Rise of Renewables

Europe-based wind turbine original equipment manufacturers (OEMs) are set to capture growth from a surge in offshore energy projects as the EU steps up efforts to become climate neutral by 2050.

With their own ESG targets to cater for, wind turbine producers will need to balance costs and profitability against sustainability, while meeting demand for ever larger cost-competitive products.

Recent pandemic-led supply chain disruptions highlight the importance of OEMs having sufficient resources to manage existing pipelines and support future growth.

Europe has established itself as a seat of offshore technology on the back of advanced know-how, supportive policies, and governments' targets. The continent's push to cut greenhouse gas emissions to 55% below 1990 levels by 2030, and become climate neutral by 2050, implies a huge increase in renewable energy sources. The EU's November 2020 Strategy on Offshore Renewable Energy proposes that offshore wind capacity should reach at least 60 gigawatts (GW) by 2030 (including 1 GW of ocean energy) versus 25 GW at year-end 2020, and 300 GW by 2050 with ocean energy capacity at 40 GW.

Energy Transition

European power prices showed a stronger-than-anticipated rebound in 2021. This follows a drop of more than 20% drop in 2020 amid COVID-19 lockdowns and weaker economy; the improvement stemmed mainly from a surge in gas prices and to a lesser extent carbon prices, which reach a record high of close to €60 per ton.

We think power prices will continue to increase in 2022-2023, as supply tightens. Europe's more ambitious environmental targets will accelerate closures of thermal and nuclear baseload generation, which renewables cannot fully replace over the coming three years, leading to greater weather-related price volatility in the interim.

European power companies will generally benefit from this high price environment. This is because their generation portfolios are almost fully hedged this year, after which they will benefit from higher prices, thereby supporting investments in the energy transition. This is also positive for the development of a European power purchase agreement (PPA) market for renewables, due to more favorable strike prices and good margins, albeit increasing pressure on power suppliers with short generation portfolios.

Hydrogen Economy

Since becoming CEO of Snam SpA in early 2016, Marco Alverà has turned one of the world's largest natural gas companies into a trailblazer in the burgeoning hydrogen economy.

The Italian utility, which operates pipelines across Europe, is now spending half its four-year, €7.4 billion investment budget on getting its infrastructure ready for hydrogen, the "new oil" that has emerged as a key tool in reaching global net-zero emissions.

Alverà, meanwhile, is about to publish his second book about hydrogen in just two years, showing how the fuel's meteoric rise has surprised even its most ardent advocates.

"I joined Snam with a vision of using [the company] to become a global leader in green molecules," the CEO said in a video interview this month. "I didn't know at the time how quickly hydrogen was going to hit the road."

The former investment banker, who previously worked at utility Enel SpA and oil and gas major Eni SpA, now spends most of his time on initiatives related to Snam's net-zero goal for 2040. That includes replacing and upgrading its 41,000-kilometer network of pipelines for the hydrogen era, piloting decarbonization projects with industries from steel to glass and working with other utilities on a pan-European effort to link up infrastructure that critics of fossil fuels have long derided as a stranded asset.

"There are few CEOs of gas infrastructure companies that have led the debate on hydrogen like Marco has at Snam," Graham Cooley, CEO of ITM Power PLC, a U.K.-based maker of hydrogen electrolyzers, said in an interview. "They're a great example for the gas industry and indeed for the whole oil and gas sector."

Snam invested €33 million in ITM in October 2020, an early example of a wider trend of utilities backing providers of hydrogen technology. A month later, the company spent about €400 million to acquire one-third of Industrie De Nora SpA, a family-owned Italian company that also makes components for hydrogen production.

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Climate Policy

Europe's recent regulatory climate stress tests aim to reveal the vulnerabilities for the banking sector. Beyond some limitations, not least in data quality, S&P Global Ratings sees them as a valuable way to start to gauge environmental and climate-related risk exposure. They should also indicate whether the institutional framework can be effective in addressing systemwide risks. We have been increasingly incorporating environmental considerations and data into our credit rating analyses. As testing becomes more sophisticated over time, it should suggest whether banks' management teams need to adjust risk appetites, develop tools to better monitor and manage climate-related risks, and even consider changes to their business models.

Increasingly brutal and frequent extreme weather events that have lashed Europe in recent years mean policymakers need no reminder of the potential severe macroeconomic and social implications of climate change. While eyes are focused on what may emerge from the United Nations Climate Change Conference (COP 26) in the fourth quarter, in July the European Commission released its "Fit for 55" legislative proposal to underpin the EU's commitment to comprehensively address climate change. It targets a reduction in net greenhouse gas emissions by at least 55% by 2030, in line with a broader ambition to become the world's first climate-neutral continent by 2050.

Catalyzed by a strong political consensus, a mandate to ensure financial stability, and increased investor interest, European regulatory authorities have accelerated their efforts to identify climate-related risks (namely, physical and transition risks) and to assess the financial sector's exposure to these risks. The translation of climate-related risks into quantifiable financial risk has been one key output from this work.

Supervisors' climate stress tests were able to identify the main sectors and geographies generating transition and physical risks for banks' assets and sought to quantify their exposure to these risks. As such, they provide a forward-looking view on how different climate scenarios could affect banks' assets. Supervisors are not yet penalizing banks with higher capital requirements for such long-range risks, but they are ratcheting up the pressure on bank management to proactively tackle these risks.

Market Dynamics

Global green bond sales are expected to recover and may set a new record this year led by Europe, which on July 14 announced an ambitious plan to reduce its net greenhouse gas emissions by at least 55% over 1990 levels within this decade.

Further Reading