The expected reduction in production in some sectors, such as iron and steel, amid deindustrialisation in Europe, could contribute to electricity demand not materialising. Grids, permitting and revenue certainty are meanwhile obstacles to deploying the renewable energy capacity needed by industry.
Europe finds itself in a chicken and egg scenario, where steelmakers need clean, competitively-priced energy to sustain operations, but deindustrialisation is hampering energy project spending. “The lack of clarity in how demand will unfold could dampen the appetite to invest in next-generation clean energy projects, potentially stalling or slowing the energy transition,” McKinsey notes.
“One major cross-cutting bottleneck facing the energy transition is a lack of firm commitment to project pipelines – not helped by concerns surrounding project economics and long-term returns, and much less by the fact there is no precedent for the global energy transition,” it continues in a report seen by Kallanish.
It can take 4-12 years to develop a solar or onshore wind project in Europe, and over 12 years for offshore wind. This leads to major development uncertainty, financing challenges and cost overruns, points out BloombergNEF.
Governments have fast-tracked some projects, with 2024-26 spending plans seen increasing by 28% from 2023 levels in Germany, Great Britain, France, Italy and Spain. Challenges around affordability for end users, regulated equity returns and availability of government funding still pose risks to the buildout, BloombergNEF continues.
“Longer development timelines due to permitting and grid challenges, and rising interest rates are putting pressure on the expected returns for renewable energy investment. This is exacerbated by elevated equipment costs for wind … as well as increased negative power prices and zero-priced hours as renewable energy levels rise, especially during daytime hours for solar,” it adds. The electrification of industry will be essential to support renewables expansion.
On offshore wind, some governments, like in Germany and the Netherlands, have moved away from providing revenue support. This means developers must find an alternative route to market, usually through corporate PPAs. Reducing such revenue risks through two-way contracts for difference, supporting permitting and accelerated auction schedules could boost project deployment in offshore wind, BloombergNEF concludes.
Adam Smith Poland
