“High carbon prices accelerate corporate sustainability”

With the ongoing coal and nuclear phase-out, electricity production in Europe will continue to change dramatically over the coming years. At the same time, the stricter greenhouse emission targets are likely to lead to higher and more volatile power prices. This offers opportunities for energy companies that embed sustainability in their business models and market new renewable energy sources.  

Over the past few days and weeks, power prices on the European exchanges have climbed to levels not seen for many years. Beside current tensions on gas market two structural factors contribute to the trend: Firstly, the government-imposed phase-out of nuclear and coal-fired generation capacities is slowly but surely leading to a noticeable shortage of supply, which cannot always be offset by the expansion of new renewable energy. And secondly, the rising prices for European Emission Allowances (EUA). The recent announcements by the EU and Germany that they intend to reduce greenhouse gas emissions by 55 percent and 65 percent respectively by 2030 led to new record price levels of EUAs. Since the beginning of the year, the price per tonne of EUA has risen by around 60% to over 50 euro, which even corresponds to an increase of 1000% compared to the beginning of 2017 (see chart). 

Will this development continue and will prices on the power exchanges continue to rise? I cannot answer this with certainty. There is an urgent need to curb greenhouse emissions, and the EU ETS scheme is the EU’s main efficient instrument to drive forward changes and investments in sustainable technologies by pricing in the high externalities of climate change. I anticipate – and I personally hope – that the era of cheap CO2 emissions is over. We can expect emission prices to remain high and subject to sharp corrections due to inevitable future regulatory interventions. 

The “Fit for 55” legislative package presented by the European Commission in mid-July will also boost sector coupling, i.e. the electrification of transport and residential heating, and thus lead to a higher demand for electricity in the medium to long term.

Future security of supply – with green power

This means that we would all be well advised to take our responsibility seriously and initiate measures now to ensure a reliable and sustainable supply over the longer term – and to make our efforts visible to the public. Of course, rising CO2 prices will drive forward the development towards sustainability by increasing the value of renewable energy sources. However, this alone is not enough. We also need to foster genuine demand for renewable electricity. Consumers must attach to the issue of sustainability the importance it deserves and act accordingly, not only in purely short-term economic terms, but also taking into consideration the long-term security of supply and ecological and social factors. The emerging appetite for a renewable supply is encouraging, but bolder signals from policy makers and regulatory authorities are required in order to support the necessary evolution of the contracting framework and enable the appropriate risk and opportunity-sharing between producers and consumers. Genuine demand for a green power supply that is attractive in the long term should cover a significant share of the investment costs of new RES production, and no subsidies should be necessary. 

Long-term partnerships reduce risks and increase planning security

In most cases, it makes sense to enter into longer-term commercial partnerships. Power purchase agreements (PPAs), which are currently the talk of the town, are particularly effective in providing price and supply security. 

However, over the past 20 years, market regulators have made longer-term contracting increasingly difficult with a view to fostering competition. It is now time to reverse this trend and actively support long-term PPAs.

In its major “Fit for 55” legislative package presented in mid-July, the European Commission opted for the top of the range on renewables with a target of 40% by 2030. This translates into more than 500 GW that are to be deployed by the end of this decade. It is good news that the European Commission is now, finally, also requesting member states to set up a dedicated regulatory framework that supports power purchase agreements.

Our role as a commercial market operator is to provide the required services to both RES producers and consumers. We manage the risks of deviations between both sides of the equation and organise the necessary back-up capacities to transform a renewable stochastic source into a reliable green supply that is attractive to customers in the long term. Our portfolio management expertise, our know-how, experience, flexible production capacities and our risk capital are increasingly being utilised to support the energy transition by managing the related prices and effectively balancing risks.

Sharing responsibility for a sustainable energy future 

All market participants must play their role and bear responsibility for the necessary acceleration of the energy transition: 

• Regulators and policy makers must eliminate bottlenecks not only on the supply side, but also on the demand side.

• The financial sector must effectively factor in environmental, social and governance (ESG) criteria into their financing projects.

• Producers must apply their technical and financing expertise to ensure the best projects are implemented and reliably operated.

• Consumers must take account of the long-term advantages of a renewable supply.

• Commercial market operators must invest in back-up flexibility, optimisation and risk management expertise and capacities, and provide the necessary risk capital.

The time has come when we must all commit to the long term. While this requires a significant change of mindset, it is also simple economic logic. A risk-adjusted and sustainable electricity supply is possible at competitive prices, and it is definitively in the long-term interest of both the businesses and the national economies.