REPLACING TRADITIONAL ENERGY SOURCES IS A MASSIVE CHALLENGE

Many people focus on the best ways to generate electricity. We focus on the best way to finance new power stations.

A QUICK OVERVIEW

The annual electricity consumption in the EU is around 3.1 million GWh. If we want to run all our cars on electricity, we need additional 1.3 million GWh. At the same time, many EU countries have decided to reduce the use of coal for electricity generation and the carbon trading scheme is weighing on the coal-fired power stations. Germany has decided to also phase-out nuclear power stations and countries like Italy have none. Wind power accounted for 13% of all electricity generated in the EU in 2019 and solar power accounted for less than 5%. Both sources are unreliable and need backup. At times, German wind power generation falls to only 17% of the nominal installed capacity, and solar power is not available at night. Gas turbines can be turned on quickly, but Europe has limited natural gas reserves and most of it has been imported from a hostile regime. Electricity storage is another backup option for intermittent renewable sources, but batteries are prohibitively expensive, and using hydrogen to store energy and generate electricity comes with energy losses of over 70%. Using new sources of energy also means that power stations are located in different areas than the old ones. Some cities and industries were built next to coal deposits and nuclear power stations were built near cities. Wind farms can only be built in windy areas and national power grids need to be upgraded to transport the electricity to the cities and to deal with intermittent sources of electricity. .

THE PERFECT SOLUTION

Wind farms and nuclear power stations are characterised by huge upfront capital expenditures. If the interest rate for financing an offshore wind farm rises from 3% to 7%, the electricity from that project will cost 40-50% more. The less optimal the site, the bigger the problem, and most of the best sites have already been used. Now wind farms need to be built further away from the shore or at less windy locations. Some power stations have a depreciation period far longer than standard bonds and bank loans. A few energy companies have already issued perpetual bonds or bonds with an extremely long maturity. This releases pressue on the company's cash flow. However, these bonds have underperformed and they turned out to be a bad investment choice for bond investors. The amount of money that energy companies need to raise for the energy transition is unprecedented. Years ago McKinsey calculated that €6.6 trillion or more would be needed. This is the biggest challenge for the finance sector and it requires modern, innovative securities.