Energy shock unleashes EU investment in energy independence

Companies operating on solar, wind, green hydrogen and LNG will benefit from infrastructure investments.

Key Point

  • The war in Ukraine caused an energy shock. The EU responded by planning to reduce Russia’s dependence on oil and gas
  • The plan will reduce Russia’s gas imports by two-thirds in 2022 and accelerate the transition to green energy.
  • Companies operating on solar, wind, green hydrogen and LNG will benefit from infrastructure investments.Nuclear power helps fill part of the energy shortage
  • We remain positive about the role of industrial metals as a portfolio hedge against sustainability, infrastructure and inflation.

Russia’s invasion of Ukraine will change the European Union’s energy policy. The block promised to reduce Russia’s reliance on resources and accelerate its transition to alternative energy sources. This initiative will impact renewable energy, liquefied natural gas (LNG) value chains, utilities, and companies operating in industrial metals.

Europe needs an urgent need to diversify its energy supply. In 2021, Russia will be the EU’s major supplier, accounting for 35% of EU gas imports and about 30% of oil imports. The supply turmoil in 2006 and 2009, and the annexation of Russia’s Crimea in 2014 surprised European policy makers. This does not prevent Russia’s gas imports from steadily increasing. Prices have risen due to the invasion of Ukraine, and Europe is facing an energy bill equivalent to about 8% of gross domestic product (GDP).

“We must be independent of Russia’s oil, coal and gas,” wrote Ursula von der Leyen, President of the European Commission. The process of diversification is underway. On February 22, Germany suspended the final approval of the Nord Stream 2 gas pipeline connecting Russia and the EU. More recently, the March 8 report on energy independence, entitled “REPower EU,” outlines the EU’s ambition to reduce gas imports from Russia by two-thirds within a year. This will make the region independent “well before 2030”.

By 2020, Russia had exported 170 to 190 billion cubic meters (B cm) of natural gas annually to the EU. The plan aims to remove a total of 155 Bcm worth of Russian fossil fuels from the energy network, equivalent to about 310. Billion euros. This amount is about 2% of Europe’s GDP, but about a quarter of Russia’s economy.

This plan will affect all energy markets. Germany is currently considering reopening coal-fired power plants, but Belgium has postponed the phasing out of nuclear power.

Improving the energy efficiency of a home can save 14 Mmc and even 4 Mmc by installing solar panels and heat pumps. In addition to renewable hydrogen storage, the EU will acquire an additional 10 Bcm via other pipeline sources and the equivalent of an additional 23.5 Bcm via new wind, solar and biomethane energy capacities. I want to get.

Limited supply of natural gas

The most important development is on LNG, and the EU plans to replace half of Russia’s gas supply with other sources. New investments in LNG are good news for suppliers, carriers and companies involved in building infrastructure. The EU hopes to replace about 50 Bcm of Russian gas with LNG by the end of 2022.

This plan seems ambitious. The International Energy Agency estimates that there is an additional 20 Bcm in the global market. LNG supply is growing at around 5-6% annually, and prices are set to remain high until 2023 as buyers compete for limited supply. In particular, the United States, which currently accounts for only 15% of the global market, is expected to make significant profits, as do suppliers from Africa and the Middle East. Qatar already plans to increase its LNG export capacity.

On March 20, Germany reached an agreement with Qatar to import LNG. This allows German energy companies to start negotiations with Qatar without specifying the amount available. Qatar exported 106 Bcm of LNG in 2020. Germany, which currently does not have a facility to convert LNG to gas, has just approved the construction of two terminals of this type.

Green transition

The EU policy shift also supports the transition to green energy. Wind and solar energy costs have already fallen sharply before the conflict, making them even more favorable compared to current gas prices.

High prices for industrial metals and labor, and supply chain issues are limiting new construction projects. In other areas, the crisis has been forced to change. Germany, for example, seems ready to relax restrictions on the development of new wind farms.

Infrastructure spending

New energy and new sources of funding can help address high infrastructure costs, especially for underprivileged EU member states. As in the past, the crisis has proven to be a catalyst for European blocks. On March 10th and 11th, European leaders discussed the idea of ​​issuing bonds to fund energy and defense spending. A precedent was set during the Covid crisis. In 2020, the Commission issued a “social bond” whose proceeds were returned to member states to help them fund partial unemployment plans.

Energy-intensive industries such as electrification and renewable hydrogen infrastructure will attract spending in addition to the EU Green Deal and the Next Generation Recovery Fund, which aim to boost post-pandemic recovery. France has already invested in energy refurbishment of buildings, Germany will invest in electrical mobility, and Spain will invest in public transport, renewable energy and smart grids.

Nuclear?Yes, please

There are no existing energy sources or savings that can compensate for the total loss of Russia’s gas flow, but much attention has been paid since the invasion of nuclear power in Europe. The need to separate the continent from Russia’s gas has frozen discussions about its future. In January, the European Union changed the classification of investment activities to include nuclear and gas in the “green energy” category.

Nuclear power is not a short-term solution. Construction and commissioning of a new facility can take up to 10 years. Europe’s total nuclear energy production is now equivalent to 90 Mmc of gas, or 23% of Europe’s electricity in 2019, about half of which is produced at the French site. If European power plant utilization rises and countries cancel their power plant shutdown plans, the EU could produce an amount equivalent to about 13 bcm of additional nuclear energy.

Industrial metal

Green electrification is also an important part of the EU’s energy program, especially for home heating, which accounts for more than 40% of Europe’s gas consumption. Sustainable heating, industrial batteries, inverters, transformers and electrical cables all benefit from technological advances in photovoltaic panels, air heat sources, geothermal heat pumps, and improvements to the “smart grid.”

We have long been positive about industrial metals and these policy changes will drive demand for copper and nickel used in batteries and electrification. They play an important role in the transition to sustainable energy and provide a hedge against inflation.

The share of European renewable energy companies has risen for the first time since the conflict in Ukraine, supporting its reputation. Investors need to be more selective and rigorous as these stocks become more expensive. However, given the potential for additional government spending, earnings are expected to be revised upwards. We support developers who are active solely in renewable energies and producers of components for solar and wind products. In the field of wind energy, offshore equipment is experiencing strong growth and tends to benefit manufacturers of large turbines. In the field of solar energy, we support new panel technologies, especially nanomaterials, or elements that can be directly integrated into roofs and windows.

The EU’s emergency response plan provides some support, but remains neutral to the utility sector as it faces price freezes to protect consumers from high energy prices and rising interest rates. ..

Russia’s aggression not only reforms Europe’s energy policy, but also its defense strategy. French economist Jean Pisani-Ferry estimates that public spending aimed at increasing military and energy independence could reach € 175 billion in Europe’s total fiscal response in 2022 alone. It is.