Up to €100 billion is estimated to have saved European consumers in the period 2021-2023 from the rapid development of Renewable Energy Sources in the old continent, especially after Russia’s invasion of Ukraine and the spike in gas prices.
This is stated by the International Energy Agency (IEA) in its report regarding the course of RES in 2023 and 2024, in which it is underlined that wholesale electricity prices in Europe would be 8% higher in 2022 without the additional capacity renewable energy sources.
As noted, the forecast for the addition of renewable energy capacity in Europe has been revised upwards by 40% compared to the period before Russia’s invasion of Ukraine, mainly due to entrenched high energy prices that have made small-scale PV a desirable option.
“Excluding” 230 TWh from coal and gas
In detail, based on the IEA report, low-cost new wind and solar installations – through which European consumers are expected to save the aforementioned amount of €100 billion – “have replaced around 230 TWh of expensive fossil fuel energy generation since Russia’s invasion of Ukraine, leading to a reduction in wholesale electricity prices in all European markets.” Without these capacity additions, the average wholesale price of electricity in the European Union in 2022 is estimated to be 8% higher.
In total in 2021 and 2022 the European Union added almost 90 GW of solar and wind capacity. This capacity has displaced nearly 10% of generation from coal and natural gas, driving more expensive power plants out of the market. In addition, another 60 GW of solar and wind power is expected to come online in 2023, increasing the replacement rate of coal and gas to nearly 20% this year.
To be sure, renewables have been able to mitigate but not cancel the consequences of the 2022 energy price spike in Europe, as reduced natural gas supplies have been accompanied by a multi-year low in hydro and nuclear power generation levels. As noted, “from January 2021 to August 2022, the average monthly price of natural gas increased tenfold and the price of hard coal increased fivefold. As a result, the cost of generating electricity from natural gas, which usually determines the price of electricity in most wholesale EU markets, rose to unprecedented levels, reaching almost EUR 800/MWh for open-cycle gas turbines (OCGTs) and EUR 500/MWh for combined cycle gas turbines (CCGTs).’ The way energy is priced in the EU, with the most expensive fuel setting the price, has led to an overall upward race for electricity prices.
Without the increase in solar and wind capacity in 2021-2023, average wholesale electricity prices would be around 3% higher in 2021, 8% in 2022 and 15% in 2023, according to the IEA’s calculations.
38% increase in power from RES
As noted by the IEA, the total investment cost for the development of photovoltaic and wind power during the period 2021-2023 is expected to reach approximately 200 billion euros. Almost 50% of this investment cost will likely be returned in the form of savings on electricity consumers’ bills as early as the end of 2023, while these power plants will continue to provide benefits for the next 20-25 years.
Overall, due also to the acceleration of fossil fuel weaning following Russia’s invasion of Ukraine, the forecast for RES capacity additions for 2023 and 2024 have been revised upwards by 38% compared to the IEA’s expectations before the war, in December 2021.
The revision is mainly due to the increase in photovoltaics. In the European Union residential and commercial PV systems account for 74% of IEA forecast growth, with most (82%) of growth coming from six key markets: Germany, Spain, the Netherlands, France, Italy and Sweden.
However, the expansion of RES, and mainly of photovoltaic plants, faces challenges such as the increase in equipment costs, inflation and constraints in the supply chain. Issues are also observed in the field of licensing, with the procedures – according to the IEA – considered time-consuming in most countries of the bloc. According to the Agency, currently at least 59 GW of onshore wind power is delayed in various licensing processes in Europe. The Commission is already promoting regulations to simplify the licensing of RES projects.
“Dry” the hydroelectrics
A question is the course of energy production through hydroelectric plants in Europe, after the drought of 2022 – the worst in the last 500 years. European hydropower generation is set to fall by 15% (80 TWh) in 2022 to 460 TWh, falling to the lowest level since 2004. “Fluctuations in hydropower generation are common due to natural variations in rainfall, but last year’s drop was the biggest annual decline in the region since 1990. Four consecutive below-average rainy seasons have led to drought conditions and reduced reservoir levels,” the IEA notes.
Reduced hydropower production resulted in an additional 13-14 billion cubic meters of natural gas being used to generate electricity last year. Some large hydropower operators in Europe suffered financial losses as they had to buy back energy at higher prices to meet their obligations.
In 2023, electricity production from hydropower plants is projected to increase by 3% year-on-year (16 TWh), based on preliminary data for the first three months of this year. First-quarter figures in Europe are up 5% year-on-year from 2022, thanks to higher production from the Iberian and Balkan regions.
However, while output in 2023 is expected to rise to 480 TWh, this is still 9% below the 10-year average (530 TWh) as drought conditions in key markets continued during last winter. First-quarter output is down year-on-year in France, Italy and Greece after low rainfall. However, production will depend on the rainfall Europe receives from April to December, which is a key uncertainty in the forecast.
Will renewables replace gas for heating and cooling?
The next question facing Europe is whether renewables can replace natural gas consumption for cooling and heating EU buildings in 2023 and 2024.
As heating and cooling are the largest end-users of energy in the EU’s buildings sector, atmospheric temperature is the main short-term factor determining energy demand in the bloc’s buildings sector, the IEA reports. The direct and indirect use of renewable energy sources through electricity, combined with greater energy efficiency and savings, can play a key role in reducing gas demand in the EU in the short term.
Annual gas demand in EU buildings, including indirect consumption, has ranged from 150 billion cubic meters to 210 billion cubic meters since 2010. The number of heating days has greatly influenced this demand, along with prices and consumer behavior. The 2022/23 warming season was the second warmest on record in the European Union, with an average atmospheric temperature 1°C above the previous ten-year average and 9% fewer warming degree days.
Under the same circumstances, these mild winter conditions alone would result in an estimated 7% reduction in natural gas consumption in buildings compared to previous winters. This mild weather therefore significantly reduced pressure on EU gas markets in the winter of 2022/23.
As the Agency notes, while long-term climate trends point to an overall increase in temperature, a harsh winter and hot summer could intensify heating and cooling demand in the EU building sector in the short term.
In any case, the rapid expansion of the use of renewable energy technologies in buildings can reduce gas demand in the EU and contribute to the bloc’s energy security in the short term. Projected cumulative new developments in direct heat from renewable sources and the expansion of electricity from renewable sources after 2022 will displace nearly 8 billion cubic meters of the EU’s annual building-related gas consumption in 2023 and more than 17 billion cubic meters in 2024. This is equivalent to avoiding emissions of more than 50 million tons of CO2 in 2023-2024.
