Vladimir Putin’s attack on Ukraine that started at the end of February is first and foremost a humanitarian crisis and we cannot even begin to fathom the tragedy our European neighbours are experiencing. This has to be acknowledged before talking about any secondary ramifications of this horrific event.
An energy crisis in Europe
The war in Ukraine has triggered an energy crisis in Europe and beyond, as Putin has strategically chosen to attack in the winter, when European gas reserves are at seasonal lows. This has sent TTF Gas up 631% and Brent Crude Oil up 57% vs this time last year¹. Europe relies on Russia for 40% of its natural gas and 27% of its oil imports so supply disruptions and looming import bans in Europe (the US has already banned Russian oil & gas imports), have sent energy prices skyrocketing. It also means that the further exploration of Ukraine’s significant natural gas reserves is off the table for now, especially for those located in the eastern region of the country and off the coast of Crimea.
Whilst Europe will likely be able to cope with its energy needs until the summer due to record high LNG imports, the same cannot be said for winter. The continent needs to prepare for a complete termination of Russian natural gas imports. In the short-term this means an increase in gas-to-coal switching, delayed nuclear phase-out, as well as residential and industrial demand destruction to offset at least 400 TWh/y of Russian gas². In the short-term, this will be environmentally and economically costly, with a heightened risk of recession in the next twelve months.
A catalyst for change
Despite the overall negative backdrop, there is light at the end of the tunnel. This energy crisis is a catalyst for the acceleration of renewable energy development and deployment, in particular for technologies supplying reliable, baseload energy. Why is that? Because energy independence has now become a matter of national security and consequently has been moved to the top of governments’ priority lists. This, in combination with existing climate targets and the cost competitiveness of renewables, will be the final push to move Europe away from fossil fuels altogether and further accelerate the path to net-zero.
Examples of legislative actions and proposals that have already been taken since the start of the conflict:
1. The European Commission on the 8th of March published a plan “to make Europe independent from Russian fossil fuels well before 2030**”** and to reduce its reliance on Russian natural gas by two-thirds this year³. Given the EU’s heavy reliance on Russian fossil fuels, this should dramatically accelerate the EU’s path towards net-zero relative to existing commitments (55% reduction in greenhouse gases by 2030 vs 1990, net-zero by 2050⁴). The EU has stated that “the case for a rapid clean energy transition has never been stronger and clearer”, including biogas, hydrogen production and improved energy efficiency in its core pillars to achieve this transition⁵.
2. Germany’s finance minister has “earmarked 200 billion euros ($220 billion) to fund industrial transformation between now and 2026, including climate protection, hydrogen technology and expansion of the electric vehicle charging network.”⁶
3. Germany and Belgium are both considering to extend the lifespan of existing nuclear plants.
4. Germany has drafted a proposal under its Renewable Energy Sources Act (EEG) for an accelerated deployment of renewable energy and other measures in the power sector to make domestic power generation almost greenhouse gas neutral by 2030. Aside from expansion of wind & solar, the focus is on the overall expansion of biomass, including new biomethane and CHP plants that are hydrogen-ready⁷.
5. The International Energy Agency (IEA) published a 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas. The plan suggests a “near-term push on innovation to diversify and decarbonise sources of power system flexibility”⁸.
Where does this leave climate tech?
Climate tech has a critical role to play in enabling Europe’s transition to energy independence. Europe cannot meet its goal without the development, commercialisation and scaling of new technologies, all of which will now see a further influx of public funds, which will be additional to the €1 trillion already committed to sustainable investments by the EU Green Deal⁹ and record-breaking levels of private capital in 2021¹⁰. Unprecedented political willpower also means that further supportive legislation is set to pass. Measures that have proven to be efficient in the past and that are likely to be on the agenda again are high factor match-financing, public grants to finance large proportions of pilot projects, as well as further support for research and academic institutions. All of this puts Europe centre-stage for the commercialisation and deployment of climate tech and challenges the US for its dominance in the sector¹¹.
This will be the decade of the climate tech unicorns. In particular, this is a catalyst for companies working on breakthroughs in renewable technologies that have not yet reached their full potential but can provide reliable baseload energy, be scaled relatively quickly and are on a path to become cost competitive with fossil fuels. Biogas and geothermal are good examples of such energy sources using domestic resources.
New technologies in the biogas sector double the efficiency of biogas plants and will allow them to play a key part in flexible power systems. With an infrastructure of 19,000 systems that are already available across the EU today, approx. 11GW of installed capacity can be achieved, below the price of fossil fuels, decentralised and capable of producing baseload electricity. To put this number into context, at a 60% load factor these upgraded plants could displace over a quarter of the minimum shortfall of 400TWh/y of Russian natural gas. These technologies are also “H2-ready”.
The same applies to geothermal energy. New drilling technology enables access to almost unlimited geothermal energy. Electricity generation costs of less than $20/MWh are achievable in the medium- to long-term by leveraging existing infrastructure. Lately there has been a growing interest in geothermal from the hydrocarbon industry with significant investments into new technologies. As geothermal remains the one of the few renewable energy sources where incumbent oil & gas players can contribute with significant assets and resources, a strategic bet on geothermal is the logical next step for the sector.
Other companies that are set to see significant tailwinds are those innovating in energy efficiency, sustainable heating & cooling and energy storage. On the storage side, startups working on green hydrogen technologies stand to gain immensely. Unlike blue and grey hydrogen, which use natural gas as a feedstock, green hydrogen uses renewable energy as a feedstock. The jump in natural gas prices has thus had the effect of making blue and grey hydrogen less cost competitive, with the breakeven cost of green hydrogen falling below that of the others since early march this year. This should rapidly accelerate the commercialisation of green hydrogen technologies.
But what about the risk of a recession?
The war in Ukraine has increased the chances of a recession, driven by demand destruction fuelled by high raw material costs. Yet for all the reasons cited above, in such a scenario climate tech is likely to be one of the most resilient sectors. It has the most to gain in the long-term and will provide the solution to the problem that triggered the recession in the first place. In addition, venture capital tends to outperform during a downturn due to long investment cycles and the ability to place bets into the best performing companies at better valuations.
Ironically, it was Lenin who once said that “there are decades where nothing happens; and there are weeks where decades happen.” The latter is surely true for the development and deployment of climate-positive technologies, especially those that can provide a reliable source of baseload energy as seldomly before has the West been so united and decisive in its legislative actions.
¹ Bloomberg, as of 11th of March 2022 ² https://www.bruegel.org/2022/02/preparing-for-the-first-winter-without-russian-gas/ ³ https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1511 ⁴ https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3541 ⁵ https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1511 ⁶ https://www.reuters.com/business/sustainable-business/germany-has-earmarked-220-billion-industrial-transformation-by-2026-2022-03-06/ ⁷ ttps://www.heise.de/downloads/18/3/3/5/9/0/5/7/referentenentwurf-erneuerbaren-energien-und-weiteren-massnahmen-im-stromsektor.pdf ⁸ https://iea.blob.core.windows.net/assets/1af70a5f-9059-47b4-a2dd-1b479918f3cb/A10-PointPlantoReducetheEuropeanUnionsRelianceonRussianNaturalGas.pdf ⁹ https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/finance-and-green-deal_en#:~:text=Related links-,Investing in a green future,investments over the next decade. ¹⁰ https://www.pwc.com/gx/en/services/sustainability/publications/state-of-climate-tech.html ¹¹ During the second half of 2020 and first half of 2022, US startups received nearly 65% of all global funding in climate tech. https://www.pwc.com/gx/en/services/sustainability/publications/state-of-climate-tech.html