EU (and UK) faces headwinds on higher hanging decarbonisation fruits

EU is ontrack to fully decarbonise power by 2050

The EU is making good progress and remains the leader on decarbonisation. Focus over the past decade has been on renewable power installation which has been a massive success - only 61% of EU electricity was from renewable sources in 2022 with only 39% from fossil fuels. Power generation accounted for c.25% of emissions in 2021. With continued roll-out of renewables, which is now cost competitive with fossil fuel power, the EU is on target to decarbonise its power grid by 2050.

Higher hanging fruit

Next step is to decarbonise building emissions (36% of EU emissions) and transport (25% of EU emissions) - these are more difficult to decarbonise, not least because of the direct impact on end use consumers and businesses in terms of cost, retrofitting and replacement.

Whilst the cost of power decarbonisation was largely invisible to the end user (factored into power prices and paid over time through customer bills), decarbonisation of building emissions and transport has immediate upfront costs. In a period of high inflation, the appetite of consumers to take on extra expenses is extremely low.

In fact, consumers have made clear their unwillingness to bear energy transition costs as witnessed in the support for right wing political parties opposing green transition and advocating for lower consumer costs.

Dilution of green policies for the electorate

Europe has seen a wave of policies or proposals being diluted to keep voters on side including:

• UK deferring ICE vehicle ban from 2030 to 2035
• Germany's plans for building insulation standards have been put on hold (although will likely be revisited), and new heating systems only have to be 65% renewably by 2026-28
• France has drop the proposal requiring a blanket ban of gas boilers from 2026

Although the long-term operating costs of greener technologies are low, the upfront capital cost is high and being borne by consumers. The EU is trying to make this less painful with generous grants and subsidies.

German troubles

German domestic political assuaging is resulting in a new budget that could reduce money available for green spending by c.€20 billion. This could delay a number of key initiatives including the establishment of a €20 billion hydrogen grid and €50 billion industrial decarbonisation support programme.

Germany could therefore end up relying more on fines and regulation rather than incentives, which will place additional burdens on households and the private sector. Germany's fiscal balancing act is not unique and other countries in Europe will face or are facing similar issues.

Despite headwinds, sustainability policy is advancing

All elements of the Fit for 55 legislative package have been agreed (55% emissions reduction by 2030) and the corresponding legislation will be finalised ahead of European Parliament elections in June 2024.

RED III was amended to increase the renewables target to 42.5% of the energy mix from 40% previously. RED III came into force on 20 November 2023.

The ETS scheme is being expanded to cover more sectors.

Despite headwinds, sustainability policy in Europe is slowly but surely advancing. 

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Chart of the week: Bilateral Hydrogen Trade Agreements and MOUs

 

Source: IRENA, as of November 2021

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Jersey Oil & Gas next in line to be Canned?

 

Following the UK Government's rejection to approve the Cambo development in the West of Shetlands, leading to Shell's exit from the field, and the scrapping of the Rosebank development by Equinor, it is clear that the UK Government is increasingly turning its focus away from North Sea Oil & Gas. The UK Government is laser focused on the Energy Transition and is supporting the renewable energy development, hydrogen and carbon capture.

Against this backdrop, it is highly possible that the political (and public) support for Jersey Oil & Gas to develop its North Sea portfolio will not be there. And even Jersey Oil & Gas' attempt to "greenify" its developments through electrification will not be enough to keep the project alive against the country's accelerating green agenda.

Beyond this, the company faces two other key issues:

• Attempts to find a farm-in partner to share risk has failed - an extensive search process was run last year with no success. No-one is looking to participate in such a large, billion dollar development with the political uncertainty that lies ahead
• Financing is becoming increasingly difficult - the original plan involved seeking bank financing for the development, but this will be challenging as more banks back away from the sector

The chances of a revival for Buchan and Verbier are viewed as very slim.

Disclaimer: this is an opinion piece by OGInsights

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SSE and Equinor developing plans for hydrogen storage in West Yorkshire

 SSE Thermal and Equinor are developing plans for one of the world’s largest hydrogen storage facilities at their existing Aldbrough site on the East Yorkshire coast. The facility could be storing low-carbon hydrogen as early as 2028.

The existing Aldbrough Gas Storage facility, which was commissioned in 2011, is co-owned by SSE Thermal and Equinor, and consists of nine underground salt caverns, each roughly the size of St. Paul’s Cathedral. Upgrading the site to store hydrogen would involve converting the existing caverns or creating new purpose-built caverns to store the low-carbon fuel.

With an initial expected capacity of at least 320GWh, Aldbrough Hydrogen Storage would be significantly larger than any hydrogen storage facility in operation in the world today. The Aldbrough site is ideally located to store the low-carbon hydrogen set to be produced and used in the Humber region.

Hydrogen storage will be vital in creating a large-scale hydrogen economy in the UK and balancing the overall energy system by providing back up where large proportions of energy are produced from renewable power. As increasing amounts of hydrogen are produced both from offshore wind power, known as ‘green hydrogen’, and from natural gas with carbon capture and storage, known as ‘blue hydrogen’, facilities such as Aldbrough will provide storage for low-carbon energy.

Equinor has announced its intention to develop 1.8GW of ‘blue hydrogen’ production in the region starting with its 0.6GW H2H Saltend project which will supply low-carbon hydrogen to local industry and power from the mid-2020s. This will be followed by a 1.2GW production facility to supply the Keadby Hydrogen Power Station, proposed by SSE Thermal and Equinor as the world’s first 100% hydrogen-fired power station, before the end of the decade.

SSE Thermal and Equinor’s partnership in the Humber marks the UK’s first end-to-end hydrogen proposal, connecting production, storage and demand projects in the region. While the Aldbrough facility would initially store the hydrogen produced for the Keadby Hydrogen Power Station, the benefit of this large-scale hydrogen storage extends well beyond power generation. The facility would enable growing hydrogen ambitions across the region, unlocking the potential for green hydrogen, and supplying an expanding offtaker market including heat, industry and transport from the late 2020s onwards.

Aldbrough Hydrogen Storage, and the partners’ other hydrogen projects in the region, are in the development stage and final investment decisions will depend on the progress of the necessary business models and associated infrastructure.

The Aldbrough Hydrogen Storage project is the latest being developed in a long-standing partnership between SSE Thermal and Equinor in the UK, which includes the joint venture to build the Dogger Bank Offshore Wind Farm, the largest offshore wind farm in the world.

Stephen Wheeler, Managing Director of SSE Thermal, said: “We’re delighted to be announcing our plans for the development of this world-leading hydrogen storage facility with our partners in Equinor, which would play a vital role in creating a low-carbon hydrogen economy in the Humber and beyond. By delivering large-scale hydrogen storage capacity, we can utilise hydrogen to decarbonise vital power generation, as well as heavy industry, heat, transport, and other hard-to-reach sectors, safeguarding and creating crucial jobs and investment across the region.”

Grete Tveit, Senior Vice President for Low Carbon Solutions at Equinor, said: “Hydrogen will be crucial for the UK to reach its net zero ambition. That’s why we are pleased to be working together with SSE Thermal on developing plans to store low-carbon hydrogen at the Aldbrough site, bringing us and our partners in Zero Carbon Humber closer to our joint ambition to support the Humber region to become the UK’s first net zero carbon cluster. Projects such as these are critical for efforts to reaching the goals of the Paris Agreement and contributing to the UK’s goals to become a world leader in low carbon.”

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European gas prices hit decade highs

 

NBP is at 75p/therm (~33% increase YTD)

TTF is at €30.4/MWh (~65% increase YTD)

Despite the sharp rise in European gas prices and arbitrage opportunity for US LNG into Europe, LNG cargoes are being pulled to Asia where prices remain elevated and fetching premiums.

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Norway's offshore electrification grid

The Utsira High network powers a number of key fields on the Norwegian Continental Shelf including:

• Johan Sverdrup (Equinor)
• Edvard Grieg (Lundin)
• Ivar Aasen (Akerbp)
• Gina Krog (Equinor)
• Gudrun (Equinor)
• Sleipner (Equinor)

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BP close to selling Shearwater

NEWS: BP is rumoured to be close to finalising a sale of its 28% stake in the Shearwater field to Tailwind Energy, a North Sea explorer headed by ex-CNOOC veteran Steve Edwards and financing to be obtained from shareholder Mercuria.

BP has previously agreed to sell the asset to Premier Oil in 2020 but that deal fell through as a result of the collapse on oil prices and COVID-19. Premier Oil had also agreed to buy BP's Andrew asset at the time.

BP is also divesting the Andrew asset and it is understood that is being sold to another party.

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