Thought leadership from our experts

Are we prepared for the near future?

Recently, I started watching the Norwegian TV show "Occupied". Produced in 2014, and only now broadcasted in Portugal, it builds a plot around a world where, in the "Near Future the US are self-sufficient in energy, civil wars have halted oil production in the Arabian Peninsula, Europe is on the verge of an energy crisis and Norway stops oil and gas production due to the effect of climate change".

Luckily, where energy matters are concerned, reality beats fiction and Europe is not facing an energy crisis. Yet, in what concerns the US self-sufficiency, the shale gas, as an alternative to oil, has modified today's economic and global political scenario, providing Washington with new capabilities for redesigning its national and foreign energy policies toward innovative, self-sufficient development.

We all know that fossil fuels will remain for many years to come and that gas (the most versatile of fossil fuels and least pollutant) may even play a key role in the transition of the energy paradigm. According to Mackinsey, the fossil fuels will dominate energy use through 2050 but the mix, however, will change. Gas will continue to grow quickly, but the global demand for coal will likely peak around 2025. Growth in the use of oil, which is predominantly used for transport, will slow down as vehicles get more efficient and more electric. By 2050, McKinsey research estimates that coal will account for just 16 percent of global power generation (from 41 percent now) and fossil fuels to 38 percent (from 66 percent now). Overall, though, coal, oil and gas will continue to account for 74 percent of primary energy demand, down from 82 percent now. After that, the rate of decline is likely to accelerate.

It may not be exactly how "Occupied" describes it but there's no way around it: climate change is here to stay and it is a matter of global security and survival. The increase of Earth temperature by three – four degrees (since it seems there are no measures able to avoid the planet from warming another two degrees, the goal of the 2015 Paris climate conference) demands an urgent and loud "call for action", focused on decarbonisation (polluter centres, mainly in power stations, electricity system and transport system) growth of electrification, localization and optimization.

Global energy demand for electricity will continue to grow twice as fast, due to strong demand from developing economies, with China and India accounting for 71 percent of new capacity. According to McKinsey, by 2050, electricity will account for a quarter of all energy demand, compared with 18 percent now. It is expected that more than three-quarters of new capacity (77 percent) will come from wind and solar, 13 percent from natural gas, and the remaining from other sources. The share of nuclear and hydro energy is also expected to grow, albeit modestly. Until 2050, wind and solar are expected to grow four to five times faster than every other source of power.

According to the mentioned research, energy-related greenhouse-gas emissions will rise 14 percent in the next 20 years. Around 2035, though, emissions will flatten and then fall, for two main reasons. Firstly, cars and trucks will be cleaner, due to more efficient engines and the deployment of electric vehicles. Secondly, there will be a shift in the power industry toward gas and renewables. The countervailing trends are that there are likely to be some 1.5 billion more people by 2035, and global GDP will rise by about half over that period. All those people will need to eat and work, and that means more energy.

It may appear as if the scope of this article is about structural and strategic changes in the energy markets in the world. In fact, it's not. It's actually about the Portuguese energy policy and if it's fit to tackle the challenges ahead, bearing in mind the global outlook stated above. Are we on track and taking the necessary actions?

Throughout the financial assistance plan (2011-2014), the country faced important changes in the energy sector as part of the conditions imposed by the Troika (IMF, ECB, EC) on the Portuguese bailout package, namely: completion of the privatization of REN (the Portuguese TSO) and EDP (the biggest Portuguese company in generation, distribution and trading of power); a downward revision of the guaranteed compensation mechanism (CMEC) paid to producers under the ordinary regime and the remaining long-term power-purchase agreements; revision of capacity payments; revision of support schemes for co-generation, with a downward adjustment of the feed-in tariff and the establishment, in 2014, of the so-called "Exceptional Contribution of the Energy Sector" (ECES).

The end of the financial assistance program, however, did not stop the prolongation of these measures and the implementation of new ones by the current Government (in office since the end of 2015) affecting the energy sector, namely: termination of the concession contracts for exploration, research, development and production of oil in the Algarve's offshore areas (although new concessions are still possible); revision of the power guarantee mechanism on availability services, through a competitive and transparent annual auction, in which can bid all power plants with net capacity equal or higher than 10 MW, which sell their electricity according to market prices, as well as, in some circumstances, other market agents which aggregate demand or the supplier of last resort (the new scheme is not yet implemented, since it is waiting a decision from the European Commission regarding State Aid); return to the National Electric System of alleged "excessive" amounts received due to the accumulation of feed-in-tariffs and public support funds (determined by Ministerial Order 19/2017, not yet materialised); submission of authorization of over equipment of power plants to a consultation of the Regulator on the impact on the National Electric System; end of the consideration of ECSE and social tariff as extra-market events in Portugal, within the mechanism to eliminate windfall profits ; end of the exemption of excise duty on coal fired power plants plus payment of an additional rate over CO2 emissions (starting from 10% up to 100% in 2022).

Most of these measures bear a direct impact on companies and might affect investments, but are in line with the energy police of the current government, whose priority is the reduction of the electricity price and the tariff deficit and the burdens with future costs overruns.

Yet, the Government maintains that Portugal is committed to de-carbonising its economy and that it will do everything to guarantee that fossil fuels will not be used after 2050.

In what concerns the affirmation of Portugal as a relevant energy supplier for Europe - goal that will ultimately depend on increasing interconnection between Spain and France and implementing connection with Africa - and increasing production of energy from renewable sources (the target is 40% of energy consumed in the country up to 2030), the current key word is solar. And, although luck has played an important role here, solar capacity in Portugal is growing faster, due to the decrease of the PV modules prices (about 70% in the last 6 years), and in line with what is happening everywhere (according to the International Energy Agency the solar energy worldwide has increased 50% and it is expected that the increase of solar energy capacity is bigger than any other renewable up to 2022).

In an article published last July, I wrote that the situation with regards to solar (with only 474 MW installed) seemed to be about to change. Well, it is changing. However, for this to continue, investments in extension of grid capacity will have to be made. The Plan of Investments on the Transport Network (PDIRT), under public consultation until the end of March) foresees for complementary projects (including development of solar potential) 220 million euros for the first five year period and 240 million euros for the second five year period. Promoters should look into the plan and participate in the consultation. In which concerns market conditions, it seems that they are being assured through PPA's executed, with off takers that guarantee a minimum fixed price for some years (7 to 10).

Another area where we are seeing some developments is micro-generation (self-consumption and small production units) with different schemes being implemented. But there's a long way to go and much remains to be done to promote individual production (namely through tax incentives).

Overall, despite what has been put into place and what has been announced, there are positive measures that still need to be pushed forward, namely interconnection with Morocco, developing of a LNG hub, energy efficiency (smart grid, smart meters, buildings), de-carbonization of public transports, implementation of green certificates, R&D on batteries for electricity storage, electro-mobility and, in general, measures able to send out encouraging indications to keep current investments and to attract new ones to Portugal.