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Alexa Capital Insights
December 2024
Why Trump-led economics are pushing toward value-for-money energy.
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Why Trump-led economics are pushing toward value-for-money energy
Donald Trump returns to the White House in 2025 with a promise to “drill baby, drill” as he dismantles his predecessor Joe Biden’s climate and energy policies. In practice, it is unclear to what extent legislative packages such as Biden’s signature Inflation Reduction Act (IRA) are under threat. Ironically, republican states have benefited the most from the IRA, and Trump has even reversed his stance on electrification, stating “I’m for electric cars, I have to be because Elon endorsed me very strongly” after being backed by Mr Musk on the campaign trail and later picking the Tesla boss to co-lead a new US Department of Government Efficiency.
What is clear is that Trump views low-cost energy as a strategic asset, echoing wider market concerns about prioritising value-for-money over environmentalism in the face of growing global competition. And for now, data seems to support the view that gas should be the go-to energy source for US industry.
What is Europe to make of this? Low-cost energy is also a strategic objective for the European Union and neighbours such as the UK, Switzerland and Norway.
Research shows increases in energy prices dampen economic growth.
Electricity costs and GDP growth for selected countries versus the US
Source: IMF
Over 70% of energy consumed across the EU is non-domestic, including heavy industry, transport and other commercial.
How sectors are affected by energy prices
Source: Eurostat, ING Research
High pricing and volatility in the UK and Europe
It stands to reason that those industries with high energy needs or high susceptibility to power prices will struggle to compete globally if they are based in regions with sustained higher-than-average electricity or fuel pricing. This is the case for much of Europe, which has some of the highest electricity costs in the world. Compared to the US, which is relatively insulated from global energy pricing swings thanks to its abundant domestic gas supplies, European nations are also subject to some of the highest levels of electricity price volatility.
Cost of electricity by country (March 2024)
Source: World Population Review
After Russia’s invasion of Ukraine, which triggered the September 2022 sabotage of the Nord Stream 1 pipeline carrying gas from Russia to Europe, electricity prices in Germany and Italy were more than three times higher than in the US. The price spikes highlighted an obvious point: energy security is as important to Europe as it is to the US.
So how can Europe achieve the kind of low-cost, secure energy supplies enjoyed by rival regions? The good news is that - despite what it might seem from looking at electricity networks in America - there is growing evidence the lowest energy costs today can be achieved using sustainable renewables, and particularly a combination of solar, wind and batteries.
This is clear from Spain, which in March 2024 saw electricity prices falling to within 23% of US rates - and 38% less than a year previous - as it registered the highest level of renewable energy generation in its history. Another reason to bet on renewables is that their costs are going down and are expected to continue doing so over time. Wind and solar are already cheaper sources of electricity generation than gas-fired turbines in many regions.
Levelised Cost of Energy (LCOE) by technology in the UK since 2018
CCGT = Combined Cycle Gas Turbine.
Source: Alexa Capital
Challenges facing value for money
Such fundamentals should provide some cheer to European policymakers and investors committed to the energy transition. However, Europe still faces important questions on energy policy, specifically related to three areas where technology is still evolving and value for money remains unclear:
- For solar + wind, grid connectivity and planning reform are challenging incremental growth. Big questions hang over how policymakers can solve these issues – in particular, how to prioritise large scale solar and wind developments connected into the high voltage transmission grid (where infrastructure is already strained, and finite expertise is available to engineer these connections)? This is an acute issue, since smaller scale distribution grid connected projects and rooftop installations will take considerably more time & cost to impact the overall power system.
- In low-carbon technology, the UK and Europe are investing in emerging technologies such as floating offshore wind and carbon capture and storage (CCS) that promise to deliver industrial leadership but are costlier than more mature alternatives. Since these technologies may require high-priced long-term contracts for difference or other subsidy structures to support commercialisation, there is a risk that UK and European consumers and industry could be locked into higher electricity prices than those in regions that have waited for the technology to mature. Notably, CCS’s history is plagued with failures and a number of questions remain over the financial viability of capturing and storing carbon.
- Hydrogen hype – Can we afford to subsidise hydrogen in the near term? Ultimately, for applications that cannot be electrified, Europe intends to use low-carbon hydrogen in the place of natural gas. But as we have said before, hydrogen is unlikely to be the silver bullet that some believe it is. Beyond a few no-alternative, no-regret applications, it is increasingly clear that electrification is a better pathway for most types of industrial decarbonisation.
Carbon taxation is under pressure. Across all decarbonisation technologies, the business case would be much clearer if carbon emissions were being taxed globally according to their true impact on society and the environment. But this is not happening today and is not likely to happen anytime soon, particularly with Trump leading the largest global economy. Where does this leave UK and European energy investors and the industries that depend upon access to competitively priced energy? Some things at least seem clear during Trump’s second presidency. For example, the US will (again) drop any pretence of climate leadership, likely exiting the Paris Agreement for a second time.
Notably, carbon taxes are highly likely to remain restricted in geographical scope, although the European Union’s Carbon Border Adjustment Mechanism could lead to a degree of ‘emissions tax creep’ across international markets. But can weak German, French and UK economies afford to constrain growth with taxation in competitive geopolitical markets?
In short, we expect demand for secure energy at the lowest cash cost will remain high, rewarding investment. In theory, this should favour nations supporting the rollout of solar, wind and batteries rather than conventional power generation. But there may are caveats where power resiliency is important, given needs to integrate a mix of dispatchable power solutions for climate periods with week wind and low solar irradiation.
Picking the right path
Take the UK, which has an ambitious target of achieving a net zero emissions grid supply by 2030 and was already sourcing 40% of its electricity from renewables in 2022, close to the European Union’s average of 43%. Achieving the UK’s Clean Power Action Plan 2030 goal is theoretically possible, but it is likely to come at a significant cost as a fair portion of emissions will have to be dealt with using CCS (for gas and biomass), on top of high priced conventional nuclear. The country has declared plans to spend c.$28 billion (£22 billion) on CCS technology over its current government period, this is on top of the $53-60 billion (£42-48 billion) spent on the 3.3 GW Hinckley Point nuclear plant expected to become operational sometime after 2030.
The UK is also looking to make big bets on low-carbon hydrogen and new nuclear, both of which are far more expensive than wind and solar with batteries. Contrast this with Poland, which is emphasising wind and storage in its energy transition and has yet to commit to CCS. Poland’s energy transition pathway is still far from certain but is at least luring infrastructure investment, with 16 GW of storage capacity being registered in a December 2023 capacity auction, and a further 2.5GW in December 2024. Not to mention significant manufacturing investments such as Intel (semiconductor manufacturing), LG (battery gigafactory), PepsiCo (bottling), 3M’s SuperHub (advanced materials and pharma filtration equipment) and Mercedes-Benz (electric vans), to name a few. A comparison of retail energy prices for March 2024 shows Poland 1/3 cheaper than the UK.
A question for OECD nations that lack the domestic conventional energy resources to compete with America’s low-cost shale reserves: how to navigate quickly the best and most sustainable value-for-money power? In answering that question, it may be instructive to investigate why some countries, such as the UK, have higher electricity prices than others (think Spain or Greece) that are similarly well advanced on the path to clean energy. Are accelerated Net Zero targets such as the UK’s Clean Power Action Plan 2030 able to deliver value-for-money, or will they lock that region into a high cost future (and low economic growth) with expensive CCS, BECCS, hydrogen and nuclear projects?
What appears clear is that high renewable integration can drive energy security and lower marginal power prices – at the cost of price volatility driven by variable weather patterns. In these markets, ‘baseload power’ becomes a bygone concept. These high renewable regions must embrace a host of digitally enabled flexibility platforms to balance and monetise flexibility, including battery storage and flexibility marketing – plus an ongoing need for flexible, distributed conventional (predominantly gas fired) generation for near term resiliency and transition. This conventional gas generation operates differently than historically, available as “an insurance policy” and called upon a fraction of the year (and with a fraction of the CO2 impact). While renewables are central to the transition, flexible gas generation continues to play a critical role as backup.
Questions remaining
Decarbonising with solar, wind and batteries can certainly drive down energy prices. The execution questions to deliver value-for-money power systems include:
What isn’t an option is to ignore the issue: in a competitive global market for industry and jobs, structural low-cost energy matters… and value for money will remain in vogue for some time.