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The European Energy Trilemma

Geopolitical realities are shifting priorities, requiring governments to better balance de-carbonization, energy costs and domestic energy security in the next decade.

By Biraj Borkhataria
Published July 8, 2022 | 2 min read
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Key Points

  • The current geopolitical environment is turning the net zero goals, clean energy investment and reduced fossil fuel use paradigm on its head.
  • The focus is now both on increasing renewables investment to new highs, and direct investment towards all forms of energy to secure supply.
  • Without this balanced approach, Europe may be headed away from an ‘orderly’ energy transition towards a ‘disorderly’ one in the years ahead.

A balance must be struck between de-carbonization, energy costs and domestic energy security

In Europe, de-carbonization has been prioritized over energy costs and domestic energy security, which has been a key contributor of the many challenges seen today. RBC expects the region’s focus to quickly shift to a more balanced approach in contrast to the last five years.

Amid rising prices, the energy problem has indeed become a critical social and governance issue that was not fully considered before. Since energy imports are typically more carbon intensive than those domestically produced, this doesn’t have to be an environmental problem. The UK North Sea and Norway offer potential options to help stem declining domestic production, but the cost of capital for European energy companies has been prohibitive and disincentivizes future investment. Banks will therefore need to be willing to ‘bank’ companies in the energy sector, rather than virtue signalling around net zero goals. Investors will also need to rationalize future investments and holdings - and be willing to face pressures from stakeholders around additional investments.

Renewables’ development is becoming increasingly important as Europe shifts from Russian gas

However, in parallel, Europe could continue to be a leader in low-carbon growth. By accelerating the permitting process for new projects, RBC believes 35TWh (~20GW) of accelerated renewable development could in total displace 6bcm in 2022, in addition to the 20bcm (~50GW) of renewable generation already anticipated to be installed in 2022. This appetite for renewables could also spur growth in green hydrogen, given the prospect of higher-for-longer gas prices has improved relative economics. However, a full transition away from grey hydrogen is highly unlikely at this stage, and RBC remains skeptical around the potential new growth markets for hydrogen such as heating and transportation.

A fundamental re-think of European energy infrastructure is needed

There are over 100bcm of available capacity in European regasification terminals. Although capacity was 40% utilized in 2021, over one third of capacity is in Iberia, which has limited capability to transport to the rest of Europe. Momentum behind plans to build, reopen and expand LNG terminals has increased, but investors may be hesitant given that the role of gas in Europe was vilified until only a few weeks ago. In the near term, more growth in floating storage capacity (FSRUs) can help bridge the gap.

Finally, in the face of shifting priorities for governments, consumers and societies, European energy companies could be seen as part of the solution to Europe’s energy woes, rather than part of the problem. To balance the ‘energy trilemma’, all the stakeholders must place equal emphasis on environmental and social factors. If they do not, and the cost of equity remains elevated for energy companies, then energy costs are likely to remain higher for longer and the outcome may not be acceptable for end consumers.

Biraj Borkhataria authored "Energy and Utilities: The European Energy Trilemma," published on March 31, 2022. For more information about the full report, please contact your RBC representative.

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