High Power Prices Are Undermining Europe's Renewable Energy Plans

1. Drastic OPEC+ Cuts Signal Group Cohesion

- Having met in person for the first time in more than two years, OPEC+ agreed to cut oil production in November 2022 by 2 million b/d from current production targets, setting it on a collision course with the US.

- Because OPEC+ has already been underperforming by almost 4 million b/d, the real output curbs would amount to some 1.0-1.1 million b/d, according to the Saudi energy minister.

- The deal sent oil prices back to territory that most OPEC+ countries feel comfortable with, as ICE Brent is back at $95/barrel and WTI is increasingly flirting with the $90/barrel threshold.

- Angered that the OPEC+ move would lift gasoline prices right before the midterm elections, the Biden Administration threatened to initiate legal anti-trust action against the oil group.

2. Sliding Yuan Creates Headache Ahead of Party Congress

- As the 20th National Congress of the CCP is set to start on October 16, China’s monetary authorities have been desperately trying to keep the Chinese yuan from sliding even lower.

- Stronger even at the peak of COVID, the yuan tumbled some 7% from mid-August and hit a 14-year low of ¥7.25 per USD in late September, forcing the Chinese Central Bank to instigate a quick dollar sell-off.

- Whilst a weaker yuan makes Chinese exports more attractive, it also stokes further volatility in the country’s financial sector as foreign investors have been cutting holdings of Chinese bonds for seven months in a row already.

- For the Chinese oil industry, the relative expensiveness of the dollar might also nudge some refiners to purchase Russian or Iranian barrels, denominated in renminbi.

3. Europe Confronts Its Underperformance in Methane-Cutting

- As if Europe’s ongoing deindustrialization were not enough, the European Union has reminded member countries that the bloc is falling behind its Global Methane Pledge undertook at the COP26 conference in Glasgow last year.

- Because methane is 80 times more powerful than CO2 over a 20-year horizon, European nations have been cutting methane emissions in the energy and waste sectors by 30%, however, emissions in agriculture are essentially stagnant.

- Globally, energy accounts for roughly 40% of all methane emissions with China, Russia, and the US being the biggest polluters. In Europe, energy-related emissions stand at a mere 13%.

- The EU currently does not have any legislative measures in place to reduce methane emissions from agriculture, though it might see some soon.

4. Success Far from Guaranteed for UK Oil Licensing Spree

- As the United Kingdom is trying to kickstart its 33rd oil and gas licensing round, skeptics argue it might be a little too late.

- With 2P oil and gas reserves shrinking to 4.4 Bboe by the end of 2020, the last time the UK saw a licensing round that resulted in any commercial discovery took place in 2012.

- Prime Minister Liz Truss promised to deliver approximately 100 new drilling licenses, mostly in the presumably gas-rich southern North Sea, however even if new wells find commercial volumes it would not be until the end of the decade that these hydrocarbons hit the market.

- Despite a complete lack of committed wells over the past years, the British authorities believe that the potential lag from discovery to first production would be below 5 years for the new projects.

5. Coal Saves the Day for Chinese Power Generation

- Chinese power demand has risen to 1145 aGW in August amidst widespread heatwaves, with coal-fired generation recording the highest figure on record at 726 aGW.

- Between now and 2025, some 150 GW of new coal power capacity could be brought into the market, keeping coal’s share of the electricity market at roughly 60% despite a huge renewables surge, too.

- Even though China pledged to start reducing coal consumption from 2026 onwards, ever since last year’s power squeeze Beijing found a new appreciation for coal with a portfolio of 8.6 GW new coal plants agreed in Q1 2022 alone.

- With coal production rising to the highest ever this year, up 11% year-on-year in the first half of 2022, Chinese power generation companies could substantially reduce their pricey imports.

6. High Power Prices Kneecap Renewables Manufacturing

- According to Rystad, elevated electricity prices are jeopardizing solar PV and battery cell manufacturing in Europe, undercutting the very foundation of the continent’s renewable ambition.

- Europe represents only 2% of global solar production capacity, however, the targeted 20 GW that the EU expects to be operational by 2025 might not materialize with power prices still at €300-400/MWh.

- Battery cell manufacturing, an even more energy-intensive sector where Europe controls 27% of global capacity, is facing issues as well. The continent’s largest project, the 30 GWh Blyth facility in the UK, has already been delayed into mid-2025 on the back of high power costs.

- With Chinese renewables manufacturing availing itself of relatively cheap and mostly coal-fuelled electricity, Europe stands to lose out to Chinese companies even before the competition got heated.

7. US Highways the New Battlefield for EV Proliferation

- The US government has been experiencing a huge lobbying push from car haulers seeking to increase truck weight limits on US highways so they can transport heavier electric vehicles.

- EVs weigh on average 1,000-1,500 pounds more than gasoline-powered cars, meaning that the federal 80,000-pound gross vehicle weight cap limits their transportation.

- The EV industry is arguing that unless highway limits are upped by at least 10%, the White House’s goal of seeing half of the car sales by 2030 being electric might be jeopardized as costs would be higher and deliveries slower.

- Amidst increasing EV sales in the United States, Congress will most likely agree to the weight limit change, despite warnings that road safety in the US would become even worse as heavier vehicles are harder to stop and easier to roll.