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New investment opportunities to alleviate the energy crisis (EN/FR)

-------French Version Below-------

I- Energy crisis is penetrating the daily energy consumption

  1. The cause of energy shortage

Since the breakout of the conflict between Russia and Ukraine, the EU claimed that it would stop buying all Russian crude oil delivered by sea - or ⅔ of all EU imports of Russian crude - from early December under sanctions imposed on Russia. To counter the sanctions, Russia has cut the gas supply to Europe by closing the gas pipeline, the Nord Stream 1, which is owned and operated by the Russian state-owned company Gazprom. According to the BBC news, this pipeline covers 35% of all the gas that EU states import from Russia. The pipeline closure has put political pressure on Europe, especially Germany. The pressure expands since the EU imports nearly 40% of its gas and 25% of its oil from Russia referring to the figure below. The scale of the negative impact is fatal because gas and oil account for nearly 60% of energy consumption in Europe.

Source: 《BP Statistical Review of World Energy 2022》

b. Consequence: the increase in energy price

Since July 2021, European gas prices have increased by 145% while oil prices have increased by 46% over the same period. The increase in primary energy prices contribute to record-high wholesale electricity prices, in particular as electricity prices in Europe are indexed on gas prices. The conflict between Russia and Ukraine is a driver of volatility in energy commodity prices. In addition, the low levels of inventories have made prices more sensitive to changes in energy supply and demand.

Source: Eurostat, Refinitiv and ECB staff calculations

II- REPowerEU is enacting policies and injecting capital into energy transformation

On May 18 2022, the European Commission presented the REPowerEU Plan as a response to the global energy market disruption. It raised the urgency to end the EU’s dependence on Russian fossil fuels and cope with the climate crisis. There are three main strategies: saving energy, diversifying energy imports, and accelerating clean energy transition. To support REPowerEU objectives, €225 billion is already available in loans under the RRF. To reach targets of 40/45% of energy production from renewables, €210 billion needs to be invested between now and 2027. Under the current MFF, cohesion policy will already support decarbonisation and green transition projects with up to €100 billion by investing in renewable energy, hydrogen and infrastructure.

Source: The REPowerEU Plan

III- Two potential solutions with economical and environmentally-friendly benefits: Heat Pump and Household Energy Storage Systems

a. The necessity to reduce energy consumption from house heating.

To fight against energy dependance in particular to Russia as explained in the introduction, Europeans should reduce their personal consumption. One main pillar of energy consumption for individuals is house heating.

Research is ongoing to find solutions to find new house heating systems capable of reducing drastically energy consumption.

The following paragraphs aim at giving insights on possible technological solutions which have been identified to potentially help European households to reduce their consumption.

b. Heat Pump

> How do heat pumps work?

A heat pump extracts warmth from outside air, the ground or a nearby source of water to generate electricity using evaporative cooling. The technology is mature, which is applied in air conditioners and fridges.


> The economic and environmental benefits

  • Less energy consumption: The electricity consumption of air source heat pumps is only about 1/3 of that of air conditioners in daily household heating and cooling.

  • Cheaper electricity bills: Lower energy consumption leads to a proportional decrease in the electricity bills.

> Why investors are/should be interested in this market

  • Supportive policies: The REPowerEU plan targets to install 10 million heat pumps in the next five years. Many governments offer subsidies to households. For example, in Germany, the households who decide to install heat pumps will receive a subsidy of 35% to 45% of the installation cost.

  • Sustainable increase in demand for heat pumps: Heat pump sales grew by 34% in Europe in 2021. The installation of heat pumps covers around 14% of the heating market. This penetration rate is expected to increase referring to ehpa (european heat pump association)


c. Household energy storage systems

> How do household energy storage systems work?

A household energy storage system is currently divided into two kinds, grid-connected and off-grid. A grid-connected household energy storage system is mixed-powered by solar and the energy storage system, including five parts: solar array, grid-connected converter, battery management system, battery pack, and AC load.


> The economic and environmental benefits

  • More reliable electricity supply

  • Cheaper electricity bills

> Why investors are/should be interested in this market

  • Supportive policies: 1) Tax reduction: For example, Italy increased the tax reduction for household energy storage equipment from 50-65% to 110%; 2) Direct financial support: For example, Switzerland issued additional CHF 46 million for residential and commercial rooftop solar subsidy scheme

  • The demand for the system is reassured by the high electricity price and high subsidy which lead households to accept innovative solutions.

IV- Investment opportunities in non-renewables

Although the above mentioned new star solutions will help countries in becoming less reliant on Russian gas, they will not solve the problem completely. The world’s demand for energy is now higher than before the pandemic and the use of fossil fuels (82%) is only slightly lower compared to five years ago (85%). Substituting fossil fuels with green energies will be difficult since our wealth (measured in terms of GDP), has proved to be positively correlated to our carbon emissions over the past 300 years.

Source: Ole Peters

The idea that the world can fully transition to green energies is too optimistic. The speed of electrification through heat pumps, for instance, is too low and cannot be scaled quickly enough for a complete transition. Additionally, the US Climate & Tax Bill passed this summer highlighted how dependent we are on fossil fuels by acknowledging the fact that we will need oil and gas for longer than was expected three years ago.

Investing in both fossil fuels and green energies contributes positively to energy diversification. Energy diversification is important since being highly reliant on only one type of energy is risky. Germany’s reliance on natural gas, for instance, has proved to be a mistake. Similarly, France’s reliance on nuclear power has proved to be fragile due to warmer rivers that take power supply offline. Those two countries are good examples of why it is important for investors to invest in all types of energies and to diversify their energy portfolios.

The non-renewable energy market gives good investment opportunities since it is the part of the energy sector which has changed the most relative to pricing and evaluations. The high oil and gas prices have led to record profits for refiners, and recently the highest quarterly profit ever recorded in the non-renewable energy sector. Exxon Mobil Corp, for instance, said its first-quarter results could top a seven-year quarterly record, with operating profits from pumping oil and gas alone of up to $9.3 billion.

Investors could make good returns through investing in specific parts of the non-renewable energy sector. The industries related only to drilling and providing equipment for drilling activities have done the worst because the decline in capital expenditures since 2015 has decreased activity in this industry. Over the past five years, the best performing industries in the energy sector have been refining and marketing since the crack spreads (the difference between the price of crude oil and the prices of refined products – gasoline and distillates) have expanded during the pandemic.

Source: CME Group

The most common type of crack spread is the simple 1:1 crack spread, which represents the refinery profit margin between the refined products (gasoline or diesel) and crude oil. It is executed by selling the refined products futures and buying crude oil futures, thereby making a profit that corresponds to the differential.

V- Conclusion

The energy crisis has led to major changes, namely the acceleration of energy transformation. Investors can benefit from those changes by investing in two main star solutions: heat pumps and energy storages.

Such systems have a limited lifetime and the recycling concern needs to be addressed to fully consider them as sustainable solutions.

Our high dependency on fossil fuels and the proved need to diversify energy portfolios, however, creates positive investment opportunities in non-renewables. One could, for instance, take advantage of high energy prices and make great returns through crack spreads.

-------Version Française-------

De nouvelles opportunités d'investissement pour contrer la crise énergétique

I- La crise énergétique affecte notre consommation quotidienne d'énergie

a. La cause de la pénurie d'énergie

Depuis l'éclatement du conflit entre la Russie et l'Ukraine, l'UE a affirmé qu'elle cesserait d'acheter le pétrole brut russe livré par voie maritime - soit ⅔ des importations européennes de brut russe - à partir de début décembre en vertu des sanctions imposées à la Russie. Pour contrer les sanctions, la Russie a coupé l'approvisionnement en gaz de l'Europe en fermant le gazoduc Nord Stream 1, qui est détenu et exploité par l'entreprise publique russe Gazprom. Selon la BBC, ce gazoduc couvre 35 % des importations de l'UE de gaz russe. La fermeture du gazoduc a exercé une pression politique sur l'Europe, en particulier sur l'Allemagne. La pression s'accroît puisque l'UE importe près de 40 % de son gaz et 25 % de son pétrole de Russie (cf graphique ci-dessous). L'ampleur de l'impact négatif est fatale car le gaz et le pétrole représentent près de 60 % de la consommation d'énergie en Europe.

Source: 《BP Statistical Review of World Energy 2022》

b. Conséquence : l'augmentation du prix de l'énergie

Depuis juillet 2021, le prix du gaz en Europe a augmenté de 145% tandis que le prix du pétrole a augmenté de 46% sur la même période. L'augmentation des prix des énergies primaires contribue à des prix de gros de l'électricité record, d'autant plus que les prix de l'électricité en Europe sont indexés sur les prix du gaz. Le conflit entre la Russie et l'Ukraine est un facteur de volatilité des prix des produits énergétiques de base. En outre, le faible niveau des stocks a rendu les prix plus sensibles aux variations de l'offre et de la demande d'énergie.

Source : Eurostat, Refinitiv et calculs des services de la BCE

II- Les plans européens et l'injection de capitaux pour la transformation énergétique

Le 18 mai 2022, la Commission européenne a présenté le plan REPowerEU en réponse aux perturbations du marché mondial de l'énergie. Elle a soulevé l'urgence de mettre fin à la dépendance de l'UE aux combustibles fossiles russes et de faire face à la crise climatique. Il comporte trois stratégies principales : économiser l'énergie, diversifier les importations d'énergie et accélérer la transition vers une énergie propre. Pour soutenir les objectifs de REPowerEU, 225 milliards d'euros sont déjà disponibles sous forme de prêts dans le cadre du FRR. Pour atteindre les objectifs de 40/45% de production d'énergie à partir de sources renouvelables, 210 milliards d'euros doivent être investis d'ici 2027. Dans le cadre du CFP actuel, la politique de cohésion soutient déjà les projets de décarbonisation et de transition verte à hauteur de 100 milliards d'euros en investissant dans les énergies renouvelables, l'hydrogène et les infrastructures.

Source : Le plan REPowerEU

III- Deux solutions potentielles présentant des avantages économiques et écologiques : La pompe à chaleur et les systèmes de stockage d'énergie domestique

a. La nécessité de réduire la consommation d'énergie pour le chauffage domestique

Pour lutter contre la dépendance énergétique, notamment vis-à-vis de la Russie comme expliqué dans l'introduction, les Européens doivent réduire leur consommation personnelle. Un des principaux piliers de la consommation d'énergie des particuliers est le chauffage.

Des recherches sont en cours pour trouver des solutions afin de trouver de nouveaux systèmes de chauffage capables de réduire drastiquement la consommation d'énergie.

Les paragraphes suivants visent à donner un aperçu des solutions technol