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Will greenflation stop RES development?

The world, increasingly aware of the threats posed by climate change, is betting more and more heavily on renewable energy sources as it transforms its economies. Along with these transformations, the demand for components and metals used to manufacture RES installations is increasing and their prices are rising. This phenomenon is commonly referred to as greenflation. One of the main reasons for this situation is the fact that metals needed for the production of batteries, accumulators and other components used for the construction and operation of installations, are mined on a large scale in a few places in the world, which allows for strong price increases.

Which types of RES will be most affected by greenflation? How much, due to green inflation, but also due to the war in Ukraine and the related sanctions against Russia, is the green transformation of Europe and Poland threatened? These questions are answered by Paweł Piotrowicz, energy market and hydrogen technology expert at TÜV SÜD Poland and CEO of hydrogen business organization, Hydrogen Poland.

Which RES industries will be most affected by greenflation and which will not be significantly affected?

The situation of the global economy is usually, to put it mildly, complicated. The war behind our eastern border caused even greater difficulties. Some supply chains have collapsed. We have record commodity prices which is causing the world to fall into greenflation. An example? Morgan Stanley forecasts that battery manufacturers will have to raise prices by 25% due to the rising price of lithium carbonate, which means higher prices for electric cars, but also higher CAPEX costs for energy storage. The International Energy Agency has calculated that the transition will increase demand for lithium by forty times, for nickel by twenty times, and for manganese by seven times. I would like to point out that these calculations were done even before the war in Ukraine broke out. This is just an example.

Just last year, economists warned that the high prices of raw materials resulting from the energy crisis will translate into problems with the supply of components necessary for the transformation of the energy sector, namely, the construction of new Renewable Energy Sources. Today, two independent actions are accumulating. The first is the strategy of energy and fuel transformation and decarbonization. The second is accelerated independence from Russian fossil fuels, due to the emergency situation. I am talking here not only about Poland, but about the whole of Europe. Today, the dynamics of changes is so high that it is difficult to determine which sectors will be more affected by greenflation. All sectors will suffer. However, I believe that we will come out of this crisis stronger and more independent.

How much is the green transformation of Europe threatened? On the one hand, cutting off from gas and ideas to recognize coal as a transitional fuel, on the other hand there is a very strong voice sticking to RES as a chance to cut off from Russia and as a safer (because dispersed) form of energy supply. Which way will the EU go?

Energy and fuel transformation is in progress. I will say more. It is strongly accelerating. It is a pity that this acceleration factor is the war. A lot is happening in Europe in terms of regulations intensifying the implementation of green technologies. New battery directive, Euro 7 standard, new directive on alternative fuel infrastructure development (AFID), increase of CO2 emission standards, revision of RES directive (RED II), there will be also RED III, regulations on alternative fuel infrastructure (AFIR), new energy directive, directive on energy efficiency.

These are only some of the planned regulations. In Poland, the Ministry of Climate and Environment is also not idle: in a moment we will have a set of laws relating to hydrogen economy, called by Minister Moskwa the Hydrogen Constitution. Investment plans are also big: Minister Zyska said at the Polish-Norwegian Maritime Seminar and Dialogue during Nor-Shipping 2022 that “offshore wind energy is developing very dynamically in Poland. We set ambitious goals, such as almost 6 GW of installed capacity by 2030. Because the potential is much bigger”. Lotos is launching the Green H2 project this year, i.e. with a large electrolyser with a capacity of 100 MW. Orlen has published plans for a network of hydrogen refuelling stations in Poland.

The whole EU is also not slowing down with projects supporting the development of green transformation. The European Commission announced that on April 1 it signed agreements to grant 1.1 billion euros from the EU ETS innovation fund for seven large-scale projects to be implemented in Belgium, Sweden, Spain, France, Italy and Finland. “This is a smart investment in decarbonisation and strengthening the resilience of the European economy,” said Frans Timmermans. The subsidised projects include CO2 capture and storage, bioenergy production with CO2 capture, the use of renewable hydrogen in iron and steel, and the production of innovative, high-efficiency photovoltaic modules. So to the question: how much is the green transformation of Europe threatened, I would answer: it is not threatened. The transformation is accelerating.

Rejecting Russian oil, gas and coal in Poland = turning to coal? How much is Poland’s green transformation threatened because of this? In your opinion, which RES producers will suffer the most and which the least?

Giving up Russian fossil fuels has always been inevitable. The war in the East has accelerated this. Any change in the economy, especially one undertaken under pressure, causes resistance and confusion, at least initially. And just as we saw panic at the beginning of the pandemic, we continue to see it today, exemplified by rampant fuel prices at gas stations. As for coal itself, its prices were already at record highs in 2021, even before Russia’s invasion of Ukraine. The year 2022 brought further increases, mainly due to sanctions on Russian imports. Coal prices are estimated to be 101% higher than last year. In the first quarter of 2022 alone, from January to April, coal became 26% more expensive.

I don’t think this coal market situation will affect RES. Renewables have a bigger problem with inadequate infrastructure (mainly grid) and insufficient or bad regulations in Poland. I’ll say more: more expensive fossil fuels should cause an acceleration in the RES market, which should see greater profitability and projects see a faster return on investment.

Hydrogen is the source of energy that has been receiving the most attention in Poland for at least a year: new hydrogen valleys are being built, and clean hydrogen technologies are being developed. At the same time, we know that green hydrogen is a project for many years, the technology is in its infancy, and grey hydrogen, according to some experts, may be even more harmful to the climate than … coal. What future awaits hydrogen technologies in Poland, in connection with the new macro-political conditions?

Hydrogen has been present in industry for over 100 years, we know this element very well, we know its properties. Poland is the fifth in the world and third in Europe producer of hydrogen [grey hydrogen, editor’s note: MS]. Azoty Puławy is considered to be the most modern and efficient plant in the world producing ammonia, which is a hydrogen compound.

At the same time we are rediscovering hydrogen as an energy carrier. In the era of decarbonization it is RES, nuclear energy and hydrogen that are becoming an alternative for us, at least until we come up with other solutions. We are interested in renewable energy sources that are free of greenhouse gas emissions, including carbon dioxide. A very good energy carrier is renewable hydrogen, which means it is produced using electrolysis technology and RES energy. The process itself has been known for a very long time, but it is now that these technologies are being rapidly developed due to growing demand and precisely defined strategies. Like any new technology, hydrogen has to go through a difficult “growing up” process before it becomes mature, and this is inevitable.

Hydrogen production technologies that emit carbon dioxide will be phased out. However, this process will not be as rapid as we would like. The demand for hydrogen will grow faster than the supply of renewable hydrogen, so I expect more of an evolution than a revolution – hydrogen will gradually go green, and in the meantime we will face an inevitable energy and fuel transition that will increasingly use the new energy carrier.

I would also like to mention that we have a plan in place and approved not only at European, but also at national level. We have a functioning Polish hydrogen strategy and a sectoral agreement, we expect changes in the energy law in a short time. Large state-owned companies are presenting their updated strategies and plans for implementation of hydrogen technologies. The emerging hydrogen valleys will be an important part of the Polish hydrogen economy ecosystem and will probably play an important role as long as they implement distributed micro and macro system strategies not only on paper but also in practice. The first of the Polish hydrogen valleys (Pomeranian Valley) has already met all the requirements and has been included in the list of European hydrogen valleys.

Without powerful energy storage facilities there is no RES on a mass scale. How technologically ready are they? When will their prices, also taking into account the recent huge increases in the costs of energy produced with the use of fossil resources, reach the level where demand will meet supply?

I would put it differently. RES can be installed on a mass scale but our networks and energy economy will not be able to withstand it, hence the problems with obtaining permits and the protracted connection process. RES is an unpredictable source of energy, unless it is paired with energy storage. Energy storage should be considered first of all in terms of its functionality. Simplifying, we have two basic functions: regulating (frequency, power, voltage) and storing. Both are extremely important and depending on the operator’s requirements and assumed functions, different technologies are used, and there are quite a lot of them. We have here both well-known and mature technologies, as well as new emerging ones, which we are only testing. Generally, the fight here is for greater efficiency and longer life. Let me repeat: RES and energy storage constitute a certain whole that guarantees continuity of supplies and energy security.

The costs of energy produced from fossil fuels are growing: in 2022 the price of active energy increased by about 37%, and the cost of distribution by 8%, the average price of 1kWh in Poland in 2022 is 0.77 PLN. On the other hand we have RES, whose importance in the energy mix is still growing. In a simplified way we can say that the more RES there are, the smaller CO2 emission fees are, and thus the cheaper energy [because the cost of purchasing CO2 emission allowances is currently the biggest share in the cost of electricity production, editor’s note].

The cost of energy from RES itself depends on two factors: investment costs and operational costs, so more efficient and cheaper technologies will make energy cheaper, and there is also a positive effect of scale. I still believe that Europe, according to its strategy and decarbonization plan, will be climate neutral in 2050.

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