Energy crunch, energy transition and grid infrastructure force choices

Rutte IV cabinet commits fully to Climate & Energy

The Rutte IV cabinet is fully committed to Climate & Energy. With Rob Jetten a special minister has been appointed and a Climate & Transition Fund of 35 billion euros is available. This climate fund applies for the next 10 years and is additional to the SDE++ scheme. The fund will be used to build the necessary energy infrastructure (electricity, heat, hydrogen and CO2), realize the green industrial policy and make mobility and the built environment more sustainable.

The government wants to encourage the supply of renewable energy sources; offshore wind, solar-on-roof, geothermal, green gas and aquathermy. Hydrogen production and import will be scaled up.

The reality of the ongoing war in Ukraine puts pressure on formulated ambitions and may require painful choices.

Source: central government, JBR analysis. Click image for readability.

War in Ukraine

On Thursday, Feb. 24, Russia's invasion of Ukraine began, resulting, in addition to much humanitarian suffering, in rising energy prices (oil and gas). Due to the sharply increased demand for raw materials, energy prices had been high for some time, but the war in Ukraine has added a hefty boost to this.

Because of these sharply increased prices, the Dutch cabinet is forced to cushion the loss of purchasing power for Dutch people, including by reducing the excise tax on fuel, the VAT rate on energy and an additional financial injection for the lowest incomes.

Europe-wide awareness has arisen that Europe must become independent of Russia and thus reduce imports of Russian oil and gas. One way to do this is by increasing its own production, using LNG from e.g. the United States or the Middle East, exploiting new fields (e.g. in the North Sea) and keeping existing coal-fired and nuclear power plants operational. With today's high energy prices, oil and gas fields that previously did not seem profitable (e.g. small oil and gas fields in the southern North Sea) are still attractive to put into production.

Meanwhile, there is agreement to phase out Russian coal and oil. In response, Russia has also taken countermeasures and reduced or stopped gas supplies to a number of countries, including in part the Netherlands. Main reasons for this are unwillingness to pay the gas bill in rubles (demand set) and claimed supply problems around essential components.

Agreements have been reached in Europe regarding the filling of gas storage facilities in individual member states. No later than November 1, 2022, the capacity of the member states must be filled to at least 80%, although there are clauses allowing the filled capacity in individual countries to be lower. The Dutch cabinet has decided to increase the import capacity of LNG (liquefied natural gas). Tenders have also been issued for filling the Netherlands' largest gas storage facility, Bergermeer, and it has been decided that the three Dutch coal-fired power plants will again be allowed to operate at full capacity (was maximum 35%). Gas from the Groningen gas field will not yet be deployed, but will be kept in reserve (pilot light) if the situation worsens and security of supply to households, hospitals and businesses comes under serious pressure.

Energy Transition

In addition to the aforementioned measures to reduce dependence on Russian energy, efforts are being made in Europe to accelerate the energy transition, making Europe less dependent on fossil fuels. To this end, the Dutch government wants to accelerate insulation of homes, tighten energy-saving obligations for companies, scale up production of green gas and accelerate installation of solar energy and offshore wind.

On Friday, March 18, the Dutch cabinet presented a plan to double its planned offshore wind capacity, to 21 GW by 2030. To this end, three new areas have been confirmed, following two previously designated areas (a total of five areas).

However, the question is whether Dutch grid companies and installers have sufficient capacity to shape some of this acceleration. For example, TenneT announced in early June 2022 that there will be a temporary stop for new companies and entities seeking a connection to the electricity grid in North Brabant or Limburg.

Dutch power grid

Before this crisis began, the electricity grid was already tight, particularly due to the increased transmission capacity required for feed-in of generation from renewable energy sources, such as wind and solar power. Also, electrification of industry and transport require more and more transmission capacity.

Network companies are working hard to expand and strengthen their grids, but this is not yet happening fast enough. This creates congestion on the grid, making it impossible to connect large consumers in some areas.

In addition, permit procedures often take a long time, so expansion takes some time. All network companies have presented plans to make substantial investments in their regional networks, strengthening and expanding them over the next 10 years.

To accomplish the work and, where possible, to speed it up even more, network operators need (many) technical personnel. Currently, this personnel is scarce in the Netherlands. On the one hand due to the high demand for personnel, on the other due to outflow (retirement) and too little inflow.

Other barriers to acceleration include lack of space, lead time to obtain proper permits and scarcity of essential raw materials. The price of several raw materials were already on the rise before the war in Ukraine and have only risen further as a result of the war.

The tightness of the labor market and the lack of technically skilled personnel are severely limiting what can ultimately be realized.

When realizing new connections, the 'first-come first-served' principle applies; in other words, network operators have a duty to realize connections in the order in which they are received. For network expansion, network operators use priority frameworks, which also apply the 'first-come first-served' principle wherever possible.

With increasing transmission scarcity and the great demands on grid operators in the coming years, the question is whether this principle can continue to be used or whether other balancing frameworks need to be established.

Conclusion

We are expected to continue to face higher energy prices in the coming period. With the current congestion in the grid, tight labor markets and scarcity of resources, the question is to what extent the energy transition can be accelerated.

The moment energy prices remain structurally higher and security of supply is threatened, social pressure to open the Groningen gas field will also increase. In addition, pressure to normalize relations with Russia in exchange for peace and energy supplies cannot be ruled out. Also, there will be a broader discussion about nuclear energy as a long-term solution.