Renewable Energy at the center of the urgent European Energy mix transition

1.???The current energy situation of Europe: offer disruption

1.1 The impact of the gas supply cut-off

Following the disruption of gas supply from Russia to Europe, the continent is facing a decrease in gas supply with limited and expensive alternatives.

In 2021, about 45% of the EU's natural gas imports came from Russia ie 155 billion m3. The war in Ukraine and the global economic recovery have reduced supply while demand is increasing, pushing gas prices above €150/MWh, well above the average of the last 8 years, while gas represents 24% of the EU energy mix (including the share of electricity from gas-fired power plants).

Production losses

Stopping Russian gas deliveries would have divergent consequences in Europe. According to an IMF study, a 70% drop in Russian gas deliveries can be overcome, but a complete halt in imports could lead to shortages representing 15 to 40% of annual consumption in some countries, with a dramatic impact on GDP. Alternatives to Russian gas, such as gas from Azerbaijan, are limited in number and capacity due to the lack of sufficient transportation infrastructure. Europe is considering alternatives such as Liquefied Natural Gas (LNG) imported from the United States and Qatar, which is causing a sharp increase in its price.

Gas consumption is cyclical within the year, but its share has steadily decreased in recent years to the benefit of renewable energies. Faced with the reduction in Russian gas deliveries and the risk of shortages, the EU countries (except Hungary) have committed to reducing their gas consumption by 15% compared to the average of the last 5 years between August 1, 2022 and March 31, 2023. The EU's gas consumption reduction target thus seems realistic. Several countries have already significantly reduced their gas consumption (forced to do so), such as Poland, the Netherlands and especially Germany.

Germany and Italy remain the weak links in the European gas market among the major countries (around 150 days of consumption covered). European solidarity therefore appears to be essential here. Nevertheless, Germany seems to be in a better situation than Italy insofar as it has already reconstituted part of its stocks and reduced its consumption by 8%. Above all, Germany can expect to be able to start importing LNG at the beginning of 2023 if it completes its floating terminals in time. In total, over H1 2022, EU gas consumption is down by around 10% year-on-year, with a sharp drop in recent months, particularly for Germany.

1.2 The impact on the European electricity market

The price of gas is now central to the pricing of electricity in Europe.?

Companies are particularly affected by this rise in electricity prices despite the unprecedented efforts of European states to compensate for the rise in costs, which in the long term requires an overhaul of the electricity market in Europe and measures for energy sobriety. Combined with the increase in the price of gas, electricity prices in France are currently at 500?€/MWh vs. an average 2001-2020 of c.40€/MWh.

The EU-27 collectively spent?€314 billion to limit electricity price increases, reduce energy taxes or provide subsidies to taxpayers, according to a study that analyzes the period from September 2021 to September 2022.

2.???Accelerating corporate demand for green electricity

Under pressure from regulations, investors and consumers, and now from rising electricity costs, companies are transitioning their electricity supply through power purchase agreements with renewable energy producers. These contracts are an opportunity to reduce and lock in costs over a given period of time at a price negotiated in advance.

Corporate PPA (corporate power purchase agreement) prices are rising in line with underlying trends but remain below market electricity prices.

Despite another turbulent year following COVID with increased prices and price volatility, corporate PPA activity in Europe in 2021 led to a 58% growth in number of agreements and 42% growth in contracted capacity since 2018. In 2021, 11.2 GW of corporate PPAs enabled the commissioning of new renewable electricity capacity through more than 140 agreements.

Amazon is the largest offtaker of Corporate PPAs in Europe, with 16% of the capacity contracted in 2021 and 30% of all European Corporate PPAs. Corporates occupy the top 3 places buyer rankings, with Alcoa and BASF alongside the IT sector with over 2GW contracted. The 20% annual growth in the IT sector's electricity consumption should ensure continuity of this trend.

Regarding PPA prices, they have seen a record increase since September 2021. The gas crisis has escalated into a broader energy crisis, causing price uncertainty and market volatility to soar to stratospheric levels in August 2022. In Germany and France, one-year electricity contracts exceeded €1,000/MWh for the first time, while they were trading at over?€300/MWh in the Netherlands.

However, it seems that the intervention in the electricity markets, recently approved by the European Commission, has led to a significant drop in prices. In Germany, for example, prices have fallen below?€500/MWh. In contrast, 10-year PPA prices for solar, onshore wind and offshore wind have consequently doubled this year, reaching an average of?€107.80/MWh. Volatility and tension in the energy markets are expected to continue this winter, with gas and electricity prices remaining high in the short to medium term.

3. Renewable energy as a sustainable response to the energy crisis

3.1 The European Commission’s impetus via the Repower Act

REPowerEU was announced on May 18, 2022 in response to the Russian crisis to diversify gas supply sources, accelerate the development of renewable energy and increase Europe's energy efficiency and independence from unreliable suppliers and volatile fossil fuels. It includes financial and legal measures to build the new energy infrastructure and systems that Europe needs and make Europe independent of Russian fossil fuels well before 2030, given Russia's invasion of Ukraine.

Full implementation of the Commission's "Adjustment to Target 55" proposals would reduce annual fossil fuel consumption in Europe by 30%, or 116 billion cubic meters, by 2030. With the measures in the REPowerEU plan, a reduction of at least 155 billion cubic meters of fossil fuel use is targeted, which is the volume imported from Russia in 2021.

Renewable energy is the cheapest and cleanest energy available and can be produced domestically, reducing our energy imports. REPowerEU will accelerate the green transition and stimulate massive investments in renewable energy to enable industry and transportation to replace fossil fuels more quickly to reduce emissions and dependencies. Ultimately, the transition to clean energy will help drive down energy prices and reduce import dependence.

To realize RePowerEU, additional investments of?€210 billion?are needed by 2027 to phase out Russian fossil fuel imports, which currently cost European taxpayers nearly?€100 billion?per year.

3.2 The competitiveness of renewable energies

In addition to the support of the European Commission and the increased demand of companies for green electricity, the competitiveness of renewable energies ensures them a sustainable future. As the current geopolitical context leads to a sharp rise in the cost of gas and oil and consequently in the cost of electricity , the need for Europe to achieve energy independence is becoming unavoidable. Solutions aimed at producing clean and cheap energy locally are a priority for public authorities and industry.

Improved technology performance and availability levels, lower construction costs thanks to a consolidation of the industrial value chain and optimized operating costs have made renewable energies more competitive. They are profitable with a resale price of electricity between 30 and 50?€/ MWh depending on the country and technology , compared to 500?€/ MWh currently on the wholesale electricity markets in Europe. According to BloombergNEF's estimate, the global production cost of utility-scale PV and onshore wind has fallen to $45 and $46 per megawatt-hour (MWh), respectively, by H1 2022, a reduction of 86% and 46% since 2010. The costs of new onshore wind and solar projects are now 40% lower than new coal and gas plants. The latter cost $74 and $81 per MWh, respectively. More countries than ever are making renewable energy technologies their first choice. By 2021, 78% of the world's nations will have installed more clean energy (including hydropower) than fossil fuels.As a result, more and more private counterparties (industrials, aggregators, energy providers) are signing long-term power purchase agreements with renewable power plants at below-market prices.

4. The Infrastructure Transition investment opportunity through debt financing

The European Commission has estimated that it would require EUR 175 to 290 billion per year more to turn the EU into a net-zero greenhouse gas economy in 2050 which represents a sizeable investment opportunity. The context of high energy prices and the urgency of the European energy mix transition supports the growth of companies and projects in the renewable energy and energy transition sector.

It creates a sizeable, diversified and immediate source of investment opportunities, especially via debt instruments that represent 60% to 85% of financing source of infrastructure projects. Infrastructure debt offers attractive risk/return features in the current volatile market environment, especially energy transition assets.

Decorrelation and credit quality:?Infrastructure debt has historical lower correlation with economic cycles, limited default rates, and higher recovery values compared to other debt and asset classes due to secure financing, as estimated by S&P.

Natural hedge against rising inflation and interest rates?through contracted revenue and project cost indexing formulas and hedge against rising interest rates through floating rate financing.

Attractive risk/return?profile compared to :

Other debt categories?: below is the comparison of Infrastructure Debt rating to the EUR Corporate yield indices

Infrastructure Equity?at equivalent rating: The yield on junior debt is close to the yields of Infra Equity Core, while having an inherent BB credit profile with a positioning on floating rate financing that captures rising interest rates. At the same time, target yields in the Infra Equity market remain under pressure due to the high volume of dry powder:

Oct 2022

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