Large-scale joint action by Europe
Globally many governments have chosen to use Covid-related stimulus packages (already totalling $15trn) to promote clean energy as well as economic recovery. The EU has dedicated 30% (€550bn) of its support to green initiatives over seven years. This includes a target of a 50-55% cut in emissions by 2030 compared with 1990 levels. The fact that low-carbon stimulus programmes create relatively more jobs helps to support this approach.
Shift in US policy on climate change
US President Biden’s administration has adopted a far more pro-active approach to the environment and climate change, including bans on new O&G leases and the ambitious aim of the US power sector being carbon pollution-free by 2035.
A package of measures is aimed to cut greenhouse emissions from transport and encourage a move to electric-only vehicles, although there is no deadline for this as yet. The Biden administration has committed to historic investments of $400 billion in the next 10 years for renewables investment and innovation in the sector. The recent Leaders Summit on Climate initiated by the US has emphasized a call for action and raised the expectations of a joint ambitious approach at the Glasgow UN Climate Change Conference later this year.
“The Biden administration represents a radical shift towards taking global action on climate change that will affect the international climate policy agenda,” says Varinia Radu, Head of Oil & Gas for the CEE region at CMS.
“This is seconded by the EU’s recent resolution backing the implementation of a Carbon Border Adjustment Mechanism and a bold ‘Fit for 55’ by 2030 set of policies that are likely to put an expensive carbon penalty on the carbon-intensive industries and will likely influence existing trade schemes.”
There is growing recognition of the potential for hydrogen as a clean energy source for transport, heating and industry. The fact that it can be transported by a variety of methods and is relatively easy to store makes hydrogen an attractive alternative to fossil fuels.
“Using hydrogen is not new,” says Dalia Majumder-Russell, Partner specialising in renewables and energy transition projects at CMS. “The Olympic torch for the Tokyo Olympics is powered by hydrogen. So use of hydrogen has been proven. What’s new is making use of low-carbon hydrogen mainstream. It is a long journey for a new process like this to become established – it took 10 years for solar PV to make inroads into the electricity markets. However, over the last 12 months the policy space around low-carbon hydrogen has certainly woken up. The EU published a hydrogen strategy in 2020, and Hydrogen Europe has been set up as a new trade association to represent the European industry and R&D players looking to support the roll-out of hydrogen and fuel cells technologies.”
“The key challenge now is to create an interface between the impressive development of renewables and a storage system that can solve the problems involved in using such energy for vehicles and aircraft,” says Holger Kraft, a CMS partner specialising in corporate M&A and energy infrastructure.
The majors are already investing in this sector. For example, bp is working with Orsted to build a 50MW electrolyser and associated infrastructure at bp’s Lingen Refinery in Germany, and Repsol is developing new technology, photoelectrocatalysis using electricity to convert solar power and water into renewable green hydrogen.
Germany is taking a lead with hydrogen just as a generation earlier it built out its solar generating capacity. The country has opportunities to connect hydrogen with clean energy, and energy companies are keen to build out their hydrogen footprint.
“It is impressive how solar power has changed in Germany over the past 15-20 years,” explains CMS’s Kraft. “It started with a high tariff that encouraged investment and also stimulated the development in China of manufacturing to meet that demand. Hydrogen needs something similar over the next decade, with developments in both cost and efficiency. Based on what happened with solar, there are reasons for optimism.”
The growing interest in hydrogen is not limited to Europe. In Asia-Pac, Australia has a huge capacity to produce hydrogen (both blue and green) and Japan, which is more advanced in the application of hydrogen technology, is keen to buy it. As with solar power, China is expected to become a manufacturer of cheap and fast hydrogen-related technology. Perhaps unsurprisingly, there is even interest in hydrogen in the Middle East where - although there is no shortage of oil - solar power can offer ways of producing green hydrogen and managing its intermittency.
Further cost declines in renewables
The significant decline in the cost of alternative energy generation technologies continues to boost the take-up of renewable energy. Wind and solar are now cheaper than more traditional electricity sources thanks to a combination of decreasing capital costs, improving technologies and increased competition. This has underpinned many O&G majors’ strategy of integrating renewables into their own operations as well as investing outside their traditional business.
The majors’ experience is already very varied across the range of renewable technologies. Shell has a carbon capture venture in Canada and is buying suppliers for electric vehicles. Repsol and Total have experience in operating windfarms and Repsol has a 335MW wind power project in Aragon.
“There have been several days in the UK now with no electricity generated from coal,” said CMS’s Majumder-Russell. “Solar and onshore wind are at times the cheapest source of energy in the UK and several other European jurisdictions, and on occasion electricity prices in the UK have actually turned negative i.e. producers have to pay to have their power taken by the grid!"
“The O&G majors are very keen to get involved in offshore wind. In the latest offshore wind leasing round some areas were keenly contested, for example in the Irish Sea off Liverpool. Consortia led by bp and Total secured more than half of the 8GW that was being auctioned. But the majors are paying high prices to access those opportunities and the less experienced are partnering with more experienced players. An example of that is bp’s purchase of a stake in Equinor’s offshore wind projects on the East coast of the USA, generating enough power for 2 million homes.”