Energy Musings - July 5, 2024

For years, Europe has been the hotbed of climate change activism. Politicians pushed governments to make rules to drive the transition away from fossil fuels to renewables. That train is slowing.

The Green Revolution Downshifts

The antidote to climate fear – renewable energy –is failing.  A flurry of recent announcements showed European corporations downshifting their plans for more renewable energy.  For example, Norway’s Statkraft AS, a leading company in hydropower internationally and Europe's largest renewable energy generator, announced changes to its investment plans for its renewables portfolio.  Additionally, BP plc, the international oil company, announced a pause in its renewable energy projects as it reassesses the economics.  Moreover, BP plc said it would commit more to finding new oil and gas reserves. 

At the same time, institutions wedded to net zero emissions goals clamor for more green energy.  They fear the rightward shift in European politics and how that could erode governments’ green energy commitments.  The environmental movement is awakening to the demands of citizens to trim the green energy commitments that are upending their lifestyles and boosting their energy costs.  Citizens are worried about the impact of expensive energy on the competitiveness of Europe’s manufacturing and agricultural industries. 

World’s Energy and Climate Landscape

One of the most vocal green energy proponents is United Nations Secretary-General António Guterres who continues to speak and issue press releases proclaiming despair for the world if governments and citizens do not end our use of fossil fuels.  His views have helped drive Europe’s politicians and European Commission bureaucrats to push policies to transition away from fossil fuels and toward renewable energy rapidly.  The push was interrupted following Russia’s invasion of Ukraine and the loss of Russian natural gas supplies.  That fallout helped spike energy costs in Europe, but they remained elevated from pre-war days.  Moreover, the latest sanctions on Russia’s liquefied natural gas industry will impact Europe beginning this winter.  Europeans are likely looking at He also demands the rapid expansion of renewable energy resources.  Heading into the UN’s COP 28 meeting last fall, Guterres said, “COP28 must commit countries to triple renewables capacity, double energy efficiency, and bring clean energy to all, by 2030.”  

Guterres’ lofty goal is unrealistic because it ignores the physics of energy, the limited supply of critical ingredients to build renewable energy, and the economics of the projects.  Guterres acknowledged these problems making his renewables expansion demand a joke. 

Guterres not only wants the mineral output, but he also has conditions on how it is produced.  He stated, “The extraction of critical minerals for the clean energy revolution – from wind farms to solar panels and battery manufacturing – must be done in a sustainable, fair and just way.”  Yes, that is how they are supposed to be produced, even though they are not now being done that way, but the output will be more costly than the existing output.  This will be another factor pushing up the cost of critical minerals besides their demand having to increase almost fourfold by 2030. 

Statkraft Slowdown Significant

Statkraft’s late June press release about its renewables energy investment slowdown stated, “Statkraft sharpens strategy for further growth.”  This is interesting because research shows Statkraft only established the growth plan two years ago.  At the same time, it restructured the corporation and reorganized its management to support the new growth plans.  One wonders whether the 2022 plans were conceived in response to the general European euphoria about renewable energy and its ability to solve the existential threat of climate change.  Amazingly, the new growth plans were announced four months after Russia invaded Ukraine, upending Europe’s energy markets.  The fallout from the natural gas shortage and the need to restart coal power plants exploded electricity prices forcing people to conserve and alter their lives to survive economically.  These were early warning signs that the energy transition was going off the rails and citizens were growing increasingly unhappy. 

Not only is Statkraft slowing its renewables investments but it is also divesting businesses.  It plans to divest its district heat business, while also seeking investors for its biofuels company Silva Green Fuel.  Lastly, they seek others to invest in Mer, Statkraft’s electric vehicle charging company.  The company is finding growth opportunities taking longer to emerge and that they produce lower financial returns. 

The press release tries to put a positive spin on the European renewables market.  But their message from Statkraft’s President and CEO Birgitte Ringstad Vartdal is that “market conditions for the entire renewable energy industry have become more challenging.”  

The press release devoted an entire paragraph to supporting Vartdal’s observation about the renewable energy market.  It stated:

• “Simultaneously, the entire energy market has become more challenging.  Energy prices are lower, and both technology costs and capital costs have increased.  Market regulations and support policies are delayed, and geopolitical uncertainty has increased.” 

Statkraft’s new renewables energy plan encompasses installing “2-2.5 GW [gigawatts] of onshore wind, solar and battery storage annually from 2026 onwards.”  This is a reduction from the 2022 target that called for 2.5-3 GW of renewable energy installed annually for 2025-2030 and 4 GW each year after 2030. 

Offshore wind was also cut substantially.  It will develop 6-8 GW by 2040, down 20%-40% from the previous target of 10 GW.  Vartdal said, “We still believe strongly in offshore wind and would like to stay in there, but we are reducing our ambition somewhat.”  Really?  Twenty percent to 40% reductions are “somewhat”? 

Statkraft is also slowing its plans for hydrogen.  While considered a fuel for replacing fossil fuel use where electrification does not work, the technology is proving challenging and costly, damaging the economics of projects.  For Statkraft, it has cut its hydrogen target of 2 GW by 2030 to 1-2 GW by 2035.  Adding five years to its target timetable is meaningful as it signals questions about the pace of the technology to address its costs, which are impacted by transportation challenges.  Hydrogen’s economics are challenged by the losses in energy when it is produced and then reconstituted as energy for use. 

Other European companies actively engaged in renewable energy have cut back their investments.  Denmark’s Ørsted A/S, the former DONG (Dansk Olie og Naturgas A/S), which now focuses almost exclusively on wind energy today, has been haunted by poor offshore wind project economics.  The result was huge impairment charges, abandoning a handful of approved projects, and management changes.  The other day, Ørsted announced it would not participate in the next U.S. offshore wind lease sale, suggesting a scaling back of its previous ambitious expansion plans.

In May, Portugal’s EDP, S.A. cut its annual renewables targets.  The company’s chief executive Miguel Stilwell d’Andrade cited “lower electricity prices and a higher interest rate environment for longer” as why they were scaling back investments.  The key point is that renewable energy companies cannot control interest rates that significantly impact their projects’ economics since they are capital-intensive and require years of operation to earn back that capital.  Therefore, they need a higher price for their output, which is not happening because citizens are revolting and politicians dependent on their votes for employment hear those objections. 

Oil company adjustments

European international oil companies, which had previously taken aggressive positions in pushing the energy transition, have slowed those efforts under new leaders.  Shell plc and BP plc have taken steps recently to pause investments, scale back commitments, and consider possible impairment charges for projects. 

The most recent announcement came from Shell.  It announced a “temporar[il]y pause of on-site construction work at its 820,000 tons a year biofuels facility at the Shell Energy and Chemicals Park Rotterdam in the Netherlands to address project delivery and ensure future competitiveness given current market conditions.”  That was the essence of its press release. 

What was essentially buried in Notes to editors were the following points. 

• “Following the decision to pause on-site construction, an impairment review will be conducted for this project.  Further guidance will be included in Shell’s second quarter update note scheduled for publication on Friday, July 5, 2024.” 

• “Shell took a final investment decision for the planned biofuels facility in September 2021.  The facility is designed to produce sustainable aviation fuel (SAF) and renewable diesel made from waste.  Additional information regarding project status and timelines will be communicated in future updates.”