By Fitch Solutions

Key View

  • The European Union (EU) is accelerating energy diversification and decarbonisation efforts through vastly expanding renewable growth targets, however we do not expect to see these met by 2030 despite new support schemes.
  • Global supply chains for wind and solar content are already very tight with prices significantly elevated, while several fundamental limits will hold back technology growth.
  • A core area of investment will be in the infrastructure sectors of transmission and distribution networks and port facilities in the case of offshore wind.

The European Union (EU) is accelerating energy diversification and decarbonisation efforts through vastly expanding renewable growth targets, however we do not expect to see these met by 2030 despite new support schemes. New EU policy, RE-Power EU, outlines a ‘new energy compact’ by which funding support from the European Green Deal will be frontloaded to accelerate growth. The European Commission (EC) is aiming to increase the renewable energy target from 40% to 45% by 2030. The RE-Power EU policy calls for a EUR210bn investment mobilisation before 2027, supported by the frontloading of the European Green Deal, a large portion of which we expect to be targeted at renewables growth. The strategy calls for a combined hydro and non-hydropower renewable electricity mix of 69% by 2030, a significant increase from its current level of 44% and our forecast of 55% by 2030. The EU has announced that it has asked member states to identify the possible limits of renewable growth in their markets and use funds from the EU Emissions Trading Scheme to finance projects directly.

The RE-Power EU proposal has increased the solar target to 740GW by 2030, more than double our current forecast for the bloc at 310GW. In order to meet this new goal, the EU is looking to introduce new initiatives, including mandates for solar rooftop deployments on all large buildings built after 2026 and residential buildings by 2029. The European Council announced at the end of June 2022 that it had agreed upon revisions to the Fit For 55 Renewable Energy Directive that would accelerate renewable project permitting. Permitting processes for all rooftop solar will be shortened to three months as a maximum, with procedures for certain ‘go-to areas’ entitled to a new rapid approval process within weeks which would significantly increase deployments, while general solar licensing procedures will be predefined. However, we remain sceptical to the impact of these new measures.

Under the RE-Power EU plan, wind will play a central role and will see capacity grow from 190GW currently installed to 480GW by 2030. Currently, we expect the EU to fall far short of this target with growth forecasted to reach 310GW by 2030. The wind sector also stands to benefit from intergovernmental agreements. Four North Sea markets including, Germany, Belgium, the Netherlands and Denmark have all announced an offshore wind target of 65GW by 2030 and 150GW by 2050. The agreements are expected to draw in EUR135bn in funding and the EC has estimated that figure could reach EUR800bn in order to meet the 2050 target. The four governments have also announced that they would seek to accelerate the permitting process at an EU regulatory level and would work with the EC to develop faster planning processes. The move comes at the same time that the UK government also expanded its 2030 offshore wind target and reduced the planning time span from four years to one.

We highlight that global supply chains for wind and solar content are already very tight with prices significantly elevated while several fundamental limits will hold back technology growth. Global solar capacity increased by over 180GW between 2010 and 2015, with a further 483GW coming online between 2015 and 2020, while wind has also seen similar increases. This high-demand environment has added pressure to the global supply of materials for construction in the sector. Rising prices in steel, copper and other key metals in the wind sector have sustained high capital costs and will see upwards pressures amid the combined rising prices and capacity. Our research highlights that global metal price pressures alone could add an approximate average of USD73,000 per MW for the offshore sector and USD35,0000 per MW for onshore wind over the decade. This poses a risk for several developments over 2022, possibly spilling over into 2023.

Furthermore, the price of polysilicon, the key material for solar wafer production, will remain the most significant factor driving the soaring cost of solar modules through the near term, as upstream production in the solar supply chain fails to meet sharp increases in global demand. In June 2020 the price of polysilicon sat at an all-time low of USD6.80/kg which rose sharply over the following years to reach an average of USD40/kg in Q122, with weekly average prices remaining between USD30/kg and USD40/kg through to end-May. We expect this to sustain elevated prices for solar equipment until more supply of polysilicon is available. That said, we expect total polysilicon production to rise from 470,000 tonnes in 2021 to roughly 700,000 tonnes over 2023; which is enough to produce about 255GW of solar PV modules globally. A drastic increase in supply, however, could add renewed pressure to demand and a failure of the EU to source consistent supply of polysilicon will limit solar growth.

The EU’s solar products manufacturing sector has seen significant levels of decline. Germany had been the second-largest producer of solar equipment before 2010, second only to China. However, it has since fallen to a marginal global player. According to the regional solar trade organisation, SolarPower Europe, annual production capacity stands at 8GW, with the vast majority of solar content coming from Asia-based supply, predominantly China. That said, one of the EC’s future industry strategies, the European Solar Initiative launched over 2021, is directly focused on expanding the solar supply chain across the bloc, seeking to establish a 20GW per annum production level by 2025. SolarPower Europe has also outlined that EUR8-10bn would be needed to develop the 20GW solar supply chain, which is reflective of the EUR8bn trade deficit for solar imported into the EU.

Despite this expansion in production, the annual requirement for solar under new EU targets exceeds output. This will leave significant scope for additional imports, which previously hampered European manufacturers’ market share and competitiveness. Chinese manufacturers have benefited from an abundance of low-cost borrowing and state financing, low land and labour costs and the market’s manufacturing capabilities at scale driving down costs too rapidly for European firms to compete. In our view, some level of incentivisation will be required to add further safeguards to European manufacturing to enable greater market parity of EU-produced solar content. For example, US senators are already proposing such schemes to provide tax credits for materials used for US-manufactured solar content. Coupled with this support could be the bloc’s broader climate agenda to shield its manufacturing sector from possible carbon footprint requirements for imported solar products. This has already seen some level of success in protecting domestic French solar manufacturing and would establish a level playing field against cheaper imported products.

We highlight that a core area of investment will be in the infrastructure sectors of transmission and distribution networks and port facilities in the case of offshore wind. We expect to see large-scale investments continue into the EU’s ports and the vessels required for the installation operation and maintenance of offshore wind farms in particular. This is seen with the offshore sector’s development in new markets such as Poland. Polish energy firm PKN Orlen has signed an agreement to lease an 11,000sq m port of Łeba site to construct a base for the maintenance of the 1.2GW Baltic Power offshore wind project in Poland. In March 2022, Baltic Power – a joint venture between PKN Orlen and Canada-based Northland Power – launched a tender for the preparation of documentation, implementation of an investment process and the construction of an O&M base. Antea Polska is developing the front-end loading documentation. Construction on the 70-turbine offshore wind facility is expected to start in 2023, with completion due in 2026.

In order to achieve such ambitious goals, the EU must continue to promote significant investment into the grid and an overhauling of scope to incorporate the EU’s new ambitions. Over Q222, the Dutch minister for energy announced that the electricity grid was fundamentally at capacity and network operator TenneT could not allow for any new commercial or industrial business to connect. This level of critical failure in the system will not only directly impact economic growth but also limit renewable injection.

As such, expanded demand for connection capacity has drawn significant large-scale investment across the EU’s network operators. TenneT, which also operates a large portion of the German grid system, has announced it will invest EUR13bn into developing its systems on land and EUR9bn for offshore systems infrastructure to incorporate increased levels of onshore and offshore wind, while connecting new consumers. This comes as other grid operators in Germany also ramp up investments into key grid projects. TransnetBW are leading the Suedlink Project with TenneT, the key north-south electricity bridge to connect Germany’s untapped offshore wind potential with major demand centers. TransnetBW announced it would be spending EUR10bn on upgrading the market’s grid in general. The two other German grid operators, 50hterz and Amprion, have also announced spending plans to unlock more capacity with EUR5.6bn and EUR12bn spent over the near term. 50hertz announced that their investment would also seek to tap the offshore segment with 7GW of grid connection being established for 2030.

The article has been sourced from Fitch Solutions and can be accessed here