By Fitch Solutions
- Transmission and Distribution network enhancement and interconnection between markets will accelerate over the decade as a result of policy action and subsequently drive renewables growth across Europe.
- We highlight key Eastern EU member states where grid improvements and cross border trade will have direct impacts at a national and regional level for renewables capacity growth.
- However, increased interconnectivity will expose thermal generators to increased risks.
Transmission and Distribution network enhancement and interconnection between markets will accelerate over the decade as a result of policy action, subsequently driving renewables growth. Over 2020 EU member states must submit their National Energy Climate Plans (NECP) to the EU for the 2021-2030 period. The NECP’s demonstrate how member states will contribute to the bloc’s energy and climate targets for 2030 through the development of renewables, improved energy efficiency and reduced emissions. As part of these plans there will be increased interconnections between markets in the European synchronous grid region, which we believe will be key in driving alignment within EU policy.
Countries must commit to a level of interconnection capacity relative to the size of their total generation capacity. Increased interconnection would allow markets to increase renewable capacity with its volatile generation patters while still adding flexibility to the power system. Furthermore, economic benefits associated with power trade arbitrage will boost support for interconnection and renewable development. This would enable two markets with different electricity prices, the opportunity to buy cheap electricity in one market and sell it at a higher price to others. The EU is aware of this fact and has set interconnection targets of at least 15% by 2030. The European grid network is heavily influenced by EU legislation and policy, and it is interconnected to the four other European networks of, Ireland, Mainland Britain, the Nordic countries excluding Denmark and recently the Baltic States. Over Q219 the European Synchronous system was enlarged to include the Baltic states, which we see as a next step to develop the region’s increasing interconnection to the EU and European markets.
We highlight key examples in Eastern EU member states where such grid improvements and cross border trade will have direct impact at a national and regional level on the levels of investment into renewables capacity growth.
Slovakia: One of the worst performing markets for renewable capacity growth in the EU, with the growth over the past 5 years averaging -3.4MW of net additions annually and is set to average annual net additions of 7.3MW over the decade to 2029. Despite the markets most recent renewables auction of 30MW and commitments to its NECP to increase capacity non-hydropower renewables, it remains a relatively under developed aspect of the markets power sector. That said, we note rising upside risks developing from its membership in the EU and access to support for renewable capacity growth. We highlight that the lack of suitable grid connectivity and management of renewable power injection has been a constraining factor on renewable growth. In the latest auctions the solar sector at 44% and cogeneration with 42% ensuring crucial grid balancing. Furthermore, new legislation has been established to allow the development of small-scale cogeneration systems under 500kW to disconnect from the grid. This would avoid ongoing grid connection issues that have hampered sector growth in Slovakia. That said owing to the EUR100mn EU backed Danube Ingrid project this trend could be reversed over the long term. The smart grid project aims to link Slovakia and Hungary and will improve network management while aiming to ensure security of supply. We expect that the project will enable a faster proliferation in renewable capacity.
Poland: The energy market is rapidly developing and we maintain a bullish outlook for non-hydro renewable growth over the decade with a forecasted 13GW of capacity set to come online by 2029. As such we expect that the segments share of total generation will rise considerably from 14.8% in 2020 to just under 24% by 2029. Our outlook is supported by considerable growth in both the onshore wind and solar segments which have seen widespread support from government and Poland’s leading energy utilities. At the same time we not that the market has not yet committed to phasing out coal, the current dominant power segment at 75% of total generation. Due to inflexibility of coal power generation we highlight that this market will increasingly rely on power trade to reduce the risks of oversupply and increase grid stability. As such we expect to see that the market will transition to a net power exporter over the coming decade after, over 2019, having record high imports. Within this context we highlight that Poland has broader ambitions to become a more formative power sector leader in the eastern Europe, connecting the central European system with the Baltics and the south eastern flank of the EU. Under the Poland’s current NECP structure the level of interconnection will fall below the EU’s targets.Over Q4 of 2020 it was announced that the EU would fund the EUR720mn Baltic synchronisation project. The new round of EU financing will follow on from previous investments and will focus on the development of the Harmony Link interconnector between Poland and Lithuania via the Baltic Sea.
The Baltics: As mentioned previously the EUR720mn Baltic project is to be one of many developments linking the Baltic Sea states together and includes projects in Estonia, Latvia and Lithuania. The aim is to bind these states more closely with the European synchronous system adding flexibility and potential the ability to install greater volumes of renewable power of their own. We highlight that these markets have been in the process of uncoupling their grid from Russia and as such were in the danger of becoming marginalised in the wider European system. The region’s states, Denmark, Germany, Estonia, Latvia, Lithuania, Poland, Finland and Sweden, have also agreed to further collaborate in the Baltic Energy Market Interconnection Plan (BEMIP). The group aims to jointly commit to foster hybrid offshore wind projects, smart grids and crucially energy system integration. The group aims to draft a work programme for offshore wind development in the Baltic Sea which will for a core focus of their NECP’s s as well as broader EU policy developments. Within the region we highlight that Estonia, is set to add 2.7GW of renewable capacity over the decade with the sector set to represent 72% of total installed capacity.
However, increased interconnectivity could expose thermal generators to increased risks. Increased downside risks could be posed to the developers of oil, gas and coal generators who, in an increasingly renewables-dominated market, could see diminished opportunities for development. We highlight that added pressure will brought on by the European parliament voting to increase the emissions reduction target for 2030 to 60% instead of 40%, the current target. We believe this will give greater impetus for renewable growth targets and emissions reduction. As markets in the EU become more closely interlinked power trading will favour cheap, low-carbon sources. Despite gas generators offering flexibility and the ability to trade on the more valuable intra day market, a reduction in the hours of operation as more renewables come online could damage profitability. Although not yet reality, a single European energy market is being pursued by the region and would mean a more centralised policy on issues such as interconection, power trade and decarbonisation.
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