25 Mar 2022 3 min read

Ukraine conflict: a turning point for energy security?

By Robin Martin , Robert Waterhouse

In our recent post on the effects of the Ukraine conflict on real assets, we touched on the potential long-term implications for European clean-energy markets. In this blog, we look at how European policymakers are not only aiming to achieve their climate objectives but also support energy security.

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Immediate reaction

Ukraine is first and foremost a humanitarian catastrophe. It has also been a painful lesson for European governments in terms of dependence on Russian energy. While Europe has made progress in decarbonising electricity, 30% of all electricity generation is still via fossil fuels.1 Gas also remains critical to home and commercial heating, with 45% of Europe’s supply coming from Russia.2

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In the immediate aftermath of the invasion, many Western European governments recognised the need to reduce their reliance on Russian gas, with Germany simultaneously freezing the certification of the Nord Stream 2 pipeline and accelerating plans for two new liquefied natural gas (LNG) import terminals.

The direction of travel was demonstrated by the European Commission’s REPowerEU proposals, released on 8 March and titled “Joint European Action for more affordable, secure and sustainable energy” (emphasis added). 

The proposed measures include a rapid scaling-up of renewables and energy storage, consistent with what was already required to meet the EU’s climate-change objectives. The war has underlined that those steps contribute directly to greater energy security as well as environmental outcomes.

Proposals to eliminate Russian gas dependency

The European Commission (EC) aims to eliminate dependence on Russian gas before 2030 by:

  1. Diversifying gas supplies, including accelerating production capacity for green hydrogen
  2. Reducing fossil-fuel dependence through energy efficiency, electrification and higher renewable electricity production

Green hydrogen is produced by using electrolysis, powered by renewable electricity, to convert water into its oxygen and hydrogen constituents. The EC has proposed increasing the target for green hydrogen use by 300% by 2030, which will increase demand for renewable electricity.

The EC has also announced several initiatives to support rapid scaling-up of renewable electricity generation, committing to announce proposals to support faster permitting for projects, as well as steps to promote power purchase agreements (PPAs), which are an important source of revenue stability for renewables.

Furthermore, the REPowerEU plan kicked off a wide-ranging review of wholesale electricity markets. It was clear that the plan was heavily influenced by the International Energy Agency’s own 10-point-plan3 released a few days earlier. This excerpt from the IEA gives a sense of where that review is likely to focus, including steps to support capital flows from investors to finance asset creation:

“Point 10. Step up efforts to diversify and decarbonise sources of power system flexibility…. A portfolio of options will be required, including enhanced grids, energy efficiency, increased electrification and demand-side response, dispatchable low-emissions generation, and various large-scale and long-term energy storage technologies alongside short-term sources of flexibility such as batteries. EU member states need to ensure that there are adequate market price signals to support the business case for these investments…” (emphasis added)

Turning point on energy security?

In our view, the Ukraine conflict will mark a turning point in the priority that European policymakers place on energy security. The early response indicates that policymakers recognise that the steps to achieving climate objectives also support energy security. Expect further announcements on how policy will promote the rapid rollout of additional renewable and energy storage capacity. Given the scale of asset creation needed, this will create a significant, long-term stream of investment requirements. It is already understood that financial returns for investors need to be appropriate to attract capital. We believe the current conflict will focus policymakers’ minds on creating the conditions for private capital to play the part that many want in supporting the energy transition.

 

  1. Source: Bloomberg New Energy Finance: New Energy Outlook, 2021
  2. Source: REPowerEU: Joint European Action for more affordable, secure and sustainable energy
  3. Source: IEA 10-point plan; How Europe can cut natural gas imports from Russia significantly within a year

Robin Martin

Global Head of Investment Strategy & Research, Real Assets

Rob is Global Head of Investment Strategy & Research for Real Assets, having joined LGP in October 2006. Prior to this, he worked for Hammerson as Head of Research, working closely with the board and senior management team on corporate, sector and asset strategies. Prior to Hammerson, Rob was at CBI for two years as a senior economist, and prior to that, he spent three years in the petroleum industry. Rob has a degree in economics and economic history.

Robin Martin

Robert Waterhouse

Research, Real Assets

Robert joined LGIM in 2021 and works across private credit and real estate within Real Assets Research. Prior to LGIM, Robert studied Mechanical Engineering at Imperial College, focusing on sustainable power and water infrastructure solutions in his final years.

Robert Waterhouse