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21 June 2021

Baringa releases analysis of latest Power Market scenario projections

Phil Grant

Phil Grant
Partner | Energy, utilities and resources | London

Pavlos Trichakis

Pavlos Trichakis
Director | Energy, utilities and resources | London

PRESS RELEASE
21 June 2021, London

 

Urgent action is required today in order to move towards a
“Net Zero by 2050” compliant pathway for Europe

EUA carbon prices of as much as 420-440 €/tonne
may be required by 2050 in order to meet the Net Zero target


Summary Points:

  • In our Q1 2021 Reference Case, renewable power accounts for 77% of European electricity supply by 2050, almost double compared to current levels
  • Whilst this represents substantial progress, it would not be enough to meet the target of Net Zero emissions in the European energy system by 2050
  • Assuming that the EUA carbon market is used as the key investment signal to drive decarbonisation of the European economy, EUA carbon prices of as much as 420-440 €/tonne may be required by 2050 to meet the Net Zero target
  • Our Net Zero scenario also sees an additional 350 GW of renewable energy capacity being developed by 2050 across Europe compared to our Reference Case which would have significant implications for power price dynamics, asset economics and the level of investment and wider system changes required
  • Given the scale of the investment challenge ahead, European countries must ensure that they have the appropriate policy and regulatory frameworks in place that will ensure they can compete to attract capital from long-term investors financing the energy transition.

Urgent action is required today in order to move towards a “Net Zero by 2050” compliant pathway for Europe 

Baringa Partners’ latest European wholesale power market scenario projections and reports (Q1 2021 update) have just been released. Assuming “business as usual” innovation and technological advancements, combined with a “business as usual” energy policy and regulation framework, the Q1 2021 Baringa Reference Case results in a largely (but not fully) decarbonised European power generation sector by 2050.

For the EU-27 plus United Kingdom, Switzerland and Norway, Baringa’s scenario projections highlight:

  • Renewable power generation technologies generate approximately 44% of electricity in 2021, rising to 61% in 2030 and up to 77% in 2050
  • Conversely, the combined share of unabated gas and coal fired generation in the European power generation sector is reduced from 33% in 2021 down to 21% in 2030, declining further to just 9% in 2050
  • This change in the supply mix is accompanied by an almost 40% increase in electricity demand in 2050 compared to 2021 levels as new sources of demand are added to the system such as electric vehicles, heat pumps and hydrogen electrolysers.

By all accounts, the state of the European power generation sector depicted in our Q1 2021 Reference Case would represent substantial progress from a decarbonisation perspective, and would have wide-ranging implications in the way we produce, deliver and consume electricity in Europe.  This includes for example the enhanced role that flexibility technologies (such as batteries) would play in balancing the system in real time to overcome the intermittency challenges associated with renewables, the need to manage transmission and distribution network capacity more efficiently to cope with rising power flows, and the move to a system where consumers play a more active role in managing their electricity consumption.    

However, whilst this rate of change might be broadly consistent with Europe’s 2030 renewable energy targets, it would not be enough to meet the target of Net Zero emissions in the EU energy system by 2050, particularly when considering the potential contribution in carbon emissions from other sectors which are more difficult to fully decarbonise such as industry, buildings and agriculture.

Phil Grant, Global Head of Power Generation – Energy & Resources at Baringa Partners said “We’ve actually seen a huge reduction in carbon emitted from the power sector in the last decade – particularly in markets where coal generation has fallen significantly. But given the role the power sector has to play in decarbonising across the whole energy sector, we need to accelerate the rate of change to ensure investment keeps flowing. We cannot afford the type of investment hiatus we have seen previously when market changes are considered.”

Baringa estimates that EUA carbon prices of as much as 420-440 €/tonne may be required by 2050 in order to meet the Net Zero target

In addition to our standard scenarios (Reference Case, Low Commodities Case, High Commodities Case), our Q1 2021 update also includes dedicated scenarios which are designed to investigate the required changes in the European power generation sector to reach Net Zero emissions and Net Negative emissions by 2050 in a cost-optimal manner.  

Two key conclusions from these scenarios are highlighted here:

Firstly, that these scenarios require a significant ramp up in both commercially proven technologies (such as onshore wind, offshore wind and solar PV) but also in emerging technologies such as Biomass Energy with Carbon Capture and Storage (BECCS) and hydrogen compared to the Baringa Reference Case.  In the Net Zero scenario, for example, there is almost 150 GW more solar PV capacity, almost 165 GW onshore wind capacity and close to 40 GW more offshore wind capacity by 2050 across Europe compared to the Q1 Baringa Reference Case. This has significant implications for power price dynamics, asset economics and the level of investment and wider system changes required to build this capacity;

And secondly, that if the EUA carbon market is going to be used as the key investment signal to drive decarbonisation of the European economy, then high carbon prices will be required in order to meet these targets.  The Net Zero scenario for example requires a carbon price of more than 420 €/tonne in 2050, whilst this increases to more than 440 €/tonne in the Net Negative scenario [1]

1 The Net Negative scenario recognises that other sectors may not be able to bring down their carbon emissions to zero by 2050 and hence the power generation sector has to make an even greater contribution.

Global gas demand remains strong, with developments in the US becoming increasingly important for global wholesale gas prices

A combination of strong economic growth (particularly in emerging economies) and tighter emissions policies (including a switch away from coal and into gas) is expected to lead to a rise in global gas demand to 2050. In 2020, the United States emerged as the world’s largest swing supplier of Liquefied Natural Gas (LNG). Our analysis suggests that this trend is set to continue over the longer term with wholesale gas prices in the key gas demand centres of Europe and Asia being increasingly benchmarked at the cost of delivered US LNG.  

As a result, President Biden’s climate agenda and wider market and policy developments in the US would likely have a significant impact on global wholesale gas prices. 

This is explored in our Q1 2021 update, which includes an analysis of President Biden’s climate agenda and potential impact for the US domestic consumption of gas and implications for global LNG markets.  The key question we investigate in the report is whether President Biden’s agenda may lead to shrinking domestic demand and a glut of supply, which in turn could lead to higher LNG and pipeline exports therefore contributing to a “lower for longer” pattern for global gas prices. 

Given the strong impact of gas prices (and carbon prices) in European wholesale power prices, this would in turn have significant implications for the European power sector as well. 

As the role of Government-backed renewable energy support schemes gradually declines, increasing volumes of private sector investments will be exposed to market and counterparty risks

Under all scenarios we have modelled, and particularly in the deep decarbonisation scenarios, substantial investments will be required in the next three decades to decarbonise the European power generation sector, meet rising electricity demand (associated with electrifying the heat, transport and industrial sectors in particular) and replace ageing infrastructure.  These investments will have to take place at the same time as Covid-19 has added significant fiscal pressure to already strained public budgets in Europe.  The need to attract private finance, particularly from long-term investors, will therefore increase.  

Additionally, there is a change in the risk profile of these investments over time as generation projects (and in particular renewables) are increasingly exposed to market and counterparty risks.  Currently, more than 90% of new-build solar and wind capacity in Europe is financed on the basis of Government-backed renewable energy support schemes, awarded via competitive auctions.  In our Q1 2021 Reference Case, we estimate that by 2030 only 50-60% of new-build solar and wind capacity in Europe corresponds to capacity awarded under competitive auctions, with an increasing role for projects developed under corporate PPAs (Power Purchase Agreements), utility PPAs and merchant/quasi-merchant investment models.

The transition to this new world will pose fundamental questions to renewable energy project developers, investors and lenders given that, as more renewable generation enters the market, mitigating market risk can become more challenging as prices become more volatile.  Market participants will therefore need to consider what commercial and operational capabilities they will need in order to manage these risks successfully and to optimise their risk-adjusted portfolio returns.  

However, whilst Net Zero strategies are gaining momentum in the private sector, the decisions taken by private businesses alone will not be enough in meeting the Net Zero target.  Instead, the role of Governments and policy makers will also be critical to unlock and funnel the private investment required and, to a lesser extent, also directly meet funding gaps in areas where those may exist. 

Therefore, given also the scale of infrastructure investment needed around the globe, European countries must ensure that they have the appropriate policy and regulatory frameworks in place that will ensure they can compete to attract capital from long-term investors financing the energy transition.  With more than €200 bn of “dry powder” (i.e. capital that has not been committed) from global infrastructure fund managers and an additional €1.5-2 tn of dry powder from private equity firms (with about 20% of that in Europe), all is left to play for in this race.

---ENDS---

Notes to Editors:

Contact: Pavlos Trichakis
Email: Pavlos.Trichakis@baringa.com

About Baringa Energy Market Modelling:

We have 20 years’ experience in providing energy analysis across global power, gas and carbon markets. Our quarterly energy market reports are used by investors, lenders, developers, utilities, regulators and governments to make key decisions that rely on high quality, insightful and consistent scenario-analysis.

Our market coverage is truly global with new geographies and new traded markets being added continuously.

For additional information, please visit www.baringa.com/lowcarboncapital

About Baringa:

Baringa Partners is an independent business and technology consultancy. We help businesses run more effectively, navigate industry shifts and reach new markets. We use our industry insights, ideas and pragmatism to help each client improve their business. Collaboration is central to our strategy and culture, ensuring we attract the brightest and the best. And it's why clients love working with us.

Baringa launched in 2000 and now has over 900 members of staff and 92 partners across our practice areas Energy & Resources, Financial Services, Products & Services, and Government & Public Sector. These practices are supported by cross-sector teams focused on Customer & Digital; Finance, Risk & Compliance; People Excellence; Supply Chain & Procurement; Data, Analytics & AI; Intelligent Automation & Operations Excellence; and Technology Transformation. We operate globally and have offices in the UK, Europe, Australia, US and Asia.

Baringa Partners have been voted as the leading management consulting firm in the Financial Times' UK Leading Management Consultants 2021 in the categories Energy, Utilities & the Environment, and Oil & Gas. We have been in the Top 10 for the last 14 years in the small, medium, as well as large category in the UK Best Workplaces™ list by Great Place to Work®. We are a Top 50 for Women employer, and are recognised by Best Employers for Race.

Baringa. Brighter Together.