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May reports highlighted the power crisis in South Asia, Europe's
efforts to mitigate the impacts of the Russia-Ukraine conflict, and
the continued growth in renewables.
South Asia power crisis
South Asia is facing an energy crisis with power cuts of more
than 12 hours in Sri Lanka and Pakistan; rationing of coal and
natural gas to industries in India, Pakistan, and Bangladesh; and
price spikes and supply shortages of petrol/diesel and natural gas
impacting transport and household sectors across the region.
According to the IHS Markit Insight "Looming energy crisis in
South Asia: Global energy crisis and economic/political discord
adding to the woes", the power crisis is a result of legacy
issues of policy-induced operational inefficiencies, worsened by
the prolonged tightness in the global fuel market due to the
Russia-Ukraine conflict. With South Asia vulnerable to global fuel
markets, the situation is expected to worsen in the short term as
costs and supply deficits in electricity are likely to exacerbate
in the summer.
In India, extreme weather is impacting parts of the country,
recording the warmest season in over 100 years. According to the
IHS Markit Market Briefing "India facing widespread load
shedding, frequency violations, and high electricity price",
electricity demand grew by an average of 8.6% over March-April.
While coal supply to the power sector grew 8.7% over January-April
2022, this was not sufficient to match growing demand. As a result,
coal stocks are deteriorating, despite an increase in imported
coal, and power shortages are impacting many states. Owing to
constraints in domestic coal supply, the system is utilizing other
generation options including oil/naphtha. There has also been an
increase in nuclear and hydro generation, while gas-fired
generation continues to decline owing to high LNG prices. The
government has taken various steps to improve the coal supply
situation in the short term.
Europe efforts to mitigate Russia-Ukraine impacts
In Europe, the Russia-Ukraine crisis has triggered a
reorientation of strategy. On 18 May 2022, the European Commission
issued its REPowerEU plan, which follows a much less detailed
document published in early March, reiterating the EU commitment to
end Russian gas imports by 2027 and focusing on a faster energy
transition as a key mechanism to achieve this.
The IHS Markit Insight "REPowerEU: Europe maps faster
decarbonization to phase out Russian gas" delves into the
details of the plan. According to the report, the European
Commission has directly edited several of the proposed directives
of the Fit for 55 package to include higher targets for renewable
energy and energy efficiency, a rooftop solar mandate, and maximum
allowable permitting timescales for renewable projects. The
supply-side of the REPowerEU plan repeats the initial March
document target for LNG and pipeline imports from suppliers other
than Russia and adds higher energy efficiency ambition and fuel
switching. REPowerEU also forsees massive growth in renewable
hydrogen use by 2030. Successful implementation of the plan will
depend not only on further action at the EU level but on specific
actions taken at the member state level.
Given the recent electricity price spikes and associated
affordability concerns, there is now increased appetite in Europe
for regulatory intervention. According to the IHS Markit Insight
"Europe's energy markets: Intervention in the short term but no
change of market design", the second REPowerEU communication
and the Agency for the Cooperation of Energy Regulators report on
market design confirm the value of short-term intervention in the
gas and power retail and wholesale markets, while maintaining
market design in the long term. While some proposals-such as
consumer empowerment and higher wholesale power market
liquidity-were included in past legislation, other proposals-such
as price caps, windfall taxes, and subsidies to generators-reflect
a change in the EU mindset. Proposed measures, however, offer a fix
to the symptoms, not the root cause, which may lead to unintended
consequences.
The European Union is also reviewing the rules for the European
carbon trading scheme (ETS) out to 2030. The IHS Markit Insight
"Europe's gas crisis—Commitment to the ETS remains strong
despite high energy prices" investigates the risk to reform
with affordability now being top of the agenda. According to the
report, Europe views the current affordability crisis as
confirmation that imports of fossil fuels must be reduced and the
ETS must remain in place to deliver this ambition. As such, there
is little doubt that Europe will agree to a higher ambition for the
current ETS. The affordability crisis, however, may hold back
extension of the carbon market to buildings and transport, which
would impact small consumers directly.
In Germany, the government has drafted policies that drastically
increase renewables ambition while specifying a willingness to cut
natural gas imports as soon as possible. The IHS Markit Insight
"Germany accelerates energy ambition amid market crisis"
breaks down the country's recent energy policy developments.
According to the report, the short-term imperative to reduce
imports of gas from Russia requires investment in gas
infrastructure through the development of Germany's own direct LNG
import industry, which goes against the longer-term ambition of
cutting fossil fuel demand in the power sector by 2035 and in the
entire economy by 2045.
According to the IHS Markit Insight "Impact of the invasion
of Ukraine on emissions in Europe", the Russia-Ukraine crisis
and Europe's response are anticipated to drive down carbon
emissions faster than expected pre-war throughout this decade, as
the reduction in emissions from lower demand exceeds the increase
from additional coal generation. However, there is a risk
that—particularly in the middle of the decade—emissions
start to rise if energy efficiency measures and renewable additions
fall short of expectation and coal remains the preferred form of
dispatchable power generation in Europe.
Renewables continue to grow
Despite supply chain bottlenecks and higher prices, renewables
continued to grow in many markets around the world—registering
record highs in some instances.
In China, the Omicron outbreak since the beginning of 2022 has
severely disrupted economic activities and energy demand, leading
to weak fossil fuel demand while renewables continued to boom.
According to the IHS Markit Insight "China's energy markets
during latest COVID-19 lockdown: Coal and gas plummet while
renewables flourish", coal and gas generation in April
declined by 11% and 29%, respectively, while wind and solar
generation increased 15% and 25%, respectively, with record
capacity additions expected this year—as a result of high coal
and gas prices as well as strengthened climate policies. Coastal
regions in China—namely Jiangsu, Shanghai, and Hainan—also
recently published rules for competitive allocation of their
respective offshore wind resources. According to the IHS Markit
Insight "New rules for offshore wind resources' competitive
allocation gradually unveiled in China", these newly unveiled
rules will decide the development rights for more than 27 GW of
offshore wind capacity, out of which 19 GW is aimed for
commissioning by 2025. While capital strength and installed
capacity remain important in evaluating developers'
competitiveness, new dimensions such as the developer's fulfillment
record and owning scalable, flexible capacity in the region were
added.
In Europe, signed power purchase agreement volumes continue to
rise. According to the IHS Markit Insight "Europe's power
purchase agreement (PPA) market grows, driven by increased
corporate appetite", PPA volumes delivered in 2022 have
doubled since 2020, with just under 6% of wind and solar production
in the EU+3 under a PPA contract and a handful of mature markets,
including Spain and the Nordics, accounting for the majority of
deals. Corporate PPAs accounted for 62% of the energy contracted in
2021 and now outweigh utility deals.
In the United States, the California Independent System Operator
(CAISO) and the Southwest Power Pool (SPP) announced record levels
of instantaneous renewable penetration in early spring 2022.
According to the IHS Markit Insight "CAISO and SPP provide
glimpses of low-carbon power systems with renewable generation
records", 97.6% of CAISO load was supplied by renewables at
one instance on 3 April 2022, and in SPP, renewable penetration
reached 90.2% in the early morning on 29 March 2022. These
short-lived records offer real-life examples of what power systems
could look like in a low-carbon future dominated by renewables.
While variable renewable resources can supply most electrical
energy when they are available, completely displacing dispatchable
fossil generation will require alternative carbon-free flexible and
firm capacity to balance the variability of renewables. Although
nuclear can consistently provide carbon-free electricity, it faces
lower energy revenues when renewables dominate the dispatch stack
in competitive markets and would require additional revenue
streams. Exports can also help facilitate higher renewable
penetration levels.
In New York, the independent system operator (NYISO) began
considering carbon pricing in 2018, to harmonize state public
policies with wholesale electricity markets and reduce reliance on
out-of-market payments. While NYISO's carbon pricing proposal has
stalled over the past years, carbon pricing remains one of the
mechanisms under consideration by the state's Climate Action
Council to help meet its goal of a zero-carbon grid by 2040.
According to the IHS Markit Insight "Carbon pricing in New York
would increase wholesale market prices while reducing REC
prices", a carbon price based on the social cost of carbon
would elevate wholesale power prices by 40-45% and reduce—but
not eliminate—required renewable energy credit payments. Carbon
pricing could drive an increase in renewable generation and
contribute to 20% emission reduction beyond existing policy
mechanisms.
In Latin America, renewable deployment is projected to grow in
most markets, with green hydrogen becoming an important driver of
renewable capacity additions in markets such as Brazil, Chile, and
Columbia. According to the IHS Markit Data "Latin American
Power Outlook: Southern Cone, May 2022", in Brazil, wind and
solar are forecasted to add on average 4.2 GW per year each from
2022 to 2050, accounting for 55% of total additions over this
period. In Chile, over 3 GW of wind and solar is under construction
and expected to come online during 2022-23. Chile's rapid
deployment of renewables is leading to calls for new clean energy
targets of 25% of demand met by renewables by 2025 and 40% by 2030.
According to the IHS Markit Data "Latin American Power
Long-Term Outlook: Andean region", solar is increasingly
gaining market share in Columbia and expected to reach around 9% of
total installed capacity by 2024—a jump from the current 2%.
Bilateral PPAs, including corporate procurements and private
auctions, are emerging as an important driver of renewables growth
in the country, although regulated renewable power auctions will
continue to play an important role in the near future.
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Jun 30
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