Energy crisis response: repowering Europe
Insights

Energy crisis response: repowering Europe

The conflict between Russia and Ukraine exposed Europe to an energy shock without precedent, exacerbating an environment of already high energy prices and creating an energy supply crisis. The EU receives around 40% of its gas from Russia, so in response to this crisis it unveiled in March an energy plan called “RePowerEU”. Its aim is to reduce Europe’s gas dependence on Russia by two thirds by the end of 2022 and to zero by 2030.1

The plan aims to ensure energy security while moving forward on decarbonisation, primarily from a material acceleration of renewables and energy efficiency measures.

The plan, therefore, is aligned with the European Green Deal and the goal is to achieve both objectives in parallel with measures to allow faster permitting for renewables which we see as a key catalyst to achieving the expansion of clean energy. RePowerEU could, therefore, bring forward investment in additional renewables capacity as well an increased focus on energy efficiency.

What’s the plan about?

The plan sets out a combination of objectives and measures for the short, medium and long term:

  • In order to reduce dependency on Russian gas by two thirds, the EU is looking to diversify gas imports, particularly via higher LNG imports from the US. Late in March, the EU and US announced a task force which will see the US strive to ensure additional LNG volumes for the EU market of at least 15 billion cubic meters (bcm) in 2022 2 – although specifics on how they will do this were not provided.
    Considering that US LNG is already at full production and increasing production will take a few years to build out, the announcement is perhaps more of a strategic agreement to ensure the US/EU natural gas relationship and the long-term growth of exports to Europe, rather than a concrete plan.
Thus, to ensure the short-term security of supply we can expect to see the use of more traditional sources of energy such as coal and fossil fuels. In practice, all energy sources will be used in tandem so we can think there will be an uptick in coal, oil and gas imported from non-Russian sources, as well as a push to expand solar, wind and nuclear. As such, traditional and alternative energy sources will coexist

EU member states could also use temporary short-term regulatory measures to counteract rising power prices, such as windfall payments. However, the most significant development in this space so far is the announcement that Spain and Portugal will be allowed to temporarily decouple electricity prices from that of gas.3 Both countries already have very high renewable electricity generation and are almost completely detached from the rest of the EU energy market due to few interconnections, and both only import around 10% of gas from Russia (versus around 55% for Germany, for example).4

As such the EU Commission has agreed a temporary special treatment for Iberia. In the medium and long term, RePowerEU has three levers with which to entirely remove Europe’s dependence on Russian gas by 2030: speed-up the use of renewables; accelerate the use of heat pumps; and the development of green hydrogen.
Renewables: RePowerEU aims to double current national plans on new wind and solar PV additions by 2030. The EU acknowledges the need to simplify and shorten the permitting process as a pre- condition to accelerating this rollout and in May unveiled legislative recommendations for EU countries to reduce this process5. We see this as a necessary and significant catalyst for a renewables boost given the current approval process takes around two to four years. Goldman Sachs estimates this would allow 150GW of installations per annum versus around 20GW- 30GW a year in the recent past.6
Heat pumps: the aim is to more than double current installation rates to around 40 million electric heat pumps by 2030 to reduce energy demand and replace gas boilers. However, the funding, reskilling and upskilling of the current workforce still needs to be further enhanced in order to support rapid deployments.
Green hydrogen: RePowerEU targets a 4x upgrade to previous green hydrogen production targets by 2030 – from 5.6 million tons to 20 million tons.7 To achieve this the EU will create a Hydrogen Accelerator programme which will help develop integrated infrastructure, storage facilities and port capacities. We see the investment case for hydrogen materially changing as the RePowerEU plan shortens the timeline to make it economical and viable.
Following the announcement of the plan, in May the EU outlined concrete targets and measures on renewables, hydrogen and energy efficiency across industry and buildings. Furthermore, 13% additional investments of €300 billion were unveiled, of which around 40% will be devoted to renewables and grid and storage infrastructure (Figure 1)8. At country level we have also seen EU governments announce individual energy packages. For example, Germany, which relies on around 55% of gas from Russia, is targeting at least 80% of electricity consumption to come from renewables by 2030, versus around 40% today. It also aims to more than triple the development of onshore wind from 3GW a year now to around 10GW a year from 2025, and solar from 7GW a year now to 22GW a year from 2026.7

Risks, opportunities and uncertainties

The funding and economics of energy- efficiency upgrades remain a key risk, as well as human capital constraints around the implementation of these measures. For example, heat pumps are still expensive and, as discussed, their installation faces limitations due to a lack of skilled labour. Energy prices will now remain higher for longer, which will create margin pressures across industries, particularly in energy-intensive sectors.

Figure 1: RePowerEU funding (€bn)

Financement de RePowerEU (mds EUR)
Clean energy stocks will prove the most likely long-term beneficiaries of the situation, as well as companies exposed to the electricity network, grid infrastructure and storage needed to support the expansion of renewables and hydrogen, as well as energy renovation, heat pumps and electrification.

In addition, the hydrogen upgrade will provide upside for European electrolyser OEMs (original equipment manufacturers), while an acceleration of US shale and global LNG (Liquid Natural Gas) construction will benefit companies in the LNG gas supply chain. 

Companies that contribute to energy efficiency, such as those involved in heat pumps and buildings energy renovation, as well as electrification, such as electric vehicle batteries and electrical equipment, will be long-term beneficiaries. Overall, this development is positive for climate change, carbon capture and storage developments.
Engagement en faveur de la transition climatique
3 August 2022
Natalia Luna
Natalia Luna
Senior Thematic Investment Analyst, Responsible Investment
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics

PDF

Energy crisis response: repowering Europe

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients).

This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.

The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors.

Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.

In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC. Collectively, these entities are known as Columbia Management.

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Related Insights

5 September 2022

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – September 2022

Our fixed income team provide their weekly snapshot of market events.
Read time - 3 min
1 September 2022

Richard Colwell

Head of UK Equities

UK equities: winter of discontent?!

Despite the macro headwinds and cost-of-living crisis facing the country, “UK plc” is in better shape than it is given credit for, and as long-term investors we will continue to concentrate on company fundamentals and not just the next six months
Read time - 6 min
22 August 2022

Standstill on Ukraine debt is right for both the country and our clients

Here’s why we believe the Ukrainian authorities’ request for a two-year standstill on Eurobond debt service needed to be approved by asset managers
Read time - 5 mins

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Awards

Columbia Threadneedle Investments has received accolades across a wide range of sectors and funds, demonstrating the breadth of our investment expertise.

Contact

For more information about Columbia Threadneedle Investments or our products please contact us.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.