The EU cometh

The EU’s climate strategies are a classic glass half empty/glass half full. Germany’s Energiewende is either the poster child for renewables development or a cautionary tale depending on your point of view. While there is always plenty of devil in the detail, Germany has almost doubled the size of its economy over the last 30 years while reducing emissions by around 35 per cent[1], which is a fair achievement, even if it will miss its 40% by 2020 target. There have been some easy wins, such as the efficiency gains from absorbing East Germany, but some self-imposed headwinds too, such as the determination to phase out nuclear power, an important source of low emissions dispatchable power.

These strategies are set to get a huge fiscal boost if the draft EU Green deal package comes to pass. The package, which is being recast as a post-COVID economic recovery tool would see billions of euros deployed to support hydrogen, building renovations, electric vehicles, network infrastructure and further renewables deployment. The support mechanisms range from loans to grants to long-term CFDs for the EU carbon price.

One of the by-products of the EU’s desire to be a climate leader among the major economies could be that European utilities get the edge in packaging up energy services such as efficiency, demand response and e-mobility. The PWC Global power strategies report reviews the strategies and positioning of the Global Top 40 (GT40) listed utilities. It finds that in general, European utilities such as Enel, ENGIE and EDF are ahead of their American and Asian peers in their investment in energy services rather than traditional generation plants and poles-and-wires. This has been achieved by a mix of buying up start-ups and niche service providers, such as Enel’s purchase of Enernoc and ENGIE’s investment in several US-based energy services providers, and internal innovation development. PWC reports that European utilities are active in establishing innovation labs, R&D centres, and start-up incubators.

European utilities also have a more diverse geographic presence. This is partly due to the EU single market allowing them to spread outside their country of origin more easily but many also have investments in the US, Latin America and Asia-pacific. Three of the largest US renewables developers are European. US utilities seem to me more focused on domestic opportunity given several of them got burned buying into UK and Australian assets in the early days of electricity sector liberalisation.

European oil majors are also muscling in on the sector, as they pivot away from their traditional core business in an effort to decarbonise. Unlike, say, Exxon Mobil, Shell, BP, and Total have all made net zero commitments, although a few years of progress towards this target may be needed to satisfy the sceptics who think this is purely “greenwashing”. The prototype for the oil giants is Oersted (formerly DONG) which is now fully divested of its oil and gas origins and has established itself as the global leader in offshore wind.

We can see this play out in Australia in which several of the large renewables players have European origins, where Shell has bought ERM Power and where ENGIE has divested its coal assets. US players are now notable by their absence except a half share of Intergen, which runs coal plant.

It is still early days in the global energy transformation, so it’s premature to anoint winners. It’s unwise to bet against American business drive when it gets going, while China has a cost advantage and a protected domestic market to build scale in. But, for now, EU utilities lead the way.

[1] Agora Energiewende estimate for 2019, although this requires a 4% annual fall from 2018.