5 emerging trends in 2021

1.Policy momentum strong, with flex coming into focus

The EU’s new 55% emissions reduction target by 2030 was written into law in Q2 2021. In the same week, the US re-established its climate leadership credentials by announcing its own target of at least 50% reduction by 2030. Just two years ago, commitments of this scale belonged in the realm of fantasy.

The most tangible step towards European decarbonisation in 2021 has been driven by the market, not policy makers. A rise in carbon prices above 50 €/t looks set to rapidly accelerate closure of coal and lignite fired power plants across Europe. But carbon prices in a 50-100 €/t range are not enough to kick start deep decarbonisation of industry, heat and heavy transport. This where tangible policy support mechanisms, at an EU and national level, will need to follow the Fit for 55 announcements.

Policy makers have an effective existing tool kit to support deployment of wind & solar capacity, although this needs to be accelerated. The key bottleneck threatening to constrain decarbonisation of the power sector is a lack of clarity on the policy framework that will support flexibility.

2.Higher carbon & power prices

The move higher in carbon prices this year represents a key trend in itself. Prior to 2021, the EU ETS was predominantly a compliance driven market, and only tangentially related to the marginal cost of carbon abatement, supposedly its raison d’etre. Industry players bought EUAs to cover portfolio emissions footprints. But the ETS has been transformed in 2021 into an investor driven market.

Large investment fund buying has been the primary force behind the doubling of carbon prices from Q4 2020 to Q2 2021. The premise behind these investment flows is pretty simple: The EU has clearly flagged that the ETS will be the primary policy tool to achieve its 55% target by 2030
Much higher carbon prices are required to drive required volumes of decarbonisation.

The rapid rise in carbon prices this year has caused some pretty seismic shifts in energy market pricing and asset value dynamics.

3.Batteries in Southern Europe

Solar will be one of the main pillars of decarbonisation in Southern Europe. Huge volumes of solar (& wind) are set to transform power markets e.g. solar output pushing peak prices below offpeak levels and rapidly rising price volatility. In power markets such as Italy and Spain, electricity storage will need to play a key balancing role as well as supporting system stability (e.g. frequency & inertia).

Up until a year ago, the investment case for batteries in Southern Europe was virtually non-existent. That is changing fast with implementation of new capacity markets to support flexible capacity in both Spain and Italy, albeit with policy clarity on auctions still required.

4.Tighter LNG & gas markets

This time last year, weak gas prices in Europe & Asia saw huge volumes of US LNG cargo cancellations with 70% of export capacity shut in. The TTF & JKM gas curves have exploded higher across the last 12 months, with forward prices for 2021 broadly tripling.

Higher gas prices are driving the big move up in wholesale power prices across Europe in 2021, working in combination with rising carbon prices.

5.Hydrogen momentum

The announcement of aggressive European policy targets across the last 12 months is fueling interest in hydrogen infrastructure investment. But there are a couple of key practical challenges that need to be resolved for hydrogen to start to scale: Hydrogen is an expensive fuel relative to power & gas (& getting more expensive as commodity prices rise in 2021) – effective business models & high value use cases need to be developed that are robust to these high costs.

Tangible policy support measures (e.g. CfDs, FiTs, network charge / tax advantages) need to be introduced in order to support initial scaling and the development of associated infrastructure.
The best hydrogen projects we are involved with are those that have high value local offtake opportunities that are driving decarbonisation of processes that are very hard or expensive to electrify. There is big potential for hydrogen, but scaling is not going to happen until policy makers define a clear set of rules.

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