Emerging Trends

Insights from 2021

2.1

The credibility of fossil gas as a transition fuel vanishes

The 2021 gas crisis created a paradigm shift for the EU’s electricity transition. Skyrocketing fossil gas prices meant that new wind and solar replaced fossil gas rather than coal. With market prices indicating that the gas crisis will continue for at least the next two years, the prospects for fossil gas as a “transition fuel” in the power sector look severely damaged.

The gas crisis caused the EU electricity price spike

Fossil gas prices have risen exponentially in 2021. TTF day-ahead (the EU gas benchmark contract) was up 585% in December 2021 versus December 2020.

This unprecedented surge in fossil gas prices has been caused by a combination of factors:

• a cold northern hemisphere winter in early 2021 depleted fossil gas storage levels
• increased demand and prices in Asia and South America resulted in liquefied natural gas (LNG) being delivered there rather than to Europe
• global demand for gas rose as Covid-19 restrictions were lifted
• lower than expected fossil gas imports arrived into the EU from Russia

The cost of using fossil gas to generate EU electricity, including any associated carbon and variable operating costs, averaged €255/MWh in December 2021. This is an almost sevenfold increase year-on-year. Consequently, electricity prices also soared. Record monthly wholesale power prices were seen across the EU in December 2021. France (€275/MWh); Germany (€221/MWh); Greece (€235/MWh); Italy (€281/MWh); Hungary (€246/MWh); Spain (€239/MWh); and the Netherlands (€238/MWh).

The colossal increase in the costs of fossil gas electricity generation is overwhelmingly due to the underlying cost of the gas itself. While the price of emitting a tonne of carbon (in the EU-ETS) rose from €33/tonne (1 January) to a record high of €89/tonne (8 December), this only adds €21/MWh to the cost of producing electricity using fossil gas and equates to 10% of the increase in gas generation costs in 2021.

The gas crisis could extend beyond 2023

Future gas prices indicate that the crisis is expected to continue for at least the next two years. The TTF Dutch gas calendar year 2022 and 2023 contracts were trading at €90/MWh and €42/MWh respectively at the end of December. At these levels, fossil gas will remain the most expensive method of generating electricity – more than both hard coal and lignite.

The ongoing supply issues and deepening geopolitical unrest have resulted in legitimate concerns that the gas crisis will have a longer-term impact. Some energy analysts believe that the gas crisis will remain until 2025. This significantly increases the risks associated with continued dependence on volatile imported fossil gas for electricity generation as opposed to accelerating the transition to domestic clean electricity.

The gas crisis has made renewables even more competitive

Wind and solar power were already cheaper than fossil gas for electricity generation before the gas crisis hit and they have become even more cost-competitive since, despite global commodity prices increasing their production costs. The International Energy Agency (IEA) recently confirmed that ‘higher natural gas and coal prices have improved the competitiveness of wind and solar PV, despite historic equipment price increases due to high commodity and energy prices’. 

Furthermore, with the advancements in storage technologies and the associated cost reductions, wind and solar combined with storage will progressively challenge fossil gas for the provision of flexible as well as bulk electricity generation, as wind and solar become the backbone of Europe’s future electricity system.

The time to transition away from fossil gas is now

The crisis has provided a powerful reminder that as long as Europe remains reliant on imported fossil fuels it is exposed to volatile energy prices. Coupled with an expensive and uncertain outlook for fossil gas power and further increases in the competitiveness of domestic alternatives such as wind, solar and clean flexibility solutions, the prospects for fossil gas as a transition fuel look severely damaged.

Many countries were relying on renewables to replace more emissions-intensive coal while ignoring their gas problem, but with gas more expensive than coal, market forces alone can no longer be guaranteed to drive this forward. There is now increased urgency to phase out both fuels on economic as well as climate grounds. Renewables will need to be deployed at sufficient scale to rapidly replace both coal and gas.

To limit global warming to 1.5C, advanced economies (including the EU) must reach zero emissions in the power sector by 2035. Accelerated deployment of renewables in conjunction with increased investment in energy efficiency offers a way out of both the energy and climate crises. In the wake of the crisis more countries look likely to choose this path rather than sticking with fossil gas.

2.2

Solar’s moment has arrived

For the first time across Europe wind and solar power combined (547 TWh) generated more electricity than gas (524 TWh). In a year of below average wind speeds, the growth in solar power was vital for passing this milestone: solar produced over 25% more power in 2021 than in 2019 and now produces 6% of Europe’s electricity. Many European countries have now laid the foundations for rapid growth in solar, and not just in southern Europe where solar potential is the highest. However progress across Europe is extremely uneven, with some countries yet to embrace solar.

Solar begins to soar across much of Europe

Spain’s solar story is a textbook example for other countries in Europe to follow, almost doubling solar generation since 2019 from 15 TWh to 26 TWh. Spain has the sunshine and the policy framework for this acceleration to continue, and its Minister for the Ecological Transition, Teresa Ribera, has won plaudits for enabling coal areas to directly transition to a growing solar industry. On current plans, solar is set to provide nearly 30% of Spain’s electricity generation by 2030 (up from 10% currently).

Further North, Europe’s growth in solar generation has been driven by the Netherlands (+6 TWh / +115% since 2019). Almost 10% of the country’s power demand was met by solar in 2021 and it has ambitious plans for further growth this decade, despite being a higher latitude country. Taken together, Spain and the Netherlands account for half of Europe’s solar growth since 2019.

From a low base, Poland has seen impressive growth in solar, more than doubling since 2019 (from 1 TWh to 4 TWh). Indeed, Polish wind and solar combined (20 TWh) have now overtaken gas generation (16 TWh). However, recent changes in government support for residential solar means growth may slow in 2022. Hungary (+67% / +1 TWh) has also seen growth and now meets over 5% of its demand with solar.

Following its neighbour’s impressive increase, Portugal is now beginning to catch up with Spain and making the most of a similar latitude, with almost 4% of demand met by solar. The first auctions for floating solar farms on Portuguese reservoirs are happening, and promise a new way to utilise solar technology.

Solar stagnates in some countries

After rapid growth in solar, supported by government incentives in the early 2010s, Italian solar growth has plateaued (+7%, +2 TWh since 2019). It may surprise some observers of the European electricity transition that Italy’s absolute growth is now slower than long-time renewable laggard Poland (see above +451%, +3 TWh). Much of this stagnation in Italy is due to delays in securing planning rights, and the Italian government is attempting to streamline the process.

Czechia and Romania are notable larger countries with almost no growth in solar since 2019, and little over the last decade. Kick-starting solar industries in these countries would bring jobs, help lower bills as the energy crisis continues, and will be essential to ensure one fossil fuel (coal) isn’t replaced with another (fossil gas) now that both countries are targeting coal phase-outs in the early 2030s.

Where solar power is successful is due to policy, not just sunshine

Countries with both higher irradiance (Spain and Cyprus) and lower irradiance (Netherlands and Germany) are now generating around a tenth of their national power demand from solar.  Government policy, if sustained, can help create a market for solar anywhere in Europe.

2.3

EU nuclear decline is slowing progress in the power sector

A third of recent wind and solar growth replaced nuclear not fossil

The structural decline of nuclear power output has slowed emissions reductions in the  EU power system. The last ten years have seen rapid growth in wind and solar (+334 TWh), while EU nuclear power output has declined by 105 TWh. Consequently, almost a third of wind and solar power growth in the last decade has replaced lost nuclear output, rather than fossil fuels, which has slowed decarbonisation efforts.

Nuclear power production set to fall further in the next 5 years

This trend looks set to continue in the next five years. At the end of 2021, half of the remaining nuclear reactors in Germany closed (4 GW), and the rest will close at the end of 2022. In December 2021, the Belgian government agreed in principle to close its nuclear power plants (6 GW) by 2025, with reactor shutdowns beginning this year. Furthermore, French nuclear output looks set to fall sharply in 2022, by an estimated 50 TWh as extended outages at five reactors were announced after faults were detected. The losses will be only partially offset by new reactors starting operation in Finland, Slovakia and France in the coming years.

Nuclear’s impact should ease after 2022 as wind and solar accelerate

Using the IEA baseline forecast for EU wind and solar power output, and Ember’s forecast for nuclear output, overall we estimate that over 75% of the growth in wind and solar power output in 2022 will replace declining nuclear output, not fossil fuels. From 2023, nuclear output should broadly stabilise – provided no further nuclear issues are identified or closures are announced – and strong wind and solar growth will rapidly drive down fossil fuels instead.

If nuclear remains in structural decline, policy makers will need to ensure that wind and solar deployment plans and further efficiency measures are sufficiently ambitious to both replace lost nuclear output and phase out fossil fuels at the speed required to stay on track for 1.5C.