Electricity Market 2023 - Technology Developments

What have been the main developments of the supply and demand sides?

Let‘s start with the demand. Overall period of negligible economic growth and still-high inflation (3.6% as of Nov’23) are some of the challenges that drove the demand in the EU to go down by 15-20% vs. pre-crisis period. The decline was mostly observed from the industry while the response of residential demand has been limited. Overall these were smaller businesses that took the largest hit as a result of the crisis that needed in Q1 2023.

?RES on the rise - but not without complications

In 2023, the strong renewable generation trend continued while the demand for coal and gas kept declining. At least in one way, Europe can pat itself on the shoulder this year: its generation from renewables outstripped generation from fossil fuels, 43.5% vs. 32% (or 1032 TWh vs. 760TWh):

Notably, 2023 was the first year in Germany and the Netherlands that renewables generated more electricity than fossil fuels – Energiewende turning from a narrative to reality?

New PV installation has been happening at breakneck speed with over 12 GW installed in DE alone in 2023 reaching about 80 GW! (Compare with an interesting parallel trend: cumulative installed storage in DE reached 7.38 GW by the end of 2023)

?So the sun is shining of the solar industry, what about wind?

Unlike PV, wind industry has been having in bumpy ride in 2023.

Onshore wind projects kept struggling both with grid connection bottlenecks ?and land permitting, which would often get rather political and take several years. ?Their offshore counterparts‘ woes were more multi-faceted, ranging from supply-chain and technical issues to the financing challenges driven by an increased cost of capital. The industry‘s struggles were particularly acute over summer.

So what happened and how bad is it? While the industry is experiencing a large political push to build more and bigger, the supply chain issues and downward cost pressures created a pronounced mismatch between the ambition and reality. In the effort to reduce costs to face up to extreme competitions, several manufactures‘ wind turbine components revealed technical issues, which lost Siemens alone over 2 billion euro.

?The construction costs increased by about 50% over just 2 years! The increasing cost of capital and of the main materials such as steel and copper, meant that major offshore wind project developers were putting their projects on hold or attempting to renegotiate their contracts. Prominent examples are Vattenfall‘s offshore farm in the UK and Orsted project in the US. For the UK, rising costs meant that the latest auction didn‘t receive any bidders due to too low a price cap.

While industry experts argue that these trends are temporary, they do affect the investment climate – not in a good way. On the positive side, EU COM‘s Wind Power Action Plan announced in October, should hopefully provide the much needed policy support and accelerated permitting.

The parallel development was extremely high payments for leasing rights, e.g. in DE and DK. In DE, the developers, BP and Total Energies, will shell out over 12 billion euro for the total of 7GW in the 2023 lease auction. This, however, falls short of a trend: some of the largest developers are securing a large market share in the offshore sites anticipating supply challenges expected to increase by 2030. In addition, experts say, the business case is improved by the German TSOs shouldering high costs of grid connection.

While wind development is expected to slow down, solar industry is likely to be next. An important aspect to keep in mind is that the pace of wind and PV development has an impact on the business case for flexibility. Not only does it affect market prices, it also one of the main drivers of balancing and congestion management needs.

Speaking of flexibility…

As to new sources of flexibility, battery storage got a push in several EU countries facilitating new investments:

• In Greece, first battery storage auction in August making it an increasingly attractive market: over 400 MWh of storage were awarded in the first round to 7 bidders (out of 93 participating bids!) showing a great interest in the technology.
• Spain’s government approved a regulatory framework for state support of innovative storage projects, such as standalone batteries (at both transmission and distribution levels), co-located battery and RES projects as well as innovative thermal storage technologies. According to the Royal Decree of July 2023, Auction-based aid for a standalone-storage project, for example, can reach max. Of 50 million euro.
• In Italy, the ?battery support mechanism was ratified in November this year in order to enable the Fitfor55 scenario for the country. First auctions are expected in 2024-2027, according to Terna. To a large extent, the resolution by ARERA was driven by the need to create a buffer for Italy‘s high RES shares. In 2023 alone, 5 more GW of wind and PV generation came online. Up to 71 GWh battery storage are expected to be auctioned by 2030, giving the battery industry a strong push.

EVs are also experiencing a rapid uptake: in 2023, full electric cars reached 14.3% of all passenger cars. Notably, this year for the first time, every second purchased car was electric or hybrid. An interesting trend is also that was Belgium that experienced the highest rise of EV sales of 150% (!) making it one of the largest EV markets in Europe.

As to other distributed energy technologies, heat pump sales were boosted across the EU, among others, due to the high gas prices in 2022. The trend continued into 2023 but then declined substantially in most countries in the second half of 2023 - with Germany being the only exception. According to EPHA, one of the main culprits of the decline were ambiguities related to policy and subsidy regimes.

What about conventional generation technologies?

April 15, Germany phased out its last 3 nuclear power plants – yet continues importing nuclear energy from France. Inland nuclear energy covered about 6% of Germany’s power consumption and almost 10% in 2022 as French nuclear was down in the same period. The total installed capacity of the last nuclear power plants, Isar 2 (3950 MW), Emsland (1406 MW), Neckarwestheim 2 (1400 MW) was about 6.8 GW. In 2022 they jointly produced 35 TWh.

Thanks to the energy crisis, the nuclear power plants got one bonus year to avert a full-blown supply crisis at the time when much of the French fleet was in maintenance. Recent survey showed that a bit over half of the German population supported prolonging the life of these plants.

Across the border, EDF managed to repair 11 out of 16 reactors in 2023 and produce around 300 TWh in 2023 or 37.6 TWh more than 2022.

In the meantime, Germany extended the lifetime of several of its coal-fired power plants designated for its strategic reserve. The assets of Uniper and ENBW will remain online until 2031 to address potential supply challenges.

What about gas? As the EU has successfully managed to diversify its supply pool, NL closed the last EU gas field in Groningen due to concerns of seismic activity – as of October 1st2023 – during the exploration peak in mid- 1970s, it was producing as much as 85 bpm annually, it went down to about 40-50 bpm in 2010s and declined to a few bpm by 2020s. A symbol of the changing times and EU‘s overall energy strategy.

In the next installment, I‘ll look into what happened on the wholesale markets in the meantime.

*the images of the cover were generated by DALL-E