Energy Transition Digest: 2-15 September 2024

1. The Long-Awaited Expansion

China’s national emission trading system will expand at the end of this year to cover iron & steel, aluminium, and cement.

So what? The compliance carbon market is an important tool to achieve China’s decarbonization targets. ETS was designed to expand from the beginning, but the expansion was delayed because of data quality issues. Now, it’s finally happening.

Details:

• The new scope will cover ~3700 entities representing ~60% of China’s emissions, up from 2257 and 40% today.
• The first compliance cycle for the three new sectors will cover the 2024 emissions (to be reported in 2025).
• Consistent with the treatment of the power sector in the ETS, the first phase (2024-2026) will focus on ensuring data quality and familiarizing emitters with the system before tightening emission allowances from 2027 onwards.

2. UK Offshore Wind Auctions Back on Track

Nine contracts for difference were awarded to offshore wind farms in the UK’s latest allocation round.

So what? The industry is recovering from challenging years marked by project cancellations because of rising costs. Last year, no bids were submitted, and no projects were selected for support in the offshore wind sector. This year, the regulator increased funding and raised the price cap, leading to a successful outcome.

Details:

• The UK supports renewable energy projects through two-sided contracts for difference (CfD). This contract fixes the electricity purchase price for the project by compensating or clawing back the difference with the market price.
• In this year’s allocation round, CfDs were awarded to 5.3 GW of offshore wind (incl. 400 MW floating), 3.3 GW of solar PV, and 1 GW of onshore wind.
• Another change introduced in this allocation round is the so-called “permitted reduction,” where a previously selected project could resubmit up to 25% of capacity for a higher price. This was the case this year for several projects, including ?rsted 's Hornsea 3, which secured a 45% increase in CfD strike price for 1080 MW of its capacity.

3. New Uranium Enrichment Capacity Coming in the US

阿海珐 will build a uranium enrichment facility in Tennessee, US, aiming to start operation in the early 2030s.

So what? The US has imposed an import ban on enriched uranium from Russia and needs to build domestic capacity to compensate for it. Furthermore, the US government is funding procurement from new projects. Orano seems to be taking advantage of the opportunity.

Details:

• Currently, only a few companies enrich uranium for the nuclear energy industry, with Rosatom possessing more than 40% of the global enrichment capacity. Russia supplies about a quarter of the US reactor demand for enriched uranium.
• The US banned the import of Russian uranium earlier this year but issued a waiver until 2028 to avoid disruptions in reactor supply. The same legislation unlocked $2.7bn government funding for procurement of locally enriched uranium from greenfield or brownfield projects.
• Orano is already working on expanding its enrichment facility in France and now started the US project, which still needs to secure offtake agreements and pass regulatory approvals.

4. China Wants to Prevent EV Technology Export

The Chinese government strongly advised domestic EV manufacturers to avoid exporting key technologies.

So what? Chinese OEMs face increasing trade barriers with tariffs in place in the US and announced in the EU and Canada. Carmakers find themselves in a tight spot: unable to avoid the tariffs without sufficient localization levels and unable to localize manufacturing because of the home government's policy. On the other hand, EU tariffs might still be reversed – Germany, Spain, and some other countries want to avoid a trade war with China.

Details:

• China's Ministry of Commerce passed the message in a meeting with automakers, according to Bloomberg's sources.
• Chinese EV manufacturers are already busy with localization efforts in the EU: 比亚迪 in Hungary, Chery in Spain, and Zeekr in a TBD location.
• EU legislature will vote on EV tariffs in October, and the European Commission's proposal could be reversed if opposed by a qualified majority of member states.

5. Draghi Proposes Reforms to Fuel EU's Growth

Mario Draghi presented a report on European competitiveness calling for reforms to support sustainable growth.

In essence:

• The goal is to reverse the slowing growth in Europe – to increase productivity amid a shrinking population while sticking to fundamental values in a sustainable environment.
• Three focus areas: closing the innovation gap with the US and China, coordinated decarbonization efforts, and increasing security (both in a military and economic sense).
• Three barriers to action: lack of focus in policy action, wasteful use of common resources, and lack of coordination in priority areas.

Bottom line: €750-800bn additional investments annually are needed to finance the proposed measures. To mobilize these investments, the EU must simplify its rules and implement governance reforms focusing on resource consolidation and coordinated action.

Other News Headlines:

• Nasdaq and Crux collaborate for market intermediation of tax credits under the US IRA.
• Vattenfall will supply fossil-free electricity to Salzgitter AG for steel production.
• Municipality of The Hague banned advertising of fossil fuels, cruise, and air travel.