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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Another Difficult Year for Europe's Transition

  • WoodMackenzie: the solar power industry saw its costs increase by 23% from 2022 to 2023, and other transition industries saw similar increases.
  • The cost surge had made a lot of projects commercially unviable, leading to lower participation in renewable energy tenders organized by European governments.
  • The cost problems of wind and solar power development are not going to go away on their own, and the factors that led to these problems are unlikely to change this year

The year that just ended was not a good one for the energy transition in Europe. Every industry involved in that transition spent the year mostly struggling to survive and keep going.

Wind and solar stocks got pummeled amid soaring raw material costs, higher borrowing costs, and supply chain snags. EV makers realized their affordability and reliability troubles are not the only ones facing the industry, with China cementing its place as the world's biggest EV maker. Hydrogen continued to be talked about, but little else. And this year is unlikely to be any different.

To begin with, the cost problems of wind and solar power development are not going to go away on their own, and the factors that led to these problems are unlikely to change this year. These factors include greater exposure to interest rate hikes than other energy companies and less cash to cushion against the worst of the rate hikes' effects.

These effects became evident last year as the European Central Bank followed suit with other central banks around the world and implemented several interest rate increases in a bid to counter inflation. The side effect of this was much higher borrowing costs for companies that were not making enough money to absorb the shock. So they didn't. Investors fled.

In comparison, oil and gas companies generated all the cash they might need in a higher-interest environment after a record-breaking year of profits in 2022 as Europe pivoted from transition to security in the energy space.

Per Wood Mackenzie, the solar power industry saw its costs increase by 23% from 2022 to 2023, and other transition industries saw similar increases. "The industry, which typically underestimates cost reductions, was not designed or prepared for these radical cost increases," wrote Rory McCarthy, Wood Mac senior research manager, European power. Related: U.S. Prices At the Pump Climb After Cold Spell Shutdowns

McCarthy went on to add that the cost surge had made a lot of projects commercially unviable, leading to lower participation in renewable energy tenders organized by European governments because the prices offered at these tenders were too low for solar developers.

The situation was similar in wind power, which led to some project cancellations. On the other hand, 2023 saw record wind capacity additions of 17 GW. While a record, the figure was only a modest increase over 2022 and substantially below what the EU needs to install every year for wind in order to hit its transition targets. These targets require annual wind capacity additions of 30 GW.

It won't happen this year—not after the European Central Bank said it would keep interest rates where they are for now and gave no signal it plans to start cutting anytime soon. Brussels continues to advocate for more state funding for wind and solar, and to urge member states to facilitate the approval and installation process as much as possible. In the end, however, it is up to national governments, and they have been slow with the facilitation.

"In the US, if you produce 1 kilo of green hydrogen, you get 3 dollars. In Europe, I need to submit a room full of paper," the chief executive of Portugal's largest utility, EDP, recently complained in Davos, adding that processing this "paper" takes ages.

Slow national governments are not the wind, solar, and EV industries' only problem. There is also the Chinese competition conundrum. Cheap solar panels have been instrumental in the fast buildout of solar power capacity in Europe. Developers want to continue using them because they're cheaper than the panels and other components manufactured locally.

This, however, is a problem for the local solar manufacturers, which are having trouble staying afloat with the flood of cheap Chinese components. This recently led Brussels to signal it was considering ways to help these local manufacturers, among them an investigation into potential dumping practices, the FT reported recently.

That would be the second investigation into the Chinese transition industry after last year when the EU launched a probe into EVs as Chinese manufacturers prepared to take on the European market. That prospect set European carmakers on edge because their EVs are a lot more expensive than Chinese ones, for which Brussels blamed state subsidies even though EVs in Europe enjoy the same treatment, the only difference being the scale of the subsidies.

The probe is ongoing, and Beijing is not happy about it. Yet uptake of EVs in Europe is slowing down, with Germany, the biggest market, booking a 58% decline in sales of EVs and plug-in hybrids in December. The reason: the cancellation of a direct EV subsidy.

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According to the Wood Mackenzie report, there is reason for optimism this year. Governments are raising the prices they offer wind and solar developers in their tenders, power purchase agreements are seen rebounding, and battery storage is about to "take off". Yet, as usual, there is a but. In this case, the "but" is linked to interest rates. Optimism will quickly fade unless there is a change in these, and soon.

By Irina Slav for Oilprice.com

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