, Senior Research Fellow at the think-tank Centre for European Reform. I asked her view on how workable the commission's proposals are.

Elisabetta Cornago: So I think on the renewables deployment, perhaps we have some of the, let's say, yes, most workable and most implementable parts of the plan. There's a rather clear objective in terms of deployment of additional solar photovoltaic capacity. So with the aim of installing over 320 gigawatts of solar PV by 2025, so that's over twice today's level. So that's a very specific, I guess, target and milestone.

And there's also clarity in terms of how to get there in a way that would include, for instance, setting out some obligations, some new obligations for the installation of rooftop PVs, particularly on commercial and public buildings. So that's a narrow, I guess, enough type of obligation to be something that can be deployed and that also local authorities and national governments can work with.

On the wind side, for example, just to compare, while there's this statement that, obviously, there's this wish to strengthen the value chain for wind energy in Europe and then there's great capacity to increase deployment there as well. There isn't a specific numeric target. There's only, if I may say so, because it's a rather important change, there's this idea to this commitment rather to simplify the permitting that's been -- the permitting procedures that have been holding back the deployment of wind energy onshore and offshore.

Jennifer Laidlaw: How easy is it going to make the process of requesting permits for wind and solar projects?

Elisabetta Cornago: It's a good question. And I guess part of me wants to say that it's already progressed to actually put a finger on these and recognize and say out loud that permitting is really -- has really been an important bottleneck. Some of the figures that we've seen in the strategy itself say that a permit for wind projects can take up to 9 years to obtain and over 4 years for ground-mounted solar projects.

So what's happening here at the same time is a bit of a tension between what the commission can try to say in terms of pointing to recognize bottlenecks and providing recommendations to cut down then on the complexity of these permits, for example, things like ring-fencing in away areas that are suitable for the deployment of renewables, where the permitting can be further simplified. But in the end, it's going to be ultimately also be down to national governments to actually change regulation locally and make this happen.

I guess we can imagine a scenario in which some countries, particularly, I'd say, Northern European countries that have been heavily betting on the deployment of wind energy, particularly offshore, would be willing to more aggressively review their permitting regulation in a way that's simpler for business to work with, whereas other countries may not evolve as quickly on this front. So there's a bit of a risk there of, I guess, perhaps further fragmentation of European markets in this sense. We're going to be observing different types of projects in different regions. Of course, some are more suitable for offshore wind, some are more suitable for large-scale solar. And interconnections are going to be critical to actually make the best use of all of these, but permitting delays need to be tackled across the union really.

But also, I think what's interesting is that it's actually introducing -- the strategy is also, introducing actual obligations for investment, right, from some actors. So this idea of having mandatory installation of rooftop panels on commercial and public buildings is actually singling out some real estate projects that are probably particularly well suited for fast rollout of solar panels and recognizing that probably the investment potential of the actors is going to be higher than that of houses. So it might be sensible to begin with these actors to try and perhaps boost a bit the supply chain of rooftop solar panels.

And there, the commission is also encouraging European member states to try and come up with joint ventures to pull resources together to join forces in things like innovation investments, labeling them as projects of common European interest.

Jennifer Laidlaw: The REPowerEU's objectives requiring additional EUR 210 billion of investment between now and 2027 the EU has said. Is the money going to come from the measures that you've just spoken about? Or is it going to come from other sources?

Elisabetta Cornago: So the financing of this planning is actually already and certainly going to be also in the next weeks and months as it's discussed, one of the, I would say, easily controversial parts of the plan because the vast majority of the financing would be coming from unused loans under the recovery and resilience facility. So the large pool of money that the European member states have agreed to pull together to finance both grants and loans in the aftermath of the pandemic shock.

Now while grants being the easy part have been easily and quickly picked up by European member states, part of the loans have not been picked up quite yet. And so the commission is suggesting to then repurpose and redirect those loans towards financing all the investments that we've been talking about. But I think another specific, I guess, financing approach and financing line that has been raising questions in Brussels is the idea of raising an additional EUR 20 billion by auctioning actually some of the ETS allowances, so some of the allowances for carbon emissions connected to the European emissions trading system that today are held in the so-called market stability mechanism, market stability reserve, which is, if you wish, a sort of storage for a surplus of allowances that have been flooding the market.

So the idea is that if you keep allowances in this reserve is to maintain some stability as the name says in the carbon price in Europe, and so some, including myself, are concerned that starting to auction then the allowances from this reserve could actually destabilize the carbon price in Europe, could actually drive it down, and that would actually counter, in fact, the objective of REPowerEU but more broadly of climate policy that the European Commission has been putting or investing a lot of political capital recently. In order to achieve more ambitious climate targets, the direction of travel of the carbon price should be one that goes upwards. And so this specific financing approach is likely to be challenged and much discussed.

Jennifer Laidlaw: I was also interested in learning what impact the plan might have on private financing and renewable investment fronts. So I spoke to Hans Stegeman, Chief Investment Strategist at Triodos Investment Management, which manages ESG-focused funds. I asked him about the role of private investment in helping the EU to reach its goals.

Hans Stegeman: There are a few options. It's still not clear where exactly the government money would go to. So you can think of blended finance solutions for bigger initiatives, which also can be of interest with private investors. But it depends essentially on how they exactly would do it, but you can think about infrastructure projects for hydrogen or other stuff that might be of interest for investors.

I think a lot of the money of the funds from the EU should also go to energy efficiency projects, which can be relatively smaller like isolating houses, et cetera, which are not that interested for investment funds but can be of interest of financial parties to go find as part of that, but that's really small tickets. But it is -- I have to say that is important energy efficiency and energy safe to reach the goals of the European Union. So that part is of interest.

And I think the -- what everybody is thinking about, what should we do, like windmills, solar panels, that's only a part. And therefore, you don't need to -- the government, to a large extent, that's already quite standardized, especially plant -- wind. And that is large scale that's easy -- relatively easy to finance. So that's not a difficult part.

So innovative solutions are always of interest. Also, storage will be one of the big items. What we see that electricity infrastructure in most countries is not capable of handling all those peaks. So we need new solutions there. I think private parties can play a role in there. And for larger scale infrastructure, we can also think about blended finance solutions where private parties can also enter. And to be honest, we are looking at everything, but mostly on the innovative part where we also can play a role and where we can help also with our network.

Jennifer Laidlaw: All right. Okay. When you talk about innovate part, could you see this creating new investment funds or influencing your investment strategy in a different way?

Hans Stegeman: Well, it is already in our investment strategy that we really look forward. For instance, decentralized distribution and networks storage, et cetera, energy efficiency. So it's not really for us. So our funds are not only doing windmills or solar panels, so we do already more. So it's in our strategy to take that all into account. I think it's not for us, but in general, large tickets will be in infrastructure. Hydrogen, of course, will be one of the biggest topics. But we don't know yet. In different countries it's under discussion what will be the part that public money will solve and what has to go together with private investors.

And I think they're a part for energy efficiency, housing, et cetera. The rest of the money will be -- probably be spent on infrastructure. And I think the large part also, I see the ambitions on hydrogen. But the horizon of these investments is, of course, more than, let's say, a few years. We have to think about 2030 and later. We are only a few months in this war, and we're more or less -- more busy with the current markets and interest rates than the longer-term horizon, which is very unpredictable at the moment.

Jennifer Laidlaw: Yes. I mean just with the way the markets are and concerns about interest rates, what kind of impact is that having on investment funds like yours or on investment in renewables? Because people are obviously very concerned about that. So is that thing just sort of turn things back a little bit? Are we going to go backwards?

Hans Stegeman: No, I don't think backwards, but it slows. One of the things I always say is what we should have in Europe to speed up the transition to green bubble. So we should have very cheap -- a lot of very cheap investments in green energy. So to make it very cheap, so that means that also return is not that fantastic, but for a time, it's okay.

We see it now, otherwise. We see all growth stocks on the market, but also growth investments where you expect a large return later on going not that good at the moment because of the higher interest rates, which go very fast. And you see it also back in the stock market that you see fossil fuel stocks doing quite okay, renewable stocks underperforming in general.

So one of the elements, of course, of the REPowerEU plan and also the green deal and also related to that, the green taxonomy, so the green spreadsheet where the European Union wants to mobilize capital for the energy transition by labeling them green, gets below if interest rates go up a lot. That means less liquidity in the market, but especially less liquidity for investment, which do not -- are outperforming in their current performance but have to -- need to have a cash flow in the future like most energy transition ideas.

And that takes more time now with the higher interest rates, and that's what we -- and that can turn relatively quickly. But at the moment, given -- so we saw higher inflation driven by energy prices, and we saw also higher interest rates driven by that higher inflation. So it's all linked. It's not helping the energy transition. And I think that's a point that was not really clear in the plans of the European Union. And there's, of course, also one thing they can do about it, so make it more attractive to invest in green, maybe also help to take some risk. And so blended finance might be a solution for that in the end.

Jennifer Laidlaw: There have been some concerns that increased coal burning at the moment will lead to a rise in carbon emissions in the short term. Over the long term, emissions will decrease harder and faster. Is that something you're seeing? And how much faster do you think the transition will be?

Hans Stegeman: This is also a very relevant question. What do you see at the moment in the short term, that it's not all good for renewables. So we see a lot of substitution from fossil to other fossil. So from gas to coal from Russian gas to gas to LNGs to somewhere else. And we see also that the financing of part of the plant is by selling more carbon credits. So more emission rights, which means that we are allowed as Europe to have more emissions or cheaper emissions now at the expense of the future.

Although I completely understand it from strategic reasons to get people along to not make the problems bigger, it can also lead to a little bit more lock-in in the current fossil setting, especially if you see that combined with a lot of subsidies in Europe for burning fossil. So also because of purchasing power, because of the high energy prices, because of our energy inflation. But in the end, it's not good in the short run for renewables.

And of course, the idea is that we speed up the transition in the end. But at this moment, we go partly a different direction. And what you see that speeding up at the moment is not really visible because also materials we use for renewables are more expensive. And the energy in the sector and also with the high interest rates, it makes it more difficult to finance a lot of energy projects. So the energy of people is more going and solving the immediate problem and not driving the energy transition in the end. Although there are, I have to say, a lot of good things in the plans, at this moment, I'm a little bit afraid that it will not go fast enough.

Jennifer Laidlaw: And as you've just heard, both Elisabetta and Hans mentioned solar power, which is a big part of the plan. To get more insight, I talked to Dries Acke, Policy Director of SolarPower Europe, which represents the solar power industry. I asked him what the plan means for the solar power market.

Dries Acke: We even believe that we can go beyond the ambition of the European Commission. SolarPower Europe has set itself a target of 1 terawatt of solar generation and production in 2030. So we are certainly not thinking that we are hitting the absolute highest ambition levels.

There is, of course, yes, supply delays at this very moment, like in many other economic sectors, if at all. But we don't see that as a structural issue, yes. Of course, unless we see further shocks, which is hard to predict but at the same time also not completely impossible, but as things stand now, the supply delays should be temporary. And solar isn’t suffering more than other sectors from these kind of delays.

In fact, what we see is also a bit of a response in different parts of the world. We're looking at opening manufacturing in China, but also elsewhere in Southeast Asia, India, U.S., Canada and, of course, also in Europe. So to conclude, we are trusting and we are seeing that the market dynamics are working in terms of supply responding to the increased predictions of demand.

Jennifer Laidlaw: What I find interesting by the REPowerEU plan was there was a big emphasis on solar power. And it seems that the commission is really working in terms of deploying that solar power. And I just wondered why this interest in solar power particularly. Is it easier to install? Or is it easier to deploy?

Dries Acke: Yes. Solar does have -- is a very versatile and agile technology. Solar provides answers to many different questions from large scale use to very local use and -- let's say, individual or tailored use. So it is certainly so that the commission has realized that solar needs to be an absolute central part of its response. And that's it as, yes, also therefore put on paper of solar strategy. I think it's a combination of realizing the opportunity of solar and of accelerated deployments in the short term and the mid-term as well as in combination with the realization that, that does mean that Europe needs to think about its strategic resilience in the supply chain of that.

So I see 2 big components of the European solar strategy. One is really about accelerating deployments and the other, which is then also backed up by a more industrial strategy and resilient strategy about bringing back a good level of manufacturing also across the supply chain to Europe.

But I think, I mean, from a deployment point of view, the key thing to mention, I believe, is the rooftop solar mandates. So I think this is really a game changer. We have been advocating for that for many years, dare I say a decade and many other groups with us from civil society and from city groups. But now it's finally there, yes. So it needed -- I think it describes to realize to make the commission and governments realize the massive opportunity of rooftop solar.

We believe that rooftop solar ticks all the boxes in terms of reconnecting to citizens, providing electricity price stability, replacing Russian gas, avoiding conflicts with land use in nature. So rooftop solar is really where the magic is. And it's great to see that this potential is now being recognized and pushed forward.

Jennifer Laidlaw: Okay. So this solar power deployment plan that the commission has put forward will also tackle slow and complex permitting for solar projects. How easy is it going to be to change that? And how would you expect the plan to be rolled out?

Dries Acke: The commission is proposing to exempt certain projects from environmental impact assessments. I think it is proposing that from a point of view that it wants to accelerate procedures, which is very welcome. But if we talk to the solar power industry and the members that we have, it is not necessarily the environmental impact assessment which is the problem or which is causing delays. In some cases, it's actually quite useful to make sure that the quality of the project is guaranteed and that the permitting goes faster.

One of the main obstacles that we see has actually more to do with capacities on the local level in the administration to smoothly deal with the paperwork. So we see more benefits or more needs to engage in educational capacity skills-building programs on a national level that has also involve local authorities where the permitting is ultimately done so that they are more aware that these things can go faster, that they know what to look out for and that the quality can be assured without the delays that we're currently seeing.

Jennifer Laidlaw: We talked about this being a very ambitious plan with a huge upsurge in solar capacity. And how much more investment might this plan bring to the solar power market?

Dries Acke: When it comes to investment and financing, most of the investments will be privately financed from a whole range of different players. That's also the interesting thing about solar sector. There's a plethora of business models in all shapes and colors depending on the off-taker or the off-taking entity, whether that is a city or municipality, a university, community projects, a big retailer, an energy intensive [company], a whole range of entities can engage in sourcing solar or investing in solar.

A key theme, of course, for us and for all of this in terms of financing are PPAs, Power Purchase Agreements. The PPA market is of critical importance. It's been booming in Europe and also globally — an increase of 42% just between 2020 and 2021. And that is, of course, a major way, a stable revenue provider and a great long-term contract and financing tool that is being deployed right now. And it becomes increasingly important because it's long term so it really helps to hedge off-takers from pricing stability that we're currently seeing, mainly driven by global gas prices and the uncertainties around that. So it's almost like Business Logic 101 if you want to hedge yourself from volatile electricity prices, engage in a PPA right now.

Lindsey Hall: So Jen, after everything we've heard today, what are the next steps for this plan?

Jennifer Laidlaw: The proposed package of measures will need to meet the approval of the European Parliament and then government ministers of EU member states. So there could be a few weeks or even months of negotiations ahead. And like Elisabetta said, a lot of it will be down to national governments to change regulation locally.

Esther Whieldon: Well, thanks, Jen. And it sounds like the jury is still out on what the impact will be on the renewables market. So please do let us know about any major developments coming up.

Jennifer Laidlaw: I certainly will.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. And a special thanks to our producer, Kyle Cangiolosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.



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