Boost or bust: Are price shocks stalling the energy transition?

The higher power prices we have seen recently are good news for Europe's existing wind and solar projects. But the way we frame the price rises could make all the difference to how consumers see the energy transition – and to investment in its progress.

Recent price shocks in energy markets have reignited the debate about costs of the energy transition, and there is now a danger that the political focus could shift from long-term ways of reaching climate goals to short-term solutions, such as increasing coal generation, gas production or delaying nuclear phase outs, for companies and households facing high energy prices.

This could be bad news for the European Union, which has a target of increasing renewable energy's share of its total consumption to 40% by 20301. Continued investment in both renewable energy and storage are key for the energy transition, alongside new clean energy technology such as green and blue hydrogen and carbon capture, storage and utilisation.

Don't blame it on the transition

The energy transition and the investments it demands in developing and scaling up low- and zero-carbon sources of energy were always going to make energy more expensive, but ING's senior economist Gerben Hieminga warns that some are linking the current price spikes to the energy transition.

"The political framing of the situation is different across Europe and also different across the left-wing and right-wing parties," he says. "If it is framed in such a way that these high prices are the result of a tightness in fossil fuel markets, which is the case, then it can actually speed up to transition towards renewables. On the other hand, some are saying that these prices are the result of the energy transition."

"There is tightness in gas markets, and a lot of LNG [liquefied natural gas] is moving to Asia rather than to Europe," he adds. "We had high [gas] prices this summer, and that is why gas reserves have not been filled to the extent that they usually would be. That is not really related to the energy transition."

A price rollercoaster

Because of low demand and high wind generation, in 2020, Europe experienced negative power prices more than twice as much as it did in 20192. Low wholesale and power prices have weighed on owners and operators of large and expensive renewable assets such as offshore wind.

That changed in the summer and autumn of 2021. High demand for power from the economic recovery, low seasonal gas storage levels and a lull in renewable generation from wind led to record gas and power prices.

"Such dramatic price increases and high volatility are never good for the market – especially not for a sustained period of time," says Hieminga. "But, for the moment, high power prices make renewables very competitive. They are actually generating higher profits now, even without subsidies."

Renewables need sustained public support

The discussion of who pays for the energy transition will continue in Europe's key markets as consumers start experiencing new near-term costs. But the good news is that about 80% of the public support the use of renewable energy.

Maintaining that support will be on the political agenda at COP26 and for the next decade to come, because there is no other technology that is as sure a bet for reaching net zero as renewable energy from wind and solar.

Gido Van Graas, ING's global lead for New Energy Technologies, expects demand for electricity to increase at least fivefold by 2050. "Meeting that demand requires a level of investment which I don't think any sector has seen before. In the coming decades, we will create a new energy system with a much lower carbon footprint. And that requires technological developments, cost reductions, and political choices."

Thank you for choosing to download the file. Please click the button below to access the file.