Repent at leisure: Belgium’s rush to crush nuclear sparks dash for gas

RWE buys Belgian CCGT project to bid for lucrative capacity payments, BP's share buyback plan + MORE 💥Energy Flux💥 Wednesday, 7th April 2021

Nuclear power retirements need to be handled very carefully. Any power grid connected to reactors nearing the end of their useful life will need a well-engineered system-wide solution to ensure the replacement capacity does not hike electricity supply costs or carbon emissions.

In light of RWE’s entry into the Belgian power market, today’s issue of Energy Flux takes a look at Belgium’s dash for gas-fired power to replace its retiring nuclear fleet. There are also parallels to be drawn in California, while the United Arab Emirates is heading in the opposite direction. And, BP is trying to have its cake and eat it.

In today’s issue:

  • RWE capitalises on Belgium’s rush to crush nuclear

  • BP keeps shareholders sweet with share buyback pledge

  • Transmission lines – Energy transition stories you might’ve missed

  • Energised minds – Critical thinking on crucial energy issues

RWE aims to capitalise on Belgium’s rush to crush nuclear

German utility RWE has spotted a potentially lucrative opportunity from Belgium’s headlong push to phase out nuclear power by 2025. The company has acquired an unbuilt 920MW gas-fired power project that it hopes will win generous remuneration in Belgium’s upcoming capacity auction, which is designed to subsidise dispatchable generators – even those rendered unnecessary by the decarbonisation agenda.

RWE this week bought the Dils-Energie combined-cycle gas turbine (CCGT) project from Swiss developer Advanced Power. The project was conceived after Belgium committed in 2018 to wind down its nuclear fleet by 2025, triggering another European capacity crunch (Germany is in the same boat, albeit a much bigger one).

Belgian grid operator Elia sees the need for 3.6GW of dispatchable generation capacity to replace Belgium’s seven retiring nuclear units at Doel and Tihange. To spur investment in new flexible generation plants and plug that gap, Brussels established the capacity remuneration mechanism (CRM) to provide a bankable revenue stream to underpin investment.

RWE first tried to position itself to participate in the CRM with its Claus C gas-fired power plant, located over the Dutch border in Maasbracht.

Local media report that this is no longer possible after Dutch authorities denied plans to run a cross-border high voltage connector from Claus C into north-east Belgium. Officials were uncomfortable with the idea of the Netherlands being left with all of the emissions and none of the electrons, which might be needed to keep the lights on in the south of Holland.

With the Dutch export interconnector dispute reportedly tied up in legal purgatory, RWE eschewed the problem by acquiring the Dils-Energie CCGT project in Limburg – which still faces some local opposition and requires a final environmental authorisation.

RWE maintains that building Dils-Energie is compatible with its target for ‘net zero’ emissions by 2040, saying newbuild CCGTs will see steadily lower utilisation rates as renewables increase their share of the mix. The only way RWE can be happy with this scenario is with a revenue stream that is guaranteed over 15+ years regardless of how much the gas-fired power plant runs – which is exactly what the CRM is designed to deliver.

Dils-Energie is one of several CCGTs expected to bid in the CRM auction this autumn. Depending on the outturn, Belgian ratepayers could end up footing the bill for 2-4GW of new gas-fired power plants built in haste to fill a capacity gap artificially created by the government’s enthusiasm to shut down ageing nuclear plants. Renewables can and will scale up to meet the nuclear shortfall, but were never expected to do so in time for a 2025 cut-off.

A similar situation seems to be emerging in California, where the state’s Public Utilities Commission is procuring 7.5GW of solar, wind, batteries, geothermal power and long-duration energy storage to replace the retiring 2.2GW Diablo Canyon nuclear plant. Some observers fear transmission blockages could prevent this capacity from arriving in time – precipitating another dash for gas.

Replacing nuclear with gas-fired power is at odds with the decarbonisation commitments of both California and Belgium. Ironically, the United Arab Emirates – which has woefully inadequate climate targets – this week joined the global elite of nuclear-powered nations with the start of commercial operations at the 1.4GW Barakah-1 nuclear power unit. This is the first of four reactors that will eventually meet 25% of UAE’s power demand, displacing gas-fired generation.

There is another irony in all of this. Germany last month agreed to compensate RWE to the tune of €880 million for lost revenue arising from Berlin’s own nuclear phase-out policy. The utility could reap further rewards from Belgium’s ill-advised venture down the same path.

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BP keeps shareholders sweet with share buyback pledge

What a difference a quarter makes. BP says share buybacks are firmly back on the table after receiving $4.7 billion from asset sales and the spectacular rebound in oil prices over the first three months of 2021.

BP now expects 2021 disposal proceeds to be at the top end of its previously announced $4‑6 billion range, and is on track to reduce its $38.9 billion debt pile to $35 billion well ahead of schedule.

Achieving this debt target will see BP return “at least 60% of surplus cash flow to shareholders by way of share buybacks, subject to maintaining a strong investment grade credit rating”. BP’s London-listed shares rose nearly 4% yesterday on the news.

The turnaround looks good at first glance but underscores the challenge facing BP. Its strategy is to taper oil production and pivot into renewables, while keeping shareholders happy. The company’s fortunes remain inextricably linked to oil and other commodity prices over which it has no control. Selling assets during an oil rebound fills the coffers, but for how long?

Reducing debt is crucial if BP wants to make above-market returns from green investments. Wind farms and solar arrays will need to be leveraged with cheap debt to improve internal rates of return, and a weaker credit rating would increase BP’s cost of capital (more on that in this Energy Flux deep-dive).

At the same time, BP wants to assuage investors by returning value by way of share buybacks. If BP’s green pivot pays off, investors will be rewarded anyway – just a bit later. By trying to have its cake and eat it, is BP placing too much emphasis on near-term shareholder sentiment – to the detriment of its longer term strategic objectives?

Transmission lines

Energy transition stories you might’ve missed

Occidental Petroleum’s venture capital arm is bankrolling a pilot plant for ‘innovative’ CO2-to-bio-ethylene technology. Oxy Low Carbon Ventures and Cemvita Factory will build a small facility fed by “human-made carbon dioxide (CO2) instead of hydrocarbon-sourced feedstocks”. Cemvita says its bio-synthetic process requires only CO2, water and light to produce bio-ethylene, which cuts costs. It is not clear where the CO2 would be sourced from. Oxy is also developing direct air capture technology to suck CO2 out of the atmosphere, which has dubious economics even with a very high carbon price. Notably, Oxy’s oily parent Occidental Petroleum – which envisages becoming a ‘carbon management company’ – opposes a US carbon tax, preferring the existing 45Q tax credit that rewards companies that capture and store CO2 (see Monday’s Energy Flux for more on the extension of 45Q tax credits).

TechnipFMC and Bombora are to develop a hybrid floating wind and wave power plant. French engineering company and Welsh marine technology company want to combine a floating wind turbine with Bombora’s mWave energy converter. Numerous hybrid wind-wave concepts have been explored since the late 20th century but none have achieved commercial success. Mechanical structures struggle to withstand the harsh marine environment and extreme ocean forces while also harnessing the power they contain.

Shell invests in sustainable aviation-fuel maker LanzaJet. Partnership will accelerate alcohol-to-jet technology to “help address the aviation sector’s urgent need to decarbonise”. LanzaJet says its tech produces 90% sustainable aviation fuel and 10% renewable diesel, which “will be blended with conventional fossil jet fuel and be supplied to airports through the existing supply routes” with “no modifications to engines, aircraft, and infrastructure”.

For the record:
  • Independent oil and gas producer Neptune Energy receives upgrade to ESG and credit ratings. Sustainalytics placed the private equity-backed driller “in the top 3% of all exploration and production companies rated by the organisation, with a global ranking of 5th out of 169”. The Sustainalytics website gives Neptune a ‘medium’ overall ESG risk rating, with ‘high’ exposure to ESG risks but ‘strong’ management structures in place to manage them.

  • PG&E deploys standalone solar grid near Yosemite in bid to stop sparking California fires. Utility is commissioning first of 20 isolated grid networks to be designed and installed by BoxPower by 2022, serving a “small but significant number of locations at the edge of the distribution system where energy use is low, but delivery infrastructure challenges are high”.

  • Eni and Lombardy transport group FNM team up to decarbonise mobility in Italy. Focus will be on hydrogen distribution points for private road mobility. Enel Green Power signed a similar partnership with FNM in February

  • ‘Banking on Climate Chaos’: the world’s 60 largest banks pumped $3.8 trillion into fossil fuels since the Paris Agreement, with financing levels higher in 2020 than in 2016, according to NGO Reclaim Finance

  • Altaaqa and AFC Energy to develop hydrogen power plants in Saudi Arabia and across Middle East. Focus will be on hydrogen fuel cells for power generation, but details are sparse on how/where “zero emissions” H2 will be sourced from

  • Saudi Arabian company sets new record for energy efficiency of seawater desalination. Saline Water Conversion Corporation (SWCC) achieves new low of 2.271 kWh per cubic metre of drinking water using reverse osmosis plants powered by “powered by energy recovery techniques”. Here’s what they’re talking about:

Energised minds

Critical thinking on crucial energy issues

‘Oil companies should hedge their bets on CCUS and offsetting’ – Ambitious carbon reduction targets allow Big Oil to put off more existential questions around reducing fossil fuel production, but shareholders won’t be duped, writes Axel Dalman of Carbon Tracker. “[I]t’s a risky bet to rely on CCUS and NBS [nature based solutions, i.e. tree planting] to perform miracles in the near term. Taking a more conservative approach may mean leaning more on other levers like production cuts, with capital either being returned or redeployed into other sectors. The end result would be targets that may be seen as more credible – something that both investors and civil society should want and actively encourage.”

‘It’s high time we abandoned the ‘free market is best’ ideology’ – Scotland should set up a national energy company aimed initially at hydrogen production, writes Dick Winchester of the Scottish Government’s energy transition strategic leadership group. “It could, in league with the Scottish Investment Bank, help enable the development of a hydrogen technology manufacturing supply chain.”

And finally...

It seems appropriate to highlight in this e-newsletter that 2021 marks 50 years since the invention of email. Here’s to another 50 years of free, open-source platform-neutral communication across continents and time zones 🥂📧

That’s all for today, tune in tomorrow for more 💥Energy Flux💥