Plan Calls for Reducing Dependency upon Russian Gas
The authors are analysts of NH Investment & Securities. They can be reached at minjae.lee@nhqv.com and ys.jung@nhqv.com, respectively. -- Ed.
The EU has announced long-term plans to reduce its dependency upon Russian fossil fuels. The EU’s long-term direction is growing more clear-cut, but uncertainties linger towards the short-term stabilization of energy supply. Considering both rising cost burdens and sluggish new orders at renewable energy players, we adhere to our existing advice to start buying up renewable energy stocks from 2H22.
REPowerEU: To reduce dependency upon Russian natural gas
On Mar 8, the EU announced its REPowerEU plan, with the aim of becoming independent from Russian fossil fuels by 2030. The goals include: 1) diversification of gas importers; 2) expansion of biomethane and hydrogen production; and 3) expansion of renewable energy supply in order to reduce fossil fuel consumption and an accompanying building up of infrastructure for this purpose.
The EU’s current portion of Russian fossil fuel imports is high: natural gas 45%, crude oil 27%, and coal 46%. To reduce the portion of natural gas from Russia, the EU is to diversify gas supply sources by constructing LNG terminals and pipelines outside Russia. Over the mid/long term, the EU is to increase its use of biomethane and hydrogen to reduce its use of natural gas. To this end, related power infrastructure will need to be beefed up.
Long-term targets strengthened, but short-term concerns remain
Ultimately, independence from Russian fossil fuels can only be achieved by reducing demand for fossil fuels. For this purpose, mid/long-term renewable energy policies are to be re-strengthened. For example, Germany plans to amend its Renewable Energy Sources Act. The timing to achieve the target of 100% renewable energy sources for the generation of electricity is now expected be pushed up from 2050 to 2035. In addition, Germany has announced that it will build two additional LNG terminals in order to diversify its sources of natural gas. Moreover, UK and Spain are saying that they will expand their offshore wind power bidding amounts.
That said, the problem of short-term energy supply shortages remains in play. Demand for thermal power generation, which can boost power generation within the near term, is on the rise again. For reference, the recent global upsurge in coal prices and climbing demand for bulk carriers for coal procurement have led to an upward trend in the BDI index. In light of the raw materials price hikes, a heightening in installation costs for renewable energy power plants looks inevitable.
The relative price merit of renewable energy has been growing shinier in response to the recent global skyrocketing in oil prices. Although mid/long-term policy directions are becoming more clear-cut, new orders are currently tepid on cost hikes and policy uncertainties. Amid mounting worries towards earnings due to the sluggish orders and heavier costs, share price volatility among global renewable energy players is amplifying in line with oil price swings. Given the honing of long-term energy policies, we anticipate a gradual improvement in order receipts from end-2022. Accordingly, a long-term investment perspective is advised.