Europe Must Go 'Ludicrous Speed' to Meet Climate Targets

such as hydrogen, and member states have made net zero commitments. However, Europe is still not on track to meet its twenty clean energy and climate goals. Eleven out of twenty seven member states recorded less than two hundred million euros in clean energy investment over the last three years. But one thing I think I can say that we have all learned over the last year is that change can happen

much faster than we might anticipate. Cold generation in Europe today is about half of what it was just five years ago. Talk of peak oil demand looked a decade or more away, and now it's possible that it has already happened. So net zero emissions, while they can seem just out of reach is it? And that is the question that BNFS team looked to address in the European

Energy Transition Outlook. So today I speak with the primary authors, Dario Trump, who is our global head of Energy Transition Research, and Andrea's Gondolfo, the head of European Power Research here at BIENF. The report, the European Energy Transition Outlook can be found at BENF dot com via our app or at b NF go on the Bloomberg terminal. Additionally, you can find the research that it was built off of, which is an extensive flagship piece we published every year

titled the New Energy Outlook. Now note that BENNF does not provide investment of strategy advice and we always have a full disclaimer at the end of the show. But for now, let's dive in regarding the European energy transition. Andreas and Dario, let's start at the beginning. Tell us why this is the right time for us to be talking about Europe in particular when it comes to the

energy transition. Last year, I mean the main topic for everyone was of course COVID, but most of the listeners of the podcast and being at followers would have noticed that was also really big year for climate ambition. So we've seen a number of key economies commit to net zero targets for the first time. That has included South Korea, Japan.

We've even had a carbon neutrality pledge in China, and of course Europe, wanting to stay ahead and continue to to to raise its climate ambition, FLAG managed to essentially get all twenty seven member state to commit to common neutrality net zero by but more importantly, and that's what makes it very concrete and and and really something to to look at right away minus emissions reduction by twenties thirty from from so real ratchetting of ambition, of ambition,

and it means many more sectors than the typically affected to date power sector will have to be looked at and coming is great. So there's a lot happening in Europe right now and policy is actively changing the landscape as we go forward into this next year and beyond. Now, we at bing F do like to look at what the potential is for a lot of the different technologies

that we look at out into the future. And Andreas, can you talk to all of us listening today about what that exercises and how do we kind of look at the world without policy and why is it so important then that we layer that on right now? So, as you said, yeah, Bloomberg, every year at being if we do this big report and energy outco, everyone knows about it, everyone hears about it, then essentially it's UH

an exercise on how a nomics can drive the energy transition. Essentially, it's a mostly cost driven scenario that looks at what's the cheapest system that we can build in the future that essentially can make sure the lights stay on UM. That is a very good exercise. It it sets down

a very good foundation. But when it came to Europe, we found that NEO was essentially too global for it to answer some specific questions that we had in Europe, and at the same time, because of the neutral approach that he wants to take and for it to be able to compare different regions, essentially strips out completely the effect of policies, which in Europe and in the European context has been very important in the past and at the moment, as Daria told us, essentially is going to

be very important going forward. So we wanted to add that back in and keeping our economic transition scenario as a starting point, and keeping the fundamental methodology of you know, this is still at least cost system, so it's the cheapest way to to do all of this, but adding in there the effects of electrifying energy demand, for example, the effects of reducing the cost of offshore wind by socializing,

for example, the transmission expands. You know what's happening in Germany where you know, they essentially develop a project up to a specific point and they hold an auction and by the right to build a project that has a cable going to it. You know, the effect of targets to any thirty targets. Europe has an increased ambition and he wants to hit some specific numbers by twenty thirty. And finally, and probably one of the most important things

that we've tweaked here is increased the carbonization ambition. So one of the parameters we've changed is looking at what happens if Europe increases its twenty thirty emissions reduction target from today fifty in our let's say, current policy scenario and up to fifty five percent in our ambitious policy scenario. However,

I think Daria cannot test that. Essentially our current politicys scenari is very too likely going to have fiftent as it's a mission reduction target, and our ambitious policy center will have to be updated for the next iteration next

year to probably look at even higher targets. Maybe one reference to the podcast of Ian Barryman, who is the man behind the machine and the tool we we used to explore these different scenarios made he mentioned that and the Avengers, This character goes to all these parallel universes to to figure out which one is the one in which they managed to be the bad guy for him. NEO was essentially about playing out all these alternate scenarios and finding which one is where we can meet demand

in the cheapest possible way. And unfortunately we in Europe that that wasn't challenging enough. So so what we decided to do with Andrea's was too goes to all these alternets at universes and find the one where not only do we optimize forecasts, but we also deliver on on the climate ambition after European Union. So so climate neutrality.

I love how you said not challenging enough. Come on, guys, you guys are overachievers and for those listening if you haven't heard in Barriman's podcast, he gets into the complexity of just how incredibly detailed this model is. You know, it takes us a year to really turn the crank, so to speak, and find out all the different things. But talking about this expansion on that incredible piece of work, so that this europe specific look what we essentially have done.

Here are more scenarios. So you've got scenario one, which is the new energy outlook, and then there's two additional ones at their most basic sense, Can you just explain what the two scenario offshoots are that we come up with for this piece of work. Yeah, I mean, at the most basic level, we app the de carbonization ambition.

So we go from an economic transition scenario that assumes, essentially lead that everybody just wants to do what's right in terms of economics, right, you want to do things that are the cheapest. Yeah, yeah, and it strips out

all policy beyond the one that we already see. Then we created a current policy scenario where we essentially try to see what's announced today some targets that we usually tend to exclude because we think there is no exact way of how to get there, and then we add on top of that, let's say some delayed electrification, So Europe, we assume that Europe will start electrifying energy demand, but that comes late into any thirty, and then our ambitious

policies and builds on top of that. And it's just essentially because a step further, it says Europe starts electrifying tomorrow, it also starts building deep the carbonization technologies by tw any thirty at large scale to replace gas and core, and it phases out core completely by twenty forty, and it also ups it's a mission reduction target for twenty thirty. So this is the policy scenario for overachievers, or maybe

it's a policy scenario for actually getting to net zero. Right. Yes, unfortunately we've called it ambitious policy scenario, but in reality it itself doesn't get us exactly to zero emissions, by gets us close, so that the net becomes an important detail in the way this whole target has been praised. I just wanted to go back on the economics approach and and people are doing what is the cheapest and

that it is right. I mean, the reality is in energy systems there's quite a lot of cultural preferences and inertia and approaches, and so it's really benf and and some other entities who like to look at things from the economicsperiment when cost optimization way that rely on these on the scenario, but actually governments tend to favor one sector of the other because they're interested in the jobs they can create, or obviously the French, you know, we have a long love for nuclear So it's not so

that economics is the main driver in reality. And I think what those scenarios allowed us to explore here in Europe, where we have a very dense set of countries with each other, their targets and their goals was on one hand, to check, you know, what is current plans and current ambition getting us too, is it aligned with what the EU is is hoping to achieve And turns out actually

current national plans aren't delivering. And then the third one, which is one where I guess, you know, we have a bit more fun, was to say, you know, how close can we get to net zero? And that's where we we pushed the boat out, and as Undress said, there is a little bit left at the end, but but it's quite quite um, it's quite close, and but but the implications that it has in terms of renewables deployment, in terms of of dispatchable capacity extal, which we'll talk

about more, are quite enormous. So it's it's really interesting to see those numbers come out. Well, so let's talk about that. So we know now that Europe has announced some of the most ambitious targets, but those aren't going to get us to net zero. So that's kind of let's not fixate on the not quite getting an A on the scorecard, and let's say, what's that next step. How far away are we in Europe to getting to net zero and what do the targets need to look

like in order for us to get there. I mean, if I could start, maybe on on all things renewables, I think one thing we're seeing across boast of current policy scenari and ambitiousy scenarios that renewables deployment needs to right away double from the record levels we've we've seen

to date. And if we look at that next zero scenario in the later parts of the modeling periods of IS, you actually see almost a tripling of renewables deployment and I think when we talk about you know, what, what does zero need to do and is the current reality aligned with with this ambition. Clearly there is a gap in the volumes of investment and commitments. We've had some good news on the side of investment activity in despite COVID, so our our investment numbers came out a week ago.

I think around now in Europe was actually really coming out on top. But it's been limited to some asset classes in countries. So offshore wind is going through a really good period, but then you have some serious buttonnecks and onshore wind in Germany and Italy options not clearing.

So I think one of the first takeaways from from the economic to the ambitious policy scenario renewables deployment conditions need to improve on the ground if we are to have both the economic power system and one that helps us and deliver our goals. Now for a very short break, stay with us. Okay, So we need to electrify many tons of clean power to do it, and what does that mean for everything else? As you said, Dana, we

need to electrify. And one of the things that we see actually throw modeling is that electrification drives renewable growth. At this point in Europe, these are the cheapest options for meeting electricity needs pretty much up or around until eight of our electricity needs. Even if these grow, and this is one of the things that mainly drives our

outlook in the European energy transitional. However, this means that we have a bunch of plants that are going to shut down, and this is primarily called but also gas will have to make way in Europe. A lot of it is just you know, comes at the end of technical lifetime, but some of it is also displaced by renewables. However, in this whole process of the energy transition and us calling a shut down, what we do find is that actually there is still some market opportunity in our outlook

is gas and a combination of some unknown technologies. On an economic basis, renewables can get you to around beyond that, we need to start doing some very weird mental exercises to go to a dent of our electricity needs with wind solar. We start building systems that just don't make sense. You know, we deploy a small country's worth of batteries. We start making statements such as like a third of German and needs to be covered in solar panels, and

that's how you get to your energy needs. And and this essentially shows that that and this is one of the reasons why in our outlook we don't get to zero in twenty fifty, even in our most ambitious And that's a lot of solar panels for a country that already has a lot of solar panels. Yes it is. And actually, worryingly enough, you're you're building that many solar panels and you end up wasting about eight of your energy.

Right so, so you're building, building, building just so you can eke out always less and less and less, which essentially tells us that, you know, we need something else. And at the time it's at the moment it's gas. But of course if we want to get to zero net zero and eventually zero, it's going to to be something else. Well, so that brings up a good point.

So right now it is gas, and new plants are going in and it's seen is you know, this isn't the perfect technology from decarbonization standpoint, but it's going to give us flexible dispatch and it's going to be something that we can do right now to really decarbonize, but these plants can stick around for a long time. So what do we do about all the infrastructure that we're building now and how useful is that going to be

for us? Is it going to be really useful and bridging the gap for the next five years or ten years, or are these timelines changing. One of the things we've started to see in Europe is policy emerge on the side of legacy assets or the assets that will become legacy. So probably won't be a surprise to anyone that call phase out are quite in vogue. A large chunk of European call now is already covered by phase out schedules.

We have some some of the few countries missing that are have ongoing discussions and even opponent now by joining the need Zerope by fifty's also kind of committing to to get out of core fight in And when you look at what these policy packages are made of, it's not just call has to be online and good risons.

It's also looking at, you know, how do you make sure that the owners of these plants are receiving endemization for for the lost market activity, but also how the community is working in these plants are getting supported and so on the front of code at least it feels like the legacy issue and and and giving away out of the market to these assets that is not just driven by their lack of economic potential which is suppressed by the common price is happening what our outlook does?

And I think Andrew asking and talk well to to

the reason why there is a technology excess. It highlights that gas actually is going to have to be taken care of next and and but when I say taking care of next, that probably means now for many policymakers, because going to an zero means that an abated gas has to be addressed relatively soon, both on the side of the role it place in the short term, so there will be some gas needed, how do we make sure it comes online and and and receives the remuneration

it deserves. But also when we need to decarbonize it or replace it with something clean, what do we do? So I'm just going to come out and ask it, are we creating a problem now with gas that we have to clean up later or is gas a necessary part of the solution and the path to NE zero.

To be honest, I think you know when we run our economic transitions and that this is probably one of the easiest questions to answer, and the answer is we were notcturing ourselves in the foot by building gas today and in fact, over the next decade, building gas is essentially a one way street, especially as we're retiring core, but we're also seeing some nuclear retirements in the question

is what type of gas do we build? And this is where policy can can play a big role, right making sure that, for example, where there is an option, we build gas that maybe can burn an alternative fuel, so that there is a kind of like insurance policy in place that these assets, if they want to operate post fifty, they can and they can burn something else

beyond gas. At the same time, I think policymakers need to make it clear today what their expectation is going to be into once we go past any thirty, Building more gas is going to be lecturing ourselves. However, at the at the moment, there is no alternative to it, right, so we're going to build it unless something else comes in.

And this is where our whole idea around technology X, which is this unknown perfect replacement for gas that doesn't have the associated emissions, comes in and we've purposely named the technology X because we just don't know right now what's going to win. There are a few options, but costwise, we just don't have data to be able to make any kind of coal. And you know, we're being very honest.

Our assumptions are going to determine the outcome and as such, this is not going to be a fair exercise if we come out and say this is what it is. However, you can expect some work from Ben if looking at different pathways, so looking at what the future might look like if this technology X is this or that like hydrogen, CCS, nuclear. I love how you just casually drop that in there's this technology X and we don't know what it is.

But you know, that's a really real way of looking at the future because we can't predict what cost curves are going to be for solutions, but we do know that we need an investment into our indeed to figure out what they are. And you mentioned hydrogen, you mentioned CCS. Can you talk a little bit about the degree of investment that's going to go into finding technology X which will help us with the parts that we can't electrify.

So I mean, one of the things that that's clear is that hydrogen has probably been the second most mentioned, saying after COVID in the energy space in twenty I don't know if that's necessarily a good or bat thing, but I wanted to cover a few of the other technology excess that I think are particularly relevant in the

European context before saying a bit more on hydrogen. In the bucket Technology X, we have interconnectors, and one thing that is important to mention is that, of course in Europe, when you see these core power plants come off line, or even in the latest term, the gas power plants come offline, the flexibility we can give each other by collaborating across boarders, by having these integrated power markets is a huge asset in the objective of the cormonizing the

power sector. A lot of the countries that we look at reaching a zero that cannot rely on a neighboring market, like if Poland, you know, was to close all of its call without interconnectors, that will make the challenge a

lot harder. So that's one. The other thing is mitigating a little bit that that need for technology X. One of the things we did in the Ambitious policy scenarios that we we socialize the cost of the grid for offshore wind and I think you know, some of the people seeing our numbers in the ambitious policy you will say that they're a bit below um what what Europe

is actually ambitioning for for the offshore wind sector. And we're hearing a lot about countries collaborating to build red platforms for offshore to to plow into, and so of course there there is actually a bit of a lever to pull. Now we do have hydrogen and in a long section talking about it in a technology X basket, and that's driven by the fact that the commitments to hydrogen we've we've heard parent around Europe are very tangible

this time. So there there is money behind it, there's capacity deployment targets and and all of them are more ambitious than what we had anticipated just a year ago. And what's interesting with hydrogen is that in Syria, you know, hydrogen turbine burning on clean hydrogen can deliver that dispatchable capacity that the system needs. However, the I mean Andreas will be able to say that the implications in terms of how much energy you need to produce the hydrogen,

of course quite quite meaningful. To Yeah, actually, that's that's a very good point, Dario. And you know, I'm definitely convinced that hydrogen is an option, but I'm not convinced that it's yet the option. And probably the biggest reason is exactly what is one of the biggest reasons is exactly what that I just mentioned that essentially, you need renewables to produce the hydrogen. Now, in the case of Europe, in an ambitious policy scenario, at the moment, we do

see enough wasted renewables or wind and solar electricity. We call it curtailed. Essentially, it's you know, you get moments when there's just too much wind or too much solar energy and you end up wasting that electricity. So there is enough of that waste to power a good portion essentially all of the technology ex that we see uh

in our outlook. But then when you go into the nuances, you do realize that, for example, you need to oversize your hydrogen production facility because you're essentially looking to capture these moments of extreme over generation versus what the industry tends to like, which is you know, stable, predictable outcome, constantly producing at a good like seventy or eight percent of my capacity, never going too high, never going too low. Instead in our outlook, but we would see jumps up

and down. And this is just to get this little portion of of grid powered. You know, if we then go to long hole mobility, you know, whether it's like long road transport or ships or airplanes industry, you start adding more and more hydrogen capacity production, which in turn requires more and more renewables. And you know, it might

be a way to get there. But at the same time we need to to keep in mind that hydrogen has a roughly sixty efficiency from electricity to hydrogen production, and then in that you need to add whatever efficiency you have on the other end, so on the use. So for example, for electricity, if you have green elect let's say you have a hundred units of green electricity going into an electrolyzer, you can expect to get around of around thirty back, which is a pretty big loss.

And I mean, you know, when you think about the fact that when are committing to zero by that means in thirty years from now, I think very few of us would have imagined that in the in the lifetime we'll ever get to zero to net zero, and so it would be weird if the challenges and changes that are ambitious policy scenario comes out with wearing a bit crazy. But really to make all of this possible, that the messages, renewables deployment needs to grow to skills that we were

struggling to think about. And if hydrogen has to play its role, we're going to need even more of those renewables. And so I think, really that's the exercise that we try to do, is it's it's all good and fair to raise ambition, but now we need to make what it looked pretty impossible not so long ago possible and we need to start like today and for that stuff

at the edge. Is it possible that technology acts is actually just a really messy mix of technologies plural that aren't economically the clearest route to the end we like to think. I think oftentimes that a lot of technologies will experience these cost of clients that we've seen in solar and we've seen in when where people actually want

to build them because they're cheaper. Maybe we don't get there, maybe not everything ends up being the cheaper solution, but that's when we're considering things on a different economic basis, and we're not taking into consideration all the costs that are associated with volatile climate and ultimately us having a

goal that we're trying to get to. Do you think that the direction of the individual countries and the Commission are willing to accept this idea that it's about the finish line isn't necessarily an economic finish line, it's a emissions finish line. I mean, I think it takes me back a little bit to that point earlier of the different cultures and and certainly each country will end up

with a mixed bag of technology excess. I think, you know, as a team, we see that, and we see that, for example, some center in Eastern European countries are still quite serious about nuclear, the UK has nuclear development, France will certainly, you know, not fully give up on the sector. So I think you'll end up with a mix. But the U is also this could active planning exercise, and there's actually a lot of sort of pure pressure but

also pure encouragement ongoing. And and now that this energy transition is on everyone's mind and that you get investors following, you've got the regulators looking at what how do we make sure all of this transition happens at a curse that isn't going to get you know, completely tank everyone's economy or take too much out of the savings of

the individuals paying for it. You do see things crystallize around the cooler or more favorable technologies fast, but hydrogen is not a cool technology or one that we talk a lot about because it's cheap. It's not cheap yet, it's just one that people look at a lot because of its potential. What I would like to add, we need that technology X, as we said earlier, kind of like we have about a decade to to start building

this instead of gas. Otherwise we might be building things twice and we're already building quite a bit of capacity for backups, so to add gas to then run for ten years and close it is really going to add

to cost. The other thing that it may might be worth adding here as a thought for technology X, is that we're obviously looking at the power sector, and yes, we are electrifying a big portion of energy used, but that doesn't mean we've managed to electrify everything, and there are still other sectors that cannot be electrified realistically at least, so it might be worth thinking that you know, the last ten percent of our electricity use will be decarbonized,

not by a technology that necessarily is the cheapest to produce electricity with, but it is the cheapest to dicarbonize some other sector, and it just happens to be a healthy byproduct that it can also produce electricity. I think a good example of this is some gas and coal plants around Europe today whose main purpose is to produce heat for industry, for um a city, and as a

healthy byproduct, also produce electricity. And you know, you see these these plants increase their utilization and efficiency similarly, uh and it's probably one of the big bets with hydrogen.

You know, you could have hydrogen essentially going into sectors that can't be electrified but that do need you know, uh, an energy molecule, and at the same time, as a healthy byproduct, you're also running your newest gas plants on hydrogen rather than on gas, which is where policy would also you know, fit in to say from twenty thirty onwards or gas plants need to be able to burn hydrogen at some point because that might be the case. And so yes, this is probably a good view for

the what technology X could be in the future. So I think I say this every time that I really look forward to seeing what is going to happen in the future. It's almost like, you know, every day I wake up and read the news and I'm like, oh, let's see how this is a all thing and whether or not some of the things that we think about are actually coming to pass. So on that, you know, just as a closing question, we took a look at this very much from a European perspective and layered that

on top of the new energy outlook. Now, I know that both of you approached this as europe specific analysts at the time that we wrote this, But if you had to, let's say, maybe we've got other colleagues listening. Now, if you had to give advice to others, what region do you want to see a policy outlook coming for? Maybe you can choose one each and I'll think the

easiest one. Joe Biden's obviously committing to Anzio power sector by but some of our colleagues they're saying that actually, when you're trying to decordnize the whole economy, necessarily so they're going really hard on the power sector. Right away. What's you're also electrifying at the same time, might be trying to do two things at the same time that they are a bit more difficult. So I would love

to see the US go next. How about you Andress, I'm gonna say, the other big elephant in the room China.

They've announced six at zero target. There are known to get things done their powerhouse when it comes to renewables, and it's going to be a very very interesting paths and I think the country as a whole might be able to take a leading position on on some new technologies to kind of like set the cost trend like Europe has been for wind and solar over the past ten years, essentially set the cost trand for some the carbonizing some other parts of the economy, and that that

would be a very interesting exercise to see what an ambitious policies and it could look like for China to maybe the carbonize even before twenty six, which anecdotally, my brother, who's in love with the country, says he keeps some time me it's it's very likely that would be the case that China will will get there before all right, Well, we'll see. I certainly plan to be around in to see whether or not that is true. No, let's uh, let's crash that finish line. On that note, thank you

very much for joining today. Andrea Sandario, thank you, thank you for having us. Today's episode of Switched On was edited by Rex Warner of Gray Stoak Media. Bloomberg an e F is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed, as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloombergunia should not be considered as information sufficient upon which to base

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