Energy transition: Can the Netherlands lead the private investment charge?
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MEPs, who voted 429 to 225 in favour of declaring a planetary crisis, urged all EU countries to commit to achieving net zero greenhouse gas (GHG) emissions by 2050, and stressed that the declaration must not be yet another empty climate gesture.
While political will is ostensibly in favour of shifting to a lower – ideally zero – carbon energy mix in Europe over the next three decades, it is likely that the private sector will need to deliver much of the required energy transition.
As things stand, unlocking and then scaling the investment needed to wean European nations off fossil fuels and onto cleaner energy is not straightforward.
Energy transition in the Netherlands is intertwined with Europe’s energy transition, and the country still has some work to do to meet its EU emissions reduction targets.
GHG emissions per capita in the Netherlands were 34% above the EU average in 2018 according to data from Statistics Netherlands, and investors and renewable energy developers are eager to see regulators and industry chiefs address a number of key issues to enable the country to successfully participate in Europe's energy transition objectives.
Greening the fuel mix is hard work
One of the main challenges investors face is choosing genuinely low-carbon alternatives to current power generation technologies.
Although many non-fossil fuels are touted as "green", closer inspection often reveals less than glowing carbon credentials.
Green hydrogen, for example, is commonly presented as a clean alternative to natural gas; however, at present, most hydrogen fuel is generated through electrolysis of water using electricity from coal-fired power stations.
Only once this electricity is sourced from renewable generation, such as wind power, can hydrogen be candidly classed as green, but this requires a major shift away from incumbent hydrogen production systems.
Greening liquefied natural gas (LNG) by obtaining it from non-fossil fuel reserves is another opportunity worth investigating for energy developers and investors, but which has so far attracted relatively little interest.
Natural gas currently accounts for 77% of the Dutch energy mix, according to data from The New Energy Coalition, most of which is fossil natural gas.
Switching to renewable gas, produced from organic material such as organic waste, sewage sludge or cow manure, would greatly reduce the carbon footprint of LNG-based fuel in industries like shipping, a key consumer in the Ports of Rotterdam and Amsterdam, and the North Sea.
For countries in Northwest Europe, proximity to the North Sea – still an abundant producing reserve of fossil natural gas – means that investors need to be incentivised to shift to greener forms of natural gas (or penalised for failing to do so).
An obvious route is to switch to offshore wind, which is a cornerstone of energy transition in the North Sea. But the intermittency of wind power means that back-up generation is required, typically from non-renewable sources.
To make the wind industry comprehensively green, more thought and investment needs to be allocated to large-scale energy storage solutions and an integrated network of clean energy sources that are interchangeable when intermittency issues arise.
No end to nuclear?
Some governments in Northwest European countries, such as France, support the further development of nuclear as an efficient form of low-emission energy.
While nuclear generation has a relatively small carbon footprint, it comes with the problem of toxic waste and the risk of catastrophic accidents.
However, in the absence of such catastrophes, the emission-reducing potential of nuclear is proving irresistible to some states.
Despite the growth of other forms of clean power, many in the energy industry believe that nuclear will still feature in Europe's energy mix in 2050, although it is currently unclear what role it will play in the Netherlands.
Regulatory frameworks matter
Energy regulatory frameworks in some European countries are much more complex than others, creating barriers for investors seeking to fund energy transition projects.
Commonly cited regulatory issues include: a lack of regulations favouring renewable energy technologies over conventional energy; the absence of well-defined policies supporting private investment in renewables; bureaucratic approval processes and delays in granting authorisation for projects; regulatory financial obligations for energy projects; and grid connection codes that are not designed to accommodate renewables.
In the Netherlands, there is clear appetite for reform of the domestic energy framework to support the development and integration of renewable power.
While many are calling for a complete overhaul and greater flexibility of regulatory frameworks, others argue against wholesale change on the grounds that investors need regulatory stability, rather than dynamic regulation.
Others believe that the market will continue to demand and deliver new technology and that regulation will ultimately follow, without the need to engineer pre-emptive rules.
It has also been suggested that accelerating Europe’s energy transition can mostly be accommodated within current frameworks, through better use of existing tools.
These include EU's Clean Energy Package and the forthcoming decarbonisation gas package which promises to define how natural gas can co-exist with increasing amounts of renewable gases, expected to be brought forward in the next few years.
Regardless of the position, clarity from policymakers and regulators is required and alignment of policies and regulations between neighbouring European countries essential to drive the energy transition and facilitate efficient cross-border energy trade.
European leadership on energy transition is yet to be proven
Despite the EU's declaration of a global climate emergency, the bloc has yet to prove its credentials as a trailblazer for energy transition.
While many stakeholders pay lip service to climate pledges, anecdotal feedback from within Europe's energy industry indicates nagging doubts that the continent will ultimately lead the world in shifting to greener power.
This negative sentiment creates risk, weighs on investor confidence and is likely to be holding back growth in private financing for energy transition projects.
Notwithstanding disagreements over regulatory change, from a leadership perspective, near-term drastic policy reform and decisive actions are needed if the EU is to make good its pledges and encourage investors to partner with developers on viable terms.
Disruptive technologies need tailwinds to thrive
History has proven that appropriate incentives fuel innovation and uptake of disruptive technologies in Europe's energy sector – such as offshore wind, which is now commonplace in the Netherlands.
With the right regulatory framework in place, or appropriate elasticity within existing frameworks, many senior stakeholders are confident that investment will start scaling up, particularly as artificial intelligence (AI) and digitisation of systems create significant opportunities.
Regulation could, for example follow new market mechanisms and technical evolutions, and provide support to bridge the risky period between initial market entry of new technology and its maturity stage.
As a technology matures and confidence rises, subsidies are usually phased out, as the many examples of successful on- and offshore wind energy projects in the Netherlands show.
This process needs to be managed carefully in line with investors' expectations to help create certainty in the market. Notably, big ticket investors are calling for more systemic financial hedging options to further shore up their investments in energy transition projects.
At the other end of the market, small-to-medium-sized energy developers (SMEs) are pushing for faster scale-up of investment (from private and government sources) to be facilitated, allowing them to focus on growth rather than regulatory red tape.
Next generation trading and retail markets
A number of pilot projects (including some notable examples in the Amsterdam area) are currently underway in peer-to-peer energy trading and trading solutions for congestion management at the distribution system operator (DSO) level.
Energy market players and investors follow these developments closely to ensure they are in a position to capitalise on opportunities emanating from successful pilots.
It is imperative that the market takes regulators along with the digitisation and technology transition process. This can happen through active sharing of case studies.
Mass electrification of transport for example, where developers and investors need certainty to enter the market, needs regulation to keep pace with societal changes and consumer choice.
Financing options and promising technologies (e.g. AI-based energy efficiency solutions) are already available to initiate scaling of disruption in next generation trading and retail markets, but increased support for private investment is needed to facilitate the transitional "jump".
Commercial and new entrant opportunities
As well as conventional institutional and private equity (PE) funding for energy transition projects, it has been mooted that bottom-up financing could be secured from crowdfunding or consumer bonds, subject to strict rules on marketing to retail investors and fiduciary obligations.
This is a particularly interesting avenue to explore for some developers, as anecdotal evidence suggests that PE companies are not necessarily interested in energy infrastructure companies, tending to look more at new downstream business models.
Grassroots funding is an effective way of getting local buy-in for smart energy transition solutions, which is useful in encouraging wider political and investor support for projects.
However, involving consumers in funding projects carries the risk of severe reputational backlash if projects fail, and therefore any public participation needs to be managed extremely carefully – especially when it comes to scaling up or consolidating investment.
From a practical perspective, where funding risk is shared between multiple small stakeholders, managing shareholder expectations can be particularly challenging.
As start-ups become bigger, a buy-out by a competitor or a PE fund can be the preferred exit route for founders and shareholders, while simultaneously providing add-on solutions for large companies that may not have invested appropriately in innovation.
History has shown that pure financial engineering is not enough to make a success of such relatively risky, large scale, investments; it needs coupling with knowhow of the sophisticated energy market.
This requires investors to start early and small, and to learn alongside utilities and entrepreneurs how energy transition can be scaled up.
In the Netherlands, a number of small venture capital investments are being initiated to support energy transition.
What next?
Although there are disagreements within the Netherlands' energy sector about how best to unlock and scale up investment in the energy transition, some common themes are emerging.
These include a consensus view that the roles of Dutch and wider European network operators and new energy market actors need to be clarified and mapped out, to help encourage new market participation models and support the scaling of investment.
There is also widely shared demand for regulatory validation of smart technology breakthroughs.
Regulators are best placed to support and promote "winning technologies", although the market may need to help new entrants/technologies by voicing loudly and clearly what they see as appropriate trade-offs and nuances in regulation and clarifications.
Finally, it is essential that government backs demand for green solutions. Policymakers have impactful levers to drive energy efficiency and sustainable practices.
Setting targets for large industrial users, along with incentives and penalties to guide performance against efficiency parameters, could play a significant role in encouraging investment in improved energy efficiency.
If at least some of the above can be achieved, access to and scaling of investment in energy transition should follow, and the prevailing calm will quickly change into a storm of opportunity for private investment, in the Netherlands and across Europe.
The above article is based on discussions held during an industry roundtable, entitled: "Energy transition in the Netherlands: How to unlock and scale private investment", co-hosted by European law firm Fieldfisher and management consultancy Baringa Partners in Amsterdam in November 2019.