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The greening of Europe's fuel mix will continue, driving prices
lower when renewable availability is high. On the policy front, the
discussion of Europe's Green Deal and 2050 climate target will
dominate the coming years. Any agreement to boost the 2030 climate
ambition will have a deep impact on the power market in the
2020s.
Europe's fuel mix is changing. Europe's energy
transition is unfolding rapidly: coal capacity continues to fall
and renewables additions remain strong. Low gas prices, supported
by a moderate carbon price, will continue to pressure coal
production across Europe. The drop of coal capacity has been very
marked in the UK where coal capacity has fallen from an all-time
high of 30 GW to 6 GW in 2020, an 80% decline. The drop is even
more stark in terms of generation; this century coal generation
peaked in 2006 at 150 TWh and generated just 7 TWh in 2019, marking
a 95% decline. Recently Drax, once the UK's largest carbon emitter
in power, announced that its remaining two coal-fired units will
close in 2022—ahead of the phase-out deadline.
At the same time, renewable additions will continue at a
sustained pace: solar capacity is expected to grow by 15 GW,
onshore wind 10 GW and offshore wind 2.8 GW in 2020. IHS Markit
expects that the Spanish and French markets will remain dynamic;
but a question mark hangs over Germany's onshore wind prospects and
more generally, local opposition is creating a challenging
environment for onshore wind deployment.
Growing weather risk in the wholesale market.
As renewable capacity increases, so does the impact of weather
variation on wholesale prices: periods of high solar or wind
production are increasingly pressuring daily prices. When demand is
low, prices are turning negative. This was illustrated in 2019 when
prices in German fell below zero during 211 hours up from 134 hours
in 2018. For the first time in the UK, on one December day, the day
ahead price was negative. February 2020 was unusually windy, as a
result, the spot price for Germany averaged 21.9 €/MWh, half what
it had cleared at in February 2019. Windy or sunny weather are now
major drivers in the market, alongside commodity prices. As
renewable penetration grows we expect it will result in a
decorrelation of annual wholesale prices from the cost of producing
power with thermal plants.
Figure 1: Share of renewables, EU28
Europe considering higher 2030 targets. In 2020
Europe aims to agree to achieve carbon neutrality in 2050. This
bold target implies raising the current 2030 ambition. Currently,
the EU aims to reduce emissions by 40% by 2030 compared with 1990.
To reach a climate neutral target in 2050, a higher climate target
will be required for 2030. The European Commission is due to assess
the current path that Europe is on and make a proposal to increase
the 2030 greenhouse gas (GHG) target in September 2020, followed by
a proposal to align the GHG sub-targets: the carbon market, the
emissions ambition outside of the carbon market, the renewable and
the energy efficiency ambition in June 2021. The Commissions'
proposals will need to be reviewed and approved by the heads of
state and the European Parliament, a process known as Trilogue
which can take several years.
While Europe is close to a consensus on a net zero carbon
ambition for 2050, agreeing a bolder 2030 target is still far from
given.
Coralie Laurencin is a senior director of Gas, Power,
and Energy Futures at IHS Markit.
Sylvain Cognet-Dauphin is a senior director of Gas, Power, and
Energy Futures at IHS Markit.
